Can someone explain to me what's going on in Greece?

[Surgo]

To this somewhat stupid outsider, it looks like a lot of big banks and politicians wholly owned by big banks are qqing that there's an actual democratic process going on there. Is this accurate, or is there something I'm missing?

[sabs]

You're missing that Greece's economy is tied to the rest of Europe. If Greece defaults on it's loans, this will do bad things(tm) to the Euro, and to European Banks. Which will in turn, do bad things to the rest of Europe.

It shouldn't really be a shocker that Greece is so fucked up that a Vote of Confidence in the PM is happening. The Greeks don't want to do the levels of Austerity measures the Germans want them to. Is what it boils down to. But because Greece is part of the European Union, which makes it somewhere between a State and a Country.... it's got all sorts of weird limitations and repercussions on what it can do.

[Koumei]

Well, according to Good News World*, the PM of Germany has an actual plan other than "AUSTERITYYYYYYYYYYYYYYYY" to help Greece out. Her plan is to mobilise a panzer division and dive-bomb the capital of Greece - it worked last time!

(Meanwhile, Vladimir Putin has offered up a solution to the economic crisis: he'll take his shirt off, and wrestle a moose!)

*One of the few reliable news sources :3c

[tzor]

Well, according to Good News World*, ...

Well it looks like The Onion finally has some competition.

[Username17]

The Greece situation is complex. But the overall Euro problem is not. Greece has a lot of structural problems, but it has a gross public debt in the five hundred billion dollar range. As in, any of the major countries in Europe could just swallow their pride and pay that shit and that part of the crisis would be over. It gets thrown around a lot because the situation there is worse than it is elsewhere and also because unlike Spain, their problems are actually their fault.

More interesting is the situation in Italy. Here's how it works:

• Italy has a primary budget surplus.
• Nonetheless, while Italy has no deficit, they have a larger debt than they can pay off in a year (as most countries do), meaning that they have to rollover many of their bonds into new bonds on a regular basis.
• If people are worried that Italy will default on their debts, they won't buy the new Italian bonds unless there is a high interest rate.
• If Italy can't rollover their old bonds into new bonds at a decent rate, they are going to become insolvent and have to default eventually even though they are running surplusses now.
• The European Central Bank have gone pants-on-head crazy and announced that under no circumstances will they act as a lender of last resort for Italy, meaning that if a bond panic starts there is no way to head it off.
• And so, Italy is currently having to rollover their bonds at more than three times the rate that the US can rollover their bonds at. This makes the bond markets worried that Italy will default, and the ECB is aforementionedly pants-on-head crazy and refuses to do anything about the situation.

And as long as the European Central Bank is acting like this, bond problems are creeping from country to country. The United States and the United Kingdom don't have this problem, because they have central banks that act as lenders of last resort and guaranty that no defaults will happen and that investors will get all their money. And so even though both countries are running huge deficits, they are in no danger of collapse or default and are borrowing at less than inflation.

So currently the Eurozone is in a debt crisis that continues to bloom whether or not they actually have deficits. Because expectations of future insolvency drive up interest rates which make future insolvency the expectable situation. This is what the gold bugs have been ranting at us about since the start of the crisis in 2007, but of course it didn't happen in countries like the US. It happened in countries that couldn't print money, exactly as if they had been hamstrung by a gold standard.

It looks like this:



The actual tragedy of Greece is merely that Greece cannot possibly pay back its debt, and the EU refuses to either pay it for them or allow them to default. So they keep doing half assed measures to delay the problem while forcing Greece into titanic austerity measures that are destroying their economy - their economy shrank by five and half percent last year. And as the interest continues to pile up and Greece's economy continues to shrink, paying off the debt becomes more and more implausible. And causing both the pain to get distributed more into more of Europe and also causing the European leadership to look more an more ineffectual. After the sixth time Angela Merkel told you that the Greek crisis was over and it obviously wasn't, how are you going to believe her when she says you don't have to worry about the solvency of Italy? Or Spain? Or France?

A discussion about the role of central banks here.
A gloomy discussion of the Euro-zone here.

-Username17

[RadiantPhoenix]

"This chicken isn't laying (big) enough eggs, so we'll starve it until it does!"

Is that a good metaphor for the situation?

[Fuchs]

Democracy scares the EU anyway. The EU has been having troubles (almost) each time there was a popular vote on anything of importance since generally, the population of any given country isn't as far into the whole EU idea as the politicians. In the past they usually simply repeated the voting process until the result suited them (see Ireland).

[Username17]

"This chicken isn't laying (big) enough eggs, so we'll starve it until it does!"

Is that a good metaphor for the situation?

That's a good metaphor for the plan of "If we cut enough government jobs, the investors will see that we are serious about unemployment and hire people for us!" And since that is the ECB's actual solution to getting growth (also Cameron's in the UK), there isn't a big mystery as to why most countries in Europe have had to downgrade their growth projections every year for the last four years.

