2010-05-02 03:56:08frank
希臘的債務危機暴露了歐元的弱點
因為加入了歐元組織，德國人民忍受了十年的實質工資負成長，而今天要他們出錢救希臘，這個揮霍的國家，德國人民怎麼肯呢？希臘又不是東德！五月九號德國的地方選舉在即，梅克爾更不可能在選前對希臘的債務危機做任何重大或具體的承諾。
以下四篇從紐約時報與經濟學人所選出來的評析，可以發現英美兩國的專家都是希望德國出面解決這希臘的債信問題。雖然歐元區有一個中央銀行，但是卻有15個政府，每一個政府的經濟實力與財務紀律也都有很大的差距。
歐元區主權債信岌岌可危的四國在英語裡被用PIIG的acronym來稱呼，或有人譯為歐豬四國，分別為：Portugal, Ireland, Italy, & Greece. 然而以下報導中所提的多為 Greece, Italy, Spain 與 Portugal. 這四篇報導都主張的德國應迅速金元希臘，不僅為希臘政府，最主要的是讓世人對歐元的信心，不會對其他主權債信不佳的國家抽銀根，造成連鎖反應，使經濟進一步惡化。
I remembered before Germany joined with Euro, many German economists openly called their govt to think twice and warned of different financial situation with each country would result in big burden, if not failure, to Germany.
Since 15 governments shared Euro, therefore each member state lost a powerful tool of monentary policy, appreciating its own currrency, so it looks that there are few options left with Euro and Greece. It seems only way out is for Germany to bear higher inflation and Greece, deflation, which both countries do not want.
However, without strong industrial fundation which can generate strong export, so we can hardly expect Greece stand up in the world like South Korea in 10 or 20 years. Is it possible for Greece to exit from Euro and embrace its Drachma again? Paul Krugman said if Greece exited from Euro, it would be a catastrophe.
S&P degraded Greek to "junk" status few days ago. Could it be possible that US financial institutions wish to take this opportunity to short Greek securities, or even Euro? My friend Ricky thought it might be about power struggle between US and Europe, or said dollar vs. euro. Well, timing is actually "inopportune", but could it be a driving force for European leaders to act to the issue more aggressively?
One thing worth paying attn to is that Germany in Eurozone enjoys the advantages of "fixed exchange rate" as China have been doing. Since in Eurozone, all the country use the same currency, Euro, therefore no exhange rate issue. China has been pegging RMB to US dollar, which resulted in high inflation China is facing now. Since the menotary policymaker in US is aim to boost economy, while RMB peg to USD, then it's virtually Mr. Bernanke, not 周小川, is managing China's monetary policy.
April 30, 2010
Op-Ed Columnist
The Euro Trap
By PAUL KRUGMAN
Not that long ago, European economists used to mock their American counterparts for having questioned the wisdom of Europe’s march to monetary union. “On the whole,” declared an article published just this past January, “the euro has, thus far, gone much better than many U.S. economists had predicted.”
Oops. The article summarized the euro-skeptics’ views as having been: “It can’t happen, it’s a bad idea, it won’t last.” Well, it did happen, but right now it does seem to have been a bad idea for exactly the reasons the skeptics cited. And as for whether it will last — suddenly, that’s looking like an open question.
To understand the euro-mess — and its lessons for the rest of us — you need to see past the headlines. Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.
The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus. And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.
Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.
What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.
But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.
The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.
Hence the crisis. Greece’s fiscal woes would be serious but probably manageable if the Greek economy’s prospects for the next few years looked even moderately favorable. But they don’t. Earlier this week, when it downgraded Greek debt, Standard & Poor’s suggested that the euro value of Greek G.D.P. may not return to its 2008 level until 2017, meaning that Greece has no hope of growing out of its troubles.
All this is exactly what the euro-skeptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.
So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.
So is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.
Meanwhile, what are the lessons for the rest of us?
The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.
And when crisis strikes, governments need to be able to act. That’s what the architects of the euro forgot — and the rest of us need to remember.
http://www.nytimes.com/2010/04/30/opinion/30krugman.html
Europe's sovereign-debt crisis
Acropolis now
Apr 29th 2010
From The Economist print edition
The Greek debt crisis is spreading. Europe needs a bolder, broader solution—and quickly
THERE comes a moment in many debt crises when events spiral out of control. As panic sets in, bond yields lurch sickeningly upwards and fear spreads to shares and currencies. In September 2008 the failure of once-stellar Lehman Brothers almost brought down the world’s banking system. A decade earlier, Russia’s chaotic default on its sovereign debt rocked the credit markets, felling Long Term Capital Management, a hugely profitable American hedge fund. When the unthinkable suddenly becomes the inevitable, without pausing in the realm of the improbable, then you have contagion.
