peterbirks | Breathing Space

Breathing Space

So, Greece gets a €110bn rescue package from the IMF and the EU. The IMF portion of this will get to Greece in time for its May 19th deadline (when Greece needs to renew some of its debt), while the EU still needs to meet to discuss the matter (of course) and there's the minor matter of 15 European parliaments that need to approve it.

The weird thing is, the countries keenest to approve it are the countries that can least afford it. I'm reminded irresistibly of someone who has fallen for a Nigerian 419 scam. If you haven't fallen for it in the first place, you will send them nothing, but if you've already hocked everything that you own and they still need "just a bit more before the money is released" then, well, you need to believe.

And so Spain, Portugal and Ireland back the loan to Greece, even though Spain, Portugal and Ireland can ill-afford any spare cash at the moment. because they need to believe that this bail-out will do the trick and will stop the contagion. If it doesn't, then Spain, Portugal and Ireland are in bigger trouble than if they let Greece go down the pan now.

So, there are two fundamental questions here: (1) Will the Greeks stand for the austerity measures that Greece, now unofficially a protectorate of the EU with no power over its own budget (an interesting and probably unintended route towards the federalism that the Benelux countries crave) and (2) even if the Greeks do stand for it, is it enough?

Both questions are hard to answer, and if the answer to either is "No", then the consequences are also hard to calculate. Which is why the EU is just assuming that the answer to both questions is "yes". As someone wrote at the weekend, this is a bit like a drunk looking for his car keys under the lamppost rather than in the gutter where he thinks he dropped them, because the light is better under the lamppost.

Let's take the economic question first. Is it enough? My thanks to the Wall Street Journal for digging out some hard numbers here.

Greece has €73 billion in debt coming due between today and three years hence: May 2, 2013. (This doesn’t include more than €11 billion due on May 20, 2013.)

Greece’s new projections show budget deficits declining from 13.6% this year to under 3% in 2014.

We can’t precisely reckon the magnitude of the accumulated deficit between now and May 2013, since the projections are annual. But if we figure the total deficits from 2010-2012 and 2011-2013, and average them, we get around €50 billion. That’s a reasonable guess.

The important thing to note there is that this is not just a matter of bailing out what Greece already owes; it's accepted that there is no way that the Greek position can fail to get even worse for the next four years. So the bailout covers sins past, sins present and sins future. Assuming that all of you can manage simple arithmetic, that means Greece needs €123bn over the next four years.

However, the extra €13bn might, just might, be obtainable from the private markets. That all depends how well Greece performs between now and 2014.

Which brings us to the second question. Will the Greeks take it? In common with the rest of the populus in Europe, the perpetual question is "why should we pay for something that isn't our fault?" Personally I would ask anyone who asks that question whether they have bought a holiday or a washing machine on a credit card over the past decade, or whether their credit card debt is higher now than it was a decade ago, or whether they have remortgaged. Because all of this is "unearned" money that was a benefit of the credit boom over 2001-2007. Sure, some other people have gained more, but don't pretend that every consumer in Europe has not had his nose in the trough.

The austerity being imposed on the Greeks is certainly tough, including (sooner than I anticipated) the realization that it isn't just those still working who will have to make sacrifices. It will also happen to the already retired. I mentioned this to a bright spark in the city who earns well into six figures a year in the pensions business, and he looked at me aghast. Now, just a couple of months later, it's come true. It will come to other European countries sooner rather than later. Sure, it will be tougher for those yet-to-retire (I'm assuming that when I reach 65 my pension will be means-tested) but the concept of the "guaranteed" pension for those already retired will turn out to be a rather nebulous concept. As an accountant might say "ah, yes, well black-and-white contracts are something of a grey area". Perhaps, when exposed to light, they fade.

The greek administration so far has been able to rely on the ambivalence of the trades unions, which did, after all, support Papandreou into power. There's a general strike due this week. This will be very much a case of "what do the ordinary Greeks think?"

It's possible that there is no solution. If the ordinary people decide that moving outside of the "proper" economy is the only way to survive (see southern Italy for an example of this) then the hike in VAT will make little difference, because official GDP will collapse as everything goes under the counter.