The thing where the central bank refuses to act as a lender of last resort and insists that if they show themselves being harsh enough to member countries that the bond market will miraculously gain confidence probably needs a different metaphor. I don't even really follow it. Apparently their argument is that since lenders of last resort are not needed by countries that have central banks empowered to act as lenders of last resort, that telling everyone that they aren't going to act as a lender of last resort will have the same effect.

Consider the FDIC. There aren't classic bank runs in the US because the FDIC covers your losses if the bank collapses due to a bank run. So if the bank is distressed, you don't need to run to get your money out, because the FDIC will come and give you your money in the case that the bank actually fails. And since noone needs to run to the bank, noone does, and the bank run does not happen. And then the FDIC funds aren't even used. The ECB is basically pointing to the FDIC's success and claiming that through the magic self correcting mechanisms of the free market they can keep bank runs from happening without actually insuring peoples' deposits. And from the 50% haircut that banks holding Greek Debt took last week, the reality appears to be that they can't.

-Username17

[Surgo]

Thanks for the posts Frank, that was a lot of good information.

It really seems to me like the whole Euro thing was a shitty idea all around. It's a shitty idea for the weaker countries like Greece because the stronger ones get to push them around because of it, but it's also a shitty idea for the stronger ones like Germany because problems in the weaker countries will cause problems in the bigger ones that are larger than if they weren't connected by the currency in the first place.

What was the benefit? Is it some sort of inverse thing where in good times the stronger guys will buoy the weaker ones or something like that? I can't really see how that conclusion would be reached but at this point I really have to guess. Maybe just having a shared currency prevents them from going to war or something -- that's probably beneficial.

[sabs]

I really feel like this United States of America thing was a shitty idea all around. It's a shitty idea for Rhode Island and Delaware, because the stronger states get to push them around, but it's also a shitty idea for Virginia and Massachusetts because problems in West Virginia and Kentucky cause problems that are larger than if they weren't connected by currency in the first place.

[Ancient History]

The euro was actually a great idea: one currency for the entire continent, to encourage trade and discourage currency speculation. The actual implementation, however, was shit and now no-one in power is willing to fix it. For a uniform currency to work, every member has to keep their economy fairly stable and with low inflation. Greece deliberately fudged their numbers to get in, until they couldn't hide it anymore.

Part of the problem is that no-one wants to even think about a nation defaulting on its debts, and the other part is that no-one wants to just pay off the national debt of another country either. The countries can't pay off the debts themselves because, y'know, they're on the euro. Eventually, something has to give...and it might be Greece, and it might be Italy.

[Surgo]

Stuff

What a complete strawman. The US has a strong central government. The European Union does not. Member countries have all of the damaging ability with none of the required responsibility.

one currency for the entire continent, to encourage trade

What was so wrong with free-trade agreements? I don't have an answer to the currency speculation part.

[sabs]

Except that in 1788 the US did not have a strong central government. They had a crappy one, and before that.. the Confederation had an even crappier central government.

It's not a strawman, the Euro is the first step in creating a European Government. It's about tying all the countries together economically in order to promote free trade, money speculation, allow Europe to compete with the US. It's also there to tie European economies so closely that WW2 just isn't likely to happen again.

It looks like a strawman, because you've got countries who don't like each other, and don't trust each other, and have centuries of independence taking baby steps. The Current Eurozone is not very dissimilar to the US Confederation of the 1780's. It's just that the member states have been sovereign countries for centuries. The Early US States were very much of the idea that they were effectively independent countries, who needed to band together Militarily to make sure the Brits in Canada did not come down and take them back over one nibble at a time.

[RobbyPants]

What would happen if Germany and the others simply paid off the debt, and then Greece left the Eurozone afterward?

[tzor]

What a complete strawman. The US has a strong central government. The European Union does not. Member countries have all of the damaging ability with none of the required responsibility.

In theory there should be no difference between the Euro and the Dollar. The euro is supposed to have a strong central bank (the ECB) with the sole authority to set monitary policy. The invidual nations are supposed to adhere to monitary and bugetary requirements. Unfortunately they don't do so and there is no penalty in not doing so. Moreover the "strong central bank" tends to neither be as strong as is necessary nor as "central" taking most of its queues from officials at the national level who deal with issues at the national, not at the EU level.

The keystone to the problem is that the EU isn't really a "government" at all, but really a "breurarcy" established for the perpetual continuation of the planners and breucrats. Fuchs points out the general distain of the EU towards democracy, or even the people in general. It's not that they EU knows what is best for the people, it couldn't give a damn, it only cares for the perpetual continuation of their own cushy positions in the breauracy.

[DSMatticus]

What a complete strawman.

