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Monday, July 30, 2012

Demagogues and others...

I generally recommend reading all articles by Nick Malkoutzis but this one I recommend particularly, this time not so much for the article itself but, instead, for the comments made to it. A highly emotional debate developed simply because a reader by the name of R. G. Danon (a Greek) made arguments which put another Greek on demagogic fire.

What really kills all rational debate is when complex issues are reduced to provocative either/or-arguments. Examples: austerity bad - yes or no! New loans for Greece - yes or no! Is Germany to blame - yes or no! One of the consequences of this is that one is immediately put into a corner by demagogues (and I am not saying that only Greece has demagogues!), and more often than not a corner that one doesn't want to be in.

Of course I agree that the EU had completely mismanaged the balance of payments crisis of Greece at the start (which mistake could not be corrected later). The EU should NEVER have prevented Greece from going directly to the IMF. The IMF is THE competent place for balance of payments crises. They have innumerable precedents and the blueprints as well. I am not saying that the IMF always has the right solutions (in fact, they have a mixed track record) but when their solutions don’t work, people get mad at the IMF as a supranational organization (and not at, say, Germany).

The first question in any financial crisis is: should tax payers be called upon to refinance maturing debt of private creditors or should existing debt be rescheduled by the existing private creditors? 

Refinancing would make sense in a case like Austria, my country, because the Austrian economy is strong enough to allow the hope that it will eventually generate the necessary revenues for the state so that the state can service its debt again (I fear that we might even see a test of that in the future…). When an economy has become so weak, for whatever reasons, as the Greek economy had, there can only be one answer and I am 100% certain that this is the answer which the IMF would have come up with (and recent publications seem to confirm that): existing debt must be rescheduled with existing creditors (NOT refinanced by tax payers!). Official lenders provide the Fresh Money and set the terms for the overall rescheduling package, but no more than that. And, by the way, the rescheduling must encompass ALL foreign debt of the country and not only the sovereign debt!

So, here I am on the same side with all the Greek demagogues who say that EU-elites (not only Germany) are to blame for the possible financial Armaggeddon we face today. For myself I have resolved: if the crash comes and if I lose my savings, I will blame EU-elites for it and not Greece.

That, however, leaves open the “other issue” which has been discussed in the comments to the article. If the Greek economy is a basket case, who should fix it? Clearly, a return to the Drachma would answer this question right away --- only Greece can fix the problems of its economy. If Greece didn't do that, the living standard of Greeks would tank (and a mass brain/talent-drain would take place).

There are some, like Prof. Yanis Varoufakis, who argue that Greece should do nothing until the EU cleans out the mess which it caused. That is plain silly. It's like saying: "I know I have problems but I won't worry about them until others have solved their problems". Prof. Varoufakis would argue that Greece cannot fix anything on its own just like Ohio couldn't do anything on its own in the midst of the US-depression. While that is, as most of his arguments, dialectically a master stroke, it is still plain silly, too. Try to start a company in Greece; try to get a permit; even: try to buy a car as a foreigner --- and you will quickly see what Greece could fix on its own. It's got to be fixed sooner or later! If one finds an excuse for not fixing it now, one simply slows down the process for improvement.

Now to this near-pathological issue of austerity. There is austerity and there is austerity. The state does not function like a family because if the state cuts expenses, it often cuts right into its revenue base. On the other hand, the economy functions, in its external relations, EXACTLY like a family. If you spend more than you earn, you have to get money from someone (typically from a bank).

I have never specifically commented in this blog about the fiscal austerity program. Why? Simply because I know far too little about it. I would argue that public finances are such a complex animal that sometimes even insiders don't have a clear view. David Stockman, President Reagan's Director of the Budget, once admitted that "none of us really understands what's going on with all these numbers". Thus, to comment on specific fiscal austerity measures should be reserved to those who really have the appropriate insights.

In general terms I would say: Greece's overall government expenses were/are probably high but, with about 50% of GDP, they are not way out of line in the Eurozone. Alexis Tsipras wants to bring them down to about 45%. That would be great; and sufficient! So, the crucial issue was not to drastically cut government expenses. The crucial issue was to reallocate them along the principles of effectiveness, fairness & justice ("stop paying money to the dead so you don't have to take it from the living!"), while moderately reducing them overall. And before I forget it, one should have cut government waste dramatically!

