Eurozone saga…what’s up?
by Rebecca Wilder
This is a post about my confusion, rather than my reporting, of the Eurozone saga. Here are some pieces worth reading if you want to catch up:
The NY Times (the basics); Ed Harrison (via Naked Capitalism); From the billy blog; The Financial Times (Martin Wolf, a must read); The Economist (will reference below).
Okay, a conditional guarantee for possible lending, maybe, with consultation from the IMF has been agreed upon by the Eurozone countries (Germany and France, really). But what I don’t understand is pretty well stated in the Economist article:
The Greek government has somehow to keep its economy on an even keel while pushing through a huge fiscal tightening. Countries that seek IMF help generally have to endure brutal cuts in public spending, which deepen recessions. To counter that effect, the IMF typically counsels a weaker currency. Sadly, this is not an option for Greece. Stuck in the euro, its exchange rate with its main trading partners is fixed. Greece cannot devalue, so it needs more time to adjust than the three years it has agreed with its EU partners—and a bigger safety net while it does.
Sadly? This is not an option? The Economist completely skips over the VERY LARGE issue of a singular currency and on to the competitiveness story, one that must be derived through internal devaluation, i.e., dropping wages and other nominal variables.
Financial crises, especially those in small-open economies (Sweden, for example), generally end with a massive currency devaluation that drives export growth (provided there is external demand to suffice). I honestly don’t see how a sufficient export-generated rebound is even a possibility, given that the rest of the Eurozone is essentially trying the “internal devaluation” bit simultaneously (chart above).
And who’s going to pick up the slack? In 2008, 64% of Greece’s export income was derived by the EU 27 countries, 70% for Spain, and 74% for Portugal. If the Eurozone as a whole is using this same internal deflation mechanism to spur export growth, only the “zone” as a whole really benefits, not any one country.
WIHTOUT a massive surge in export-driven GDP growth no “zone” country can drop its financial deficit without incurring behemoth debt burden growth (in the case of the Eurozone, the term “burden” actually applies since Greece, nor any one economy, can print its own money).
Look at the government’s period budget constraint (left), where the lower-case letters “d” and “p” stand for the debt and primary deficit as a share of GDP, respectively. r is the nominal interest rate, and (1+g) is the rate of NOMINAL GDP growth (including price appreciation). (Email me if you want the algebra.)
When Greece starts dropping p (the primary deficit), the fundamentals of the economy (i.e., nominal gdp growth (1+g)) must be robust enough to prevent a surging debt burden. And here’s the cycle: to drop the primary deficit, it does so by reducing G and raising T, which drags Y (as of Y = C + I + G + Ex – Im) and growth of Y, (1+g), since export growth is unlikely to be there to offset the decline in private spending; these effects then flow back to the primary deficit to raise p.
And likewise, only under the circumstances of heroic export growth can the government reduce its fiscal deficit to 3% WITHOUT the private sector levering up their balance sheets and contributing to a larger default risk (of the depressionary type). I’m confused.
All I’m saying is that this plan, in its current form, is really not much of a plan at all. The internal devaluation model has a lot of holes.
Rebecca Wilder crossposted with News N Economics
It’s interesting. You reckon that much the same thing has been happening in every monetary union for centuries? Maybe it’s part of why some regions like Sicily and Mississippi seem to be perpetually impoverished?
Hi VtCodger,
I think that it’s fair to compare Mississippi to Greece, but fundamentally they are different. Greece is a sovereign state, while Mississippi is under the fiscal umbrella of the U.S. federal government. Let’s take Katrina, for example, Louisiana received government support (funds and resources) after the hurricane, California, too, amid wild fire shocks. Had they been left to their own accord, borrowing from the markets, the implications would have been dire. Instead, they were able to attain fiscal support relative to another state that didn’t need it nor received it…..all with a unified currency, the dollar.
The same cannot be said of Greece or any of the GIIPS – they are subject to market sentiment and supply/demand forces on interest rates for borrowing. So what normally would occur in Greece’s situation? A sharp devaluation of the currency, coupled with economic contraction that drives down relative prices, and you get a real exchange depreciation that drives export growth. Can’t do that. The Eurozone was never expected to survive nor be able to withstand such an external shock as the financial crisis and the precipitous drop in global trade that resulted over the last two years.
This is not good. Rebecca
I would like to clarify something I said above, I said: “Greece is a sovereign state”
That is not true – The Greek government is not fully sovereign, as it does not print money. It’s government debt, however, is.