I think that was his point. It's not that the idea itself sucks, it's that they're doing it wrong. Like Ancient History said.

[tzor]

Except that in 1788 the US did not have a strong central government. They had a crappy one, and before that.. the Confederation had an even crappier central government.

But one of the purposes of the federal constitution and why the confederation was scrapped completely (the constitutional convention was supposed to amend the confederation not scrap it) was the creation of a central system for monitary policy, while the notion of a central "bank" was considered evil, the notion of a cerntral source for the printing of money was not. Having 13 "states" each separately printing their own currency under the common name of the dollar was throwing interstate commerce into total chaos. The inability for the individual states to print their own currency is a defining feature of the federal constitution.

[sabs]

Tzor, please learn to spell.

mmK?
Thanx

[sabs]

Except that in 1788 the US did not have a strong central government. They had a crappy one, and before that.. the Confederation had an even crappier central government.

But one of the purposes of the federal constitution and why the confederation was scrapped completely (the constitutional convention was supposed to amend the confederation not scrap it) was the creation of a central system for monitary policy, while the notion of a central "bank" was considered evil, the notion of a cerntral source for the printing of money was not. Having 13 "states" each separately printing their own currency under the common name of the dollar was throwing interstate commerce into total chaos. The inability for the individual states to print their own currency is a defining feature of the federal constitution.

Congratulations Tzor! You just argued against me, by proving my point. AWESOME.

One of the purposes of the EU was the creation of a central system for monitary policy. The inability for the individual states to print their own currency is a defining feature of the European Council.

[tzor]

Bah humbug, I've been typing badly for more years than you have been alive. I spell so badly Microsoft Word hates me and I have to look things up on Webster's unabridged.

AND YES I HAVE BEEN TYPING BADLY FOR THE PAST 45 YEARS! MY FIRST TYPEWRITER WAS A MANUAL ONE. I HAD A FANCY IBM DURING HIGH SCHOOL. TYPED ON A PUNCH CARD MACHINE TOO.

[Ancient History]

one currency for the entire continent, to encourage trade

What was so wrong with free-trade agreements? I don't have an answer to the currency speculation part.

There's nothing wrong with free-trade agreements, but a common market (which the EU is) has benefits beyond free trade. Right now, you can live in Italy and work in France, and you are paid in euros in France and spend euros in Spain, and use those euros to buy goods from all over the EU. If you live in Italy and work in France before the euro, then you're being paid in francs and spending lira, and the goods you can buy may depend ont he fluctuations in currency - because changing the values of currency relative to one another will make some goods more expensive this week compared to last week. Beyond that, there is the sortof intangible confidence that comes with a currency and market union - being able to go anywhere in the EU and spend your money actively encourages people and corporations to go anywhere in the EU and spend their money, because you're smoothing the way. Tourism and travel, for example, are much easier when you only have to fool with one currency instead of umpteen.

[sabs]

sure, but Bureaucracy isn't that hard to spell. Especially cause you keep spelling it wrong every single time. That's not bad typing, that's bad orthography.

[tzor]

Congratulations Tzor! You just argued against me, by proving my point. AWESOME.

But I wasn't arguing against you. The problem is clearly not with the "currency." The question is clearly spending on the second (state un the US, nation in the EU) level and how second level debt and the issuance of second level bonds effects the entire first level union.

This is the problem in the United States, (what was the problem again)?

The total of U.S. state debt, including pension liabilities, could surpass $4 trillion, with California owing the most and Vermont owing the least, a new analysis says.

Using the higher pension gap number, State Budget Solutions said California is in the biggest financial hole — with total debt of more than $612 billion. New York follows with $305 billion of debt, and then Texas, with total debt of $283 billion. Vermont has the lowest amount of total debt at just over $6 billion.

Consider this carefully, since the current debt of Greece is actually less than the the current debt obligation of Califorina and is currently valued at wikipedia at $454 billion. If Califorina were to collapse into the fiscal sea, most of the other states might pause a moment for a moment of silence, but the dollar would be more or less what it is right now. The notion that New York needs to bail out Califorina is just a non starter.

PIGS are a big problem ... CNYT is not. Califorina is a lot like Greece in more ways than one, but the problem of contamination just isn't there.

[Surgo]

sabs: so what you're saying is that the unified monetary policy should (or in this case, is) come before strong federal authority? I can get that...i don't know if I necessarily agree, but I get it.

[Username17]

The Road to European Unification began in the 1950s with the establishment of the European Coal and Steel Community. Here is the French Foreign Minister proposing its creation in 1950:

Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity. The coming together of the nations of Europe requires the elimination of the age-old opposition of France and Germany. Any action taken must in the first place concern these two countries.

With this aim in view, the French Government proposes that action be taken immediately on one limited but decisive point.