So, what about if the whole thing goes tits up? Well, the ECB has changed the rules on collateral (not really a surprise, because if it didn't do this, the Greek banks would be fucked) to accept Greek bonds, even though they are 'junk'. In essence, the ECB has overruled the rating agencies. But rating agencies don't downgrade like this for fun. If and when the default comes, what then? Well, as I said at the start, Spain, Portugal and Ireland are next in the firing line, and they will have less ammunition in reserve, because they will have spent money that they don't have trying to prop up Greece.

This time round, it looks like the Germans will come through with the cash. But if Greece fails, would they come up with the far larger amount needed for Spain? Somehow I doubt it.

Spain, actually, is the key. The euro could probably survive defaults in Portugal, greece and Ireland -- relatively peripheral countries in the grand scheme of European economics. But Spain? Not really. That, surely, would mean the death of the euro as we know it.

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So do you agree with the analysts who say that Greece is the real basket case, as Spa/Por/Ire at least had working economies before all this kicked off?

There was an interesting story on the New York Times the other day: http://www.nytimes.com/2010/05/02/world/europe/02evasion.html
It says studies say the Greek treasury could be losing €30 billion a year to tax evasion, which sounds massive but tax fraud is routine there, in part due to a hangover from Ottoman days.

Apparently, if you have a swimming pool you have to declare it on your tax return, as it's regarded as a sign of wealth. In the northern suburbs of Athens, 324 residents admitted to having pools. However, when the Revenue checked satellite photography of the area, it came up with a staggering total of 16,974 pools.

The response of the populace to being caught fiddling their tax returns? Companies which build swimming pools have been inundated (ho-ho) with calls from people wanting to know how to camouflage their pools.

(The answer is a green cover with no water showing: http://www.telegraph.co.uk/news/worldnews/europe/greece/7664764/Revolution-from-Greeces-ruins-as-crisis-deepens.html)

So, will the Greeks take it - or will it be "I'm all right Ioannis" as everything there goes under the counter, in the hope (if they can even be bothered to think about where the buck might stop) that Spa/Por/Ire will take the hit instead?

Well, Greece is certainly different. In corporate terms, we might be comparing a company that has gone bankrupt because the business model wasn't sustainable, and a company that has gone bankrupt through fraud. Greece's numbers were never true.

As for the tax evasion, one need only look at the London housing market, which is being sustained at the top end by Greek cash (yet another "unearned" benefit for London house owners that they will take for granted and as their rightful due, rather than something that may have to be paid back some day) which by all accounts doesn't exist.

One good thing that has come out of this, BTW, is that surely Turkey's hope of joining the EU (and of other non-euro countries within the EU to join the euro) have now been kicked rather more than temporarily into touch.

More below, in answer to Pete D.

Well, simple arithmetic suggests that it's actually €24bn, not €13bn. Unless we take it for granted that the period between May 2nd and May 20th has some sort of automatic free pass thrown in.

This isn't going to work, is it? My bet would be on the EU money stalling, just because the EU can't agree on anything in a fourteen-day period. But even if I'm wrong, that's a whole three years of riots, strikes, and general Greekiness coming up. It's not as if they don't do that sort of thing in normal times.

As usual with economic pontificators (not you -- the IMF, the ECB, and so on), the cultural dimension has been entirely missed. Ireland/Spain/the UK is not Greece, indeed. But they're not Greece, because they're entirely different cultures -- not because of numerical data.

Greece has been a seriously schizophrenic society since the end of the Colonels. It's got the most opaque military budget in Europe, to satisfy nationalists and fascist hangers-on. It's got a set of plutocrats entrenched in the political system who keep their money offshore wherever possible. It's got a ridiculously bloated public sector and a general leftist/statist tendency that harks back to the good old days of 1946-8, when the Communist partisans were battling the American-backed fascists. In short, it looks more like Saddam's Iraq (minus torture cells and mustard gas) than it does like a modern European country. Why the hell the Germans let them into the Euro is entirely beyond me.

The Euro is near death. If you remember, you predicted something like 2014, and I predicted something like 2012. I now take this back. It'll be lucky to last the rest of this year.

I deliberately focus on the economic matters rather than cultural and anthropological matters because the danger is that you head into what I call the "never-finished PhD" territory. That is to say, you end up trying to write 1,000 words and end up writing 50,000 and never publishing it, because there's just one more relevant point that you need to put in.