Rebecca
Hi VtCodger,
I think that it’s fair to compare Mississippi to Greece, but fundamentally they are different. Greece has its own sovereign debt, while Mississippi is under the fiscal umbrella of the U.S. federal government. Let’s take Katrina, for example, Louisiana received government support (funds and resources) after the hurricane, California, too, amid wild fire shocks. Had they been left to their own accord, borrowing from the markets, the implications would have been dire. Instead, they were able to attain fiscal support relative to another state that didn’t need it nor received it…..all with a unified currency, the dollar.
The same cannot be said of Greece or any of the GIIPS – they are subject to market sentiment and supply/demand forces on interest rates for borrowing. So what normally would occur in Greece’s situation? A sharp devaluation of the currency, coupled with economic contraction that drives down relative prices, and you get a real exchange depreciation that drives export growth. Can’t do that. The Eurozone was never expected to survive nor be able to withstand such an external shock as the financial crisis and the precipitous drop in global trade that resulted over the last two years.
This is not good. Rebecca
Hi VtCodger,
I think that it’s fair to compare Mississippi to Greece, but fundamentally they are different. Greece has its own sovereign debt, while Mississippi is under the fiscal umbrella of the U.S. federal government. Let’s take Katrina, for example, Louisiana received government support (funds and resources) after the hurricane, California, too, amid wild fire shocks. Had they been left to their own accord, borrowing from the markets, the implications would have been dire. Instead, they were able to obtain fiscal support relative to another state that didn’t need it nor received it…..all with a unified currency, the dollar.
The same cannot be said of Greece or any of the GIIPS – they are subject to market sentiment and supply/demand forces on interest rates for borrowing. So what normally would occur in Greece’s situation? A sharp devaluation of the currency, coupled with economic contraction that drives down relative prices, and you get a real exchange depreciation that drives export growth. Can’t do that. The Eurozone was never expected to survive nor be able to withstand such an external shock as the financial crisis and the precipitous drop in global trade that resulted over the last two years.
This is not good. Rebecca
Nice post Rebecca
Thanks for linking to billy blog btw. I’ve spent an inordinate amount of time over there the last six months but the education on monetary systems has been invaluable. Anyone who fancies themselves a progressive or a part of the “reality based” community needs to learn what Mr Mitchell, Warren Mosler, Randall Wray and Marshall Auerback are talking about. The veil of ignorance that has been placed over our eyes about money and money creation is staggering. Talking about pegged currencies (China), countries which are not sovereign in their currencies (Eurozone) and commodity based currencies (not sure if any exist today in developed world) as if they are all operate the same is very common in the economic discussions you see all over the blogosphere.
All these austerity measures being forced upon the working citizens, while the elite “suffer” from fewer buyers of their Ming vases is not going to end well if continued. The liquidationist mindset is quite pervasive especially here in the US but it must be fought. Only the people left with money will be able to buy at the liquidation sale being proposed by the Austrians and neoliberal deficit terrorists.
To hear some folks talk you’d think they believe that the answer to everyones ills is to deflate make your products cheaper and then EXPORT your way to prosperity ala the Germans. Ive heard of fuzzy math before but thinking that EVERYONE can be a net exporter takes the cake.
I guess we’ll sell to the Martians
Maybe. As I understand it Mississippi actually did default on its soveregn debt in the 1840s and people are still trying to get it to pay up on the bonds. But I agree that US states today are buffered by the Federal Government in ways that the EU isn’t, But it is curious that Mississippi has never, in good times or bad, been able to get its economy in gear and managed to achieve even temporary prosperity relative to the rest of the country. I can’t help wondering if it might have faired better if it had its own currency whose value could be reset relative to the other states. … Probably not.
Codger
I dont think there is any doubt that Mississippi COULD have fared better with their own currency, provided they understood and used all the tools commensurate with that fact. Being able to issue it and managing it intelligently are two different matters. Of primary importance would be to avoid stupid rules like $4$ debt issuance with all spending and balancing budgets. Tying the hands of a currency issuer and limiting them to spend only what they can collect in taxes is unnecessary and only serves to impose further austerity when private sectors are slowing their spending.
TEST
Here is a record of CBO projections for SSA OASDI trust funds exhaustion. Note that the CBO dropped the projected calendar year of OASI exhaustion from 2048 to 2042, a six year decline, during the period of CBO reports issued from August 2008 to August 2009.