The other crucial issue was to increase the revenue base in an intelligent way. To simply take money away from the usual suspects (i. e. those who are taxed at the source) is not only unfair but also stupid because it cuts right into the revenue base. The clever thing would have been to increase revenues which do not cut that much into the revenue base (i. e. taxes on luxury assets/incomes and some form of EU-compliant levies on luxury imports).

Again, I will not specifically comment on the fiscal austerity program because I know far too little about the details. All I did was to outline some of the general themes.

I will, however, comment specifically about the Greek economy. The Greek economy had run into a phenomenal balance of payments problem since the Euro. Some would scream today that this was the fault (“guilt”, to use the buzzword) of the Euro and of EU-grants which destroyed Greek agriculture. To those I would respond: maybe yes, maybe no. But I remember very well times, not too long ago, when Greece was very happy about cheap Euro-funding and free EU-grants.

Nevertheless, by 2008, the Greek economy was a basket case as regards the balance of payments. For every 1.000 Euros earned abroad, 1.530 Euros were spent abroad. That is overspending to the tune of 53%! A family living like that would be told by its banker to either increase earnings, cut expenses or a combination of the two. For sure he would tell the family that he wasn't going to finance that kind of overspending any longer. I should add that from Jan-May 2012, the external overspending was still 32% despite 3 years of recession. Austerity? Not recognizable!

If you have external overspending, you have to finance it in one way or another. Either through guest-workers' remittances (like Greece in the 1960/70s) or through foreign investment (like the US). If you can't get either of the two, you need to finance external overspending with debt and, to the extent that you get them, EU-grants. There aren't really any more alternatives (at least none that I know of).

Guest-workers' remittances had more or less stopped many years ago and so had foreign investment. EU-grants, while still a few billion EUR annually, were not much more than peanuts in the grand scheme of things. So, the only answer to make the balance of payments balance was foreign debt. And Greece didn't even have to ask for foreign debt; it was thrown after it.

So let me conclude this part by saying: the Greek economy, by 2008, its growth, tax generation and everything else --- well, that was like an engine whose gasoline was foreign debt. Reduce the flow of gasoline and the engine stutters. Stop the flow of gasoline, and the engine stops.

One has to understand that the Greek living standard is a function of imports. Reduce imports and you reduce living standard. Reduce imports drastically and you reduce living standard drastically. The recession has by now reduced imports by quite a bit and the reduction in living standard is noticeable. However, reducing living standard on a continous basis is not necessarily what voters like to see.

The first reaction to a situation like the above is normally "We will export ourselves out of this problem". Fair enough, but that won't work in Greece, at least not in the shorter term, because the Greek economy doesn't have that much of an export base (yet). The next reaction should be: "Let's get foreign investment instead of foreign loans!" Dead right! And the final reaction would be: "Let's try to substitute all imports we could substitute. That way we reduce our foreign overspending and create new domestic activity!" Dead right!

Who should work towards making these 3 things happen? Angela Merkel perhaps? Or George Soros?

Neither new foreign investment nor new exports nor import substitution will come about by itself. The only way to achieve this is to reform the Greek economy in such a way that incentives are set for these things to happen. And as far as I can see, one wouldn't have to wait one more day to start working towards this.

At the end of the day, everything boils down to the question whether Greece can become a good place to do business. Doing good business creates economic activity and economic activity creates living standard. Personally, I think Greeks have a way of life where they can, if needed, be happy with a lot less materialistic values than, in contrast, the Germans. That speaks in favor of Greece. One doesn't have to be as productive as the Germans are but one has to be productive enough to justify the living standard one wants to have.

How can you tell a demagoue? He will forcefully disagree with everything I have said above. Not for logical reasons but, instead, for dogmatic reasons.

1 comment:

  1. Exactly right. There is one more thing I can add: There is still a LOT of fat to cut and it does NOT involve wages or pensions. However it takes someone with a personality who is willing to go after the real problems inestead of the easy targets. And that includes among other things the 'untouchables' in the judiciary. And, FYI he will be called a 'demagogue' by his opponents.