Yes, Greece possesses some seriously unique aspects -- not least the money paid to the army since 1967 to keep it on-side. One could logically argue that Greece is not a sustainable democracy because it has to fiddle the books to keep the army happy on one side and the revolutionaries/communists happy on the other. When a political system can only survive through bribery, it's not really a viable political model.

That said, if it weren't for the EU's rather petty pro-democracy rules, the farce is that Greece's best chance of remaining within the euro would be for the army to be in power. I'm not saying that this is a sacrifice worth making (it isn't).

I don't think the euro is yet near death, yet. As I said, the really weird thing about this is that, for the euro to succeed, it needed federalism to a greater degree than it had (that, of course, was the Benelux plan). In particular, it needed a common financial strategy. Now, because of crisis, it actually has that federal control over Greece (albeit under the eye of the IMF and the ECB rather than the European parliament -- oh, the delicious irony). Rescuing the euro (if the crisis spreads to Spain, Portugal and Ireland), could give the EU the federalism it craved.

But far more likely will be that the euro will, somehow, be ditched.

Germany and, to a lesser extent, France, are the key players here. Benelux will back a euro rescue and federalism. But would Germany think the greater federalism worth the huge economic cost? Or, rather could it? Would the German people come along? I suspect not. But what about France? Its instincts are federal and the cost to it (of rescuing the euro) would be less than to Germany.

The EU cannot stand still between now and 2014. Either the Benelux dream becomes a reality, or the euro dies and the EU takes a big step backwards (from the point of view of the federalists).

Fascinating times.

The chances of Germany putting up with much more of this are zilch. I'm at least half-convinced that the only reason the political classes there have carried it this far is because of the exposure of the Landesbanken to Greek debt (and indeed to other piggy problems). Germans are very logical people. They'll accept the fiction that this is not an anti-Maastricht bailout, but an emergency deal to save the Euro; but they won't accept it the second time around. And then we get into the territory of Die Macher...

The French are, perhaps, a more interesting proposition. First of all, they've got a mess of their own brewing up on their doorstep, what with the Walloons and the Flems being the only civilised people in the world at the moment who are tearing their own country apart for something other than economic reasons.

Secondly, I'm not convinced by this federal instincts thing. As in so many areas, the French are masters at saying one thing and meaning another. The attractions of increased EU federalism are several:

* Back-door Napoleonism. More important than an anglophone might think.
* Vast quantities of jobs with power available to the graduates of les Ecoles. (Interesting that Germany doesn't usually bother so much about this.)
* Cocking a snook at America (and indeed Anglo-Saxons in general).
* Sucking as much money as possible for les paysans out of the CAP.
* Keeping the Germans on-side.

I think the last means that they'll do whatever Germany tells them to do (whilst blaming Germany for the consequences). The CAP is going to die a hideous death if all EU money is suddenly sucked out and thrown into fire-fighting -- and note that the PIIGS already take a disproportionate amount of CAP money, even when they're not in crisis. Jobs for the boys have been there since the days of Monnet and will continue to be there, no matter what the future structure of the EU.

That only leaves the Napoleonic complex and the opportunistic anti-Americanism. I'm pretty sure that French intellectuals can finesse their way around these unimportant little Cartesian discontinuities.

I've seen Catherine Deneuve on a prime-time French philosophical TV discussion. She, Gerard Depardieux and the rest are more than capable of talking both hind legs off a Greek goat. And if they can do it, I'm sure the technocrats can do it even better.

Euro dead by mid-2011 at the latest, I'm telling you. The only serious issue is the unravelling of debt positions held in Euros. God, that'll be a mess, whenever it happens.

Pete wrote "If the ordinary people decide that moving outside of the "proper" economy is the only way to survive (see southern Italy for an example of this) then the hike in VAT will make little difference, because official GDP will collapse as everything goes under the counter."

In my experience there is no "proper" economy in the farming community. Barter is a way of life, subsidy fraud is endemic, Farmers Markets are regarded as tax free income and with most farms being family businesses most employees are also family members.

Strangely, I made exactly this point to Jan a couple of years ago, as I tried to work out how people on wages of £12k seemed to live the same lifestyle as, say, someone on £25k to £40k in London.

It quickly became clear (to me, but not to those living in Worcestershire, who simply took it for granted) that the non-monetary/non-declared economy made up a significant portion of GDP. And this isn't a farming community, this is a sizeable town.