CBO – Projected Social Security OASDI
Combined Trust Funds Financial Exhaustion Date
Under Current Law
CBO Report – End of Calendar Year OASDI Exhaustion
Jun 2004 LTSSO….2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO…..2050
Jun 2006 LTSSO….2046
Dec 2007 LTBO…..2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO…..2047
Aug 2009 LTSSO….2042
Notes:
LTSSO – Long Term Social Security Outlook
LTBO – Long Term Budget Outlook
DOSSP – Long-Term Analysis of the Diamond-Orszag Social Security Plan
2007 LTSSO – No document published
Aug 2008 LTSSO – “Another commonly used metric is the trust funds’ exhaustion date, which CBO projects will be 2047 under the extended-baseline scenario and 2045 under the alternative fiscal scenario. Once the trust funds are depleted, the Social Security Administration no longer has legal authority to pay benefits. In the years following the trust funds’ exhaustion, annual outlays would be limited to annual revenues, so the benefits that could be paid would be substantially lower than the benefits that were scheduled to be paid. In its August 2008 report titled Updated Long-Term Projections for Social Security, CBO projected benefits under two scenarios: a “payable benefits” scenario, in which outlays are limited by the availability of trust fund balances, and a “scheduled benefits” scenario, in which they are not limited. This report uses the latter scenario.”
Aug 2009 LTSSO – “In 2043 — CBO’s projected date for the exhaustion of the trust funds — revenues will equal only 83 percent of scheduled outlays. Thus, payable benefits will be 17 percent lower than scheduled benefits.” Therefore, 2042 is the last projected calendar year for payment of full scheduled benefits. It is stated as the actual calendar year of OASDI exhaustion in the above presentation to maintain consistency with all other projected OASDI exhaustion calendar years based on CBO commentary in the other reports.
Sources:
http://www.cbo.gov/publications/collections/collections.cfm?collect=5
http://www.cbo.gov/publications/bysubject.cfm?cat=3
.
TEST
Here is a record of CBO projections for SSA OASDI trust funds exhaustion. Note that the CBO dropped the projected calendar year of OASI exhaustion from 2048 to 2042, a six year decline, during the period of CBO reports issued from August 2008 to August 2009.
CBO – Projected Social Security OASDI
Combined Trust Funds Financial Exhaustion Date
Under Current Law
CBO Report – End of Calendar Year OASDI Exhaustion
Jun 2004 LTSSO….2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO……2050
Jun 2006 LTSSO…..2046
Dec 2007 LTBO……2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO…..2047
Aug 2009 LTSSO…..2042
Notes:
LTSSO – Long Term Social Security Outlook
LTBO – Long Term Budget Outlook
DOSSP – Long-Term Analysis of the Diamond-Orszag Social Security Plan
2007 LTSSO – No document published
Aug 2008 LTSSO – “Another commonly used metric is the trust funds’ exhaustion date, which CBO projects will be 2047 under the extended-baseline scenario and 2045 under the alternative fiscal scenario. Once the trust funds are depleted, the Social Security Administration no longer has legal authority to pay benefits. In the years following the trust funds’ exhaustion, annual outlays would be limited to annual revenues, so the benefits that could be paid would be substantially lower than the benefits that were scheduled to be paid. In its August 2008 report titled Updated Long-Term Projections for Social Security, CBO projected benefits under two scenarios: a “payable benefits” scenario, in which outlays are limited by the availability of trust fund balances, and a “scheduled benefits” scenario, in which they are not limited. This report uses the latter scenario.”
Aug 2009 LTSSO – “In 2043 — CBO’s projected date for the exhaustion of the trust funds — revenues will equal only 83 percent of scheduled outlays. Thus, payable benefits will be 17 percent lower than scheduled benefits.” Therefore, 2042 is the last projected calendar year for payment of full scheduled benefits. It is stated as the actual calendar year of OASDI exhaustion in the above presentation to maintain consistency with all other projected OASDI exhaustion calendar years based on CBO commentary in the other reports.
Sources:
http://www.cbo.gov/publications/collections/collections.cfm?collect=5
http://www.cbo.gov/publications/bysubject.cfm?cat=3
.
Jun 2004 LTSSO….2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO……2050
Jun 2006 LTSSO…..2046
Dec 2007 LTBO……2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO……2047
Aug 2009 LTSSO….2042
Jun 2004 LTSSO….2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO……2050
Jun 2006 LTSSO…..2046
Dec 2007 LTBO……2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO…….2047
Aug 2009 LTSSO….2042
TEST
Here is a record of CBO projections for SSA OASDI trust funds exhaustion. Note that the CBO dropped the projected calendar year of OASI exhaustion from 2048 to 2042, a six year decline, during the period of CBO reports issued from August 2008 to August 2009.