It proposes that Franco-German production of coal and steel as a whole be placed under a common High Authority, within the framework of an organization open to the participation of the other countries of Europe. The pooling of coal and steel production should immediately provide for the setting up of common foundations for economic development as a first step in the federation of Europe, and will change the destinies of those regions which have long been devoted to the manufacture of munitions of war, of which they have been the most constant victims.

The solidarity in production thus established will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible. The setting up of this powerful productive unit, open to all countries willing to take part and bound ultimately to provide all the member countries with the basic elements of industrial production on the same terms, will lay a true foundation for their economic unification.

From there, more and more things and more and more countries were added to the union to promote greater political stabilization. The European Union was founded with basically three goals:

• To create political stability that would prevent the outbreak of a third world war in Europe.
• To create a bargaining entity of sufficient power that Europeans could push around Russia and the United States instead of constantly having to give blowjobs to the super powers.
• To enhance the economic growth of the continent through united effort.

And on all those fronts the EU was a success. World War 3 did not happen in the Eurozone (so far). European countries have been able to enforce bizarre brand demands on the rest of world. I mean, it's bad enough that we have to call champagne "sparkling wine" and shit, but Portugal demanded (and received) special ownership of the name "Port", Denmark got protection for Danish Blue and Esrom, Greece got protection for Feta, and so on and so forth. And until 2007, the EU had really quite remarkable growth coupled with price stability in the Eurozone.

The big countries got to be the bosses of an increasingly powerful economic and diplomatic unit, and the peripheral countries got to have a shared currency area with more with-it countries like Germany, France, and Italy and had unprecedented capital investment flow into them. Finland basically got a telecommunications industry with EU capital investment. They were rated the best country in the world by Newsweek recently and if they had not joined the Eurozone that would not have happened.

Where it all went to hell in a hand basket is where it turns out that the European Union does not actually have any of the institutions required to deal with a crisis. As recently as a couple of years ago they were shaking their uncircumsized penises at the naysayers shouting about how the might and growth of the EU had proved all their detractors wrong. But...

In times of crisis all that investment that flooded into Spain and Ireland and the rest of the periphery suddenly pulled out - which means that they were left holding wages, prices, and government mandates consistent with a medium inflation country undergoing rapid expansion under the weight of large capital inflows while in reality they had no currency in their economy and suddenly had unemployment rates in the double digits. They needed huge corrections to right themselves, and the EU simply does not have the mechanisms to do any of them. For example:

• Your core problem in Spain is that all the money went back to Germany to hide from the economic storm. You could have all your workers move to Germany to "follow the money" - except that they don't actually speak German and that is physically not an option.
• OK, so if the money all went away, why not just print more money? Well, member states of the EU aren't actually authorized to print more money, so that's not an option either.
• So who does have the authorization? The European Central Bank, but they are apparently pants-on-head crazy and refuse to print more money.
• So you could export your way out of the crisis, right? If you made your manufactured goods more attractive, you could get all your industry up and running with foreign demand instead of foreign investment. Problem1: you're now actually living in a closed economy called "Europe" and in many ways there basically isn't any foreign demand. Problem2: You have no control over your exchange rates, that's the department of the ECB. And they are still pants-on-head crazy.
• So what about massive fiscal stimulus? Governments are immortal and can take any amount of debt required to fix a purely financial situation, right? Well, sort of. Governments like Japan can have outstanding debts of 200% the GDPand still borrow more money at less than half a percent because they are completely safe places to store money. But they are completely safe because they can always print money or borrow from a cooperative central bank to cover any nominal debts, making the risk of default essentially zero. As mentioned before, Spain can't print money and their central bank is still pants-on-head crazy, so their ability to borrow money is extremely constrained. Worse, the major European institutions are all doubled down on praying for the confidence fairy to save the day, so if Spain wants any help covering the debts incurred when the crisis first hit, they need to take austerity measures - which is the literal opposite of fiscal stimulus.
• What about defaulting on their current debts? The EU actually won't let them do that.
• So what's left? Years and years of painful deflation until their wages are low enough that their products become attractive enough that they open up enough manufacturing to reduce their unemployment of 21.5% to something reasonable. And hope this magically happens before years of low employment and negative real growth leave their government insolvent. Also: hope that the bond market doesn't notice that they currently are not on track to do that, triggering a self fulfilling market panic that makes them insolvent right away.

The thing is: the Eurozone actually could be salvaged. Germany could accept an inflation target of 4-5% and Spain could achieve a "relative devaluation" by keeping nominal wages static for a few years. Meanwhile the ECB could guaranty all the sovereign debt, putting a clamp down on the runaway interest rates, and the governments could be freed from the austerity shackles and allowed to actually grow their way to budgetary stability. The thing is that the ECB has made it clear that You Can't Handle The Truth! So they have basically come out and said in public that they would rather take a chance that things will magically fix themselves than admit they were wrong.

-Username17