This would indicate that even in the UK the actual level of GDP is considerably higher than the official calculation, and that the tax burden as estimated by official numbers is slightly askew.

Tax avoidance by the well-off and the middle-classes is probably counterbalanced by the non-monetary part of GDP among lower wage earners. If you try to tax the high earners properly, they leave the country. If you try to tax the low wage earners properly, they sink into real rather than relative poverty.

PJ

One small point.

I've yet to see evidence to support the proposition that "if you try to tax the high earners properly, they leave the country." This axiom is a prop holding up the Thatcher/Reagan notion of trickle-down, which came many years after Keynesianism and hasn't held up as well.

The reductio ad absurdum of this is that you don't tax the higher earners at all. I'll leave you to pursue the consequent simple mathematics.

As for "taxing low wage earners properly," that's an entirely different can of worms. Perhaps you can dig into your thesaurus to replace "properly" with what you actually meant.

Irregardless, there'll always be a black market. Indeed, there'll always be several black markets, in any given economy.

In the case of Greece, and perhaps of south Italy, the black market economy (with or without mafia or army assistance) is pretty much outdistancing the real economy. Which of course is a problem. And which, of course, nobody is going to do anything about, any time soon.

In the case of the UK, and to simplify:

(1) Almost anybody earning over £100,000 a year is benefiting from the black economy. The tax system is absurdly complicated. You can hire an accountant to hide or postpone this or that, or if you're lucky, you can even move funds to one of the UK's convenient offshores. It's a Special Purpose Vehicle, if you will.
(2) Almost anybody earning under £10,000 a year is benefiting from the black economy. Half of the people I meet down the pub here in Birmingham have got some sort of dicky connection to cash-in-hand deals, or semi-legit commodity smuggling, or something. I suppose that's another sort of Special Purpose Vehicle -- I understand that a white Citroen Berlingo is preferred.

It's a silly argument. You can't tax the bottom end of this, because what they do is illegal, and since the law apparently doesn't work, you've got nothing left. You can't tax the top end of this, because the tax system is riddled with loop-holes and the fuckers can just create artificial losses against real gains, or move money from one legitimate bucket to another legitimate bucket. I don't know why the Conservative party is against the EU. It's a God-send in this respect.

This might also be a silly argument; but I can't see anything wrong with piling appropriately designed taxes on those who have made money in the financial sector. At the worst, they'll leave: oh dear, some other country will have to bail the fuckers out next bubble. (And don't forget that this is something like the fourth bubble in fifteen years. S&L, dot-com/telco, Enron/Worldcom, easy credit/CDS ... and I'm not sure I didn't see tulips in the middle there.)

At the best, the government claws something back. Which of course they'll throw away on consultants and Big IT. But that's a different problem.

In between, we might actually rebalance the UK economy. Hardly very likely, is it?

But maybe it's the best chance we've got.

This is actually not a bad point. Or, rather, in the short term, it isn't a bad point. But I think that the problem isn't so much that people would leave, in that new people wouldn't come. This is what happened in the 1960s and by the mid-1970s it was assumed that New York and Frankfurt would be the future centres of finance. And where is Frankfurt in the world of finance today? Nowhere, buried under German bureaucracy and UK laissez-faire. And, sad though it might be to say, that brought a lot of wealth into the UK (not least a support of asset prices), which many of us have been living off.

The tax level that you want to impose on anyone is the tax level that will maximize income without causing a revolution. This is not necessarily the highest tax rate, because the Conservative argument is that lower tax rates stimulates financial activity which, eventually, increases the overall take.

As an addition to this, of course, is tax enforcement, an additional complication whose cost/revenue factor has to be added into the mix. I didn;t say it was easy :-).

The general solution is to "tax what you can" rather than "tax what you should". Hence the increase in stamp duty on property purchases -- something that you can't take offshore and something which you can't do much "under the counter". However, the downside is that it causes a reduction in mobility of labour. However, if we brought in some "tax what you shoulds" and introduced tougher enforcement and propaganda to "bring people round", you might get a better long-term result.

Another side of this is that in large parts of rural Shropshire what happens in Westminster or even at County Hall is seen of being of almost nil importance.

Also many services, public transport for example, that people in the SE take for granted simply do not exist in the villages.

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Breathing Space

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The rural economy

Re: The rural economy

Re: The rural economy

Let 'em go

Re: The rural economy