CBO – Projected Social Security OASDI
Combined Trust Funds Financial Exhaustion Date
Under Current Law
CBO Report – End of Calendar Year OASDI Exhaustion
Jun 2004 LTSSO….2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO……2050
Jun 2006 LTSSO…..2046
Dec 2007 LTBO……2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO…….2047
Aug 2009 LTSSO….2042
Notes:
1. LTSSO – Long Term Social Security Outlook
2. LTBO – Long Term Budget Outlook
3, DOSSP – Long-Term Analysis of the Diamond-Orszag Social Security Plan
4. 2007 LTSSO – No document published
5. Aug 2008 LTSSO – “Another commonly used metric is the trust funds’ exhaustion date, which CBO projects will be 2047 under the extended-baseline scenario and 2045 under the alternative fiscal scenario. Once the trust funds are depleted, the Social Security Administration no longer has legal authority to pay benefits. In the years following the trust funds’ exhaustion, annual outlays would be limited to annual revenues, so the benefits that could be paid would be substantially lower than the benefits that were scheduled to be paid. In its August 2008 report titled Updated Long-Term Projections for Social Security, CBO projected benefits under two scenarios: a “payable benefits” scenario, in which outlays are limited by the availability of trust fund balances, and a “scheduled benefits” scenario, in which they are not limited. This report uses the latter scenario.”
6. Aug 2009 LTSSO – “In 2043 — CBO’s projected date for the exhaustion of the trust funds — revenues will equal only 83 percent of scheduled outlays. Thus, payable benefits will be 17 percent lower than scheduled benefits.” Therefore, 2042 is the last projected calendar year for payment of full scheduled benefits. It is stated as the actual calendar year of OASDI exhaustion in the above presentation to maintain consistency with all other projected OASDI exhaustion calendar years based on CBO commentary in the other reports.
Sources:
http://www.cbo.gov/publications/collections/collections.cfm?collect=5
http://www.cbo.gov/publications/bysubject.cfm?cat=3
.
Jun 2004 LTSSO….2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO…….2050
Jun 2006 LTSSO…..2046
Dec 2007 LTBO……2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO…….2047
Aug 2009 LTSSO….2042
Jun 2004 LTSSO….2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO…….2050
Jun 2006 LTSSO…..2046
Dec 2007 LTBO…….2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO…….2047
Aug 2009 LTSSO….2042
Jun 2004 LTSSO…..2052
Dec 2004 DOSSP….2052
Mar 2005 LTSSO….2052
Dec 2005 LTBO…….2050
Jun 2006 LTSSO…..2046
Dec 2007 LTBO…….2043
Aug 2008 LTSSO….2048
Jun 2009 LTBO…….2047
Aug 2009 LTSSO….2042
I agree with this post and I wrote at http://mgiannini.blogspot.com/2010/03/money-creation-for-nothing-or-let.html
– that default is the only option and at http://mgiannini.blogspot.com/2010/03/naked-gun-smell-of-fear.html
– that the plan is a naked gun put on the table by EU leaders smelling the fear and just to buy time.
Hi Greg,
You should definitely add Dean Baker and Rob Parenteau to that list, too. But I agree, people tend to lump the non-floaters all together. At least if a country with a currency peg came under pressure, it could float the currency! Greece, alas, cannot do that!
Rebecca
Rebecca
I was remiss in not mentioning Rob Parenteau. He has written some great pieces Ive seen over at Naked Capitalism. I certainly have seen Dean Bakers stuff over the years but I have not placed him in the MMT/Chartalist camp. I have recently noticed that Mr Galbraith has written some stuff that sounds Chartalist as well.
billy blog has a piece today that quotes some of the German financial commenters as saying that Greece should reissue drachmas and leave the EMU. Interesting.
it’s not about becoming mote competitive, it’s about spending within your means
Marshall also wrote a piece today: Greece and the EuroZone: Angie, Ain’t it Time to Say Goodbye?
Rebecca
Marshall Auerback also write a piece today at the New Deal 2.0.
Rebecca
Its also about defining what “means” are.
Does the bond market get to tell sovereign currency issuers how much they can spend?
The Emperor’s Clothes
I am not an economist. Thank you and the letter writers to explain some basic economics that even I for years have found troubling. I always thought of it not as the Greek but the Portugese problem in the EU. It looks like the European politicians of the post ww II generation should have read these exchanges.