The Greek crisis—or more properly Europe’s sovereign-debt crisis—looks dangerously close to that (see article). Even as negotiators from the European Union and the IMF are haggling with the Greek government over an ever-growing bail-out package, the yield on Greek debt has ballooned: two-year bonds soared towards 20% this week. Portugal’s borrowing costs jumped. Spain’s debt was downgraded, along with Portugal’s and Greece’s, and Italy came worryingly close to a failed debt auction. European stockmarkets have slumped and the euro itself fell to its lowest level in a year against the dollar.
The road into Hades…
It will strike some as mystifying that a small, peripheral economy should suddenly threaten the world’s biggest economic area. Yet, though it is only 2.6% of euro-zone GDP, Greece sounds three warnings that reach far beyond its borders.
The first is economic. Greece has become a symbol of government indebtedness. This crisis began last October when its new government admitted that its predecessor had falsified the national accounts. It is labouring under a budget deficit of 13.6% and a stock of debt equal to 115% of GDP. It cannot grow out of trouble because of fiscal retrenchment and its lack of export prowess. It cannot devalue, because it is in the euro zone. And yet its people seem unwilling to endure the cuts in wages and services needed to make the economy competitive. In short, Greece looks bust.
Few, if any, European countries suffer from all of Greece’s ills, but many scare investors. Portugal has a high budget deficit and is chronically uncompetitive. Spain has a low stock of debt, but it seems unable to restructure its economy. So too Italy, which is heavily indebted to boot. Non-euro-zone Britain has let its currency fall, but its budget deficit is unnerving.
The second lesson is political. Two weeks ago, having concluded that an eventual Greek restructuring was all but inevitable, we said Europe’s leaders had “three years to save the euro”. We presumed that they would quickly get a proposed €45 billion ($60 billion) deal to stave off an imminent and chaotic Greek default, buying time for an orderly rescheduling and for the other weak economies to begin overdue structural reforms. We overestimated their common sense.
The chief culprit is Germany. All along, it has tried to have it every way—to back Greece, but to punish it for its mistakes; to support the Greek economy, but not to spend any money doing so; to treat this as just a Greek problem, when German banks and German citizens, who lend to Greece, stand to lose money too. German voters do not favour aiding Greece. But rather than explain to them why it is in Germany’s interest, the chancellor, Angela Merkel, has run scared of upsetting them before a big regional election on May 9th.
Playing for time has backfired. Now the mooted rescue plan has climbed above €100 billion because no private money is available. The longer euro-zone governments dither, the more lenders doubt whether their promises to save Greece are worth anything. Each time politicians blame “speculators” (see article), investors wonder if they understand how bad things are (or indeed that investors have a choice). Euro-zone leaders initially refused to seek IMF help because it would be humiliating. Their ineptitude has done far more than their eventual decision to call in the IMF to damage the euro.
This political and economic failure leads to the third Greek warning: that contagion can spread through a large number of routes. A run on Greek banks is possible. So is a “sudden stop” of capital to other weaker euro-zone countries. Firms and banks in Spain and Portugal could find themselves shut out of global capital markets, as investors’ jitters spread from sovereign debt. Europe’s inter-bank market could seize up, unsure which banks would be hit by sovereign defaults. Even Britain could suffer, especially if the May 6th election is indecisive.
What then is to be done? The mounting crisis—and the fact that Greece will almost certainly not pay everybody back on time—will renew some calls to abandon it. That would spell chaos for Greece, European banks and other European countries: the effect would indeed be Lehman-like. Hence the necessity, even at this stage, of a show of financial force, linked to the construction of a stronger firewall between Greece and Europe’s other shaky countries. The priority for European policymakers is to do the same as governments eventually did with the banks: to get ahead of the crisis and to convince investors that they will spend whatever is necessary.
…and the expensive way back
The economics starts with the politics. Europe will not stem this crisis unless its decision-making apparatus is overhauled and Germany radically changes its tune. Mrs Merkel needs to go on German television and explain to her people what is at stake—laying out how much Germany has gained from the euro and what it has to lose from a cascade of chaotic sovereign defaults. Germans need to understand the risks to their banking system and their prosperity. They need to understand that stemming Greece’s debt crisis is less an act of charity than of self-interest. However unfair it seems—and the frugal Germans are as furious about the profligate Greeks as the rest of the world was about bankers—a bail-out is justifiable on the same logic: doing nothing would cost them even more.
The resolve cannot stop at Germany’s borders. Financial markets have no idea who is in charge. Europe’s Byzantine decision-making structure does not help but Germany needs to ensure that decisions are reached fast, that Europe speaks with one voice—and that co-ordination with the IMF is smooth. As a way to convince financial markets that the political weather has changed, the euro zone should set up a single crisis-management committee, with the power to take decisions.
Political resolve won’t work unless the underlying economics make sense. The first test of this is the Greek package. In return for fiscal and structural adjustments that give the economy a hope of stabilising its debts, this must provide enough money to prevent a forced default. Up to €150 billion may be needed over the next three years—better to err by offering too much. But the firebreak between Greece and the other embattled sovereigns of the euro zone is even more important. In economic terms, that should not be too hard to justify. Despite their problems, no country other than Greece is manifestly bust. Portugal is in the greatest danger, but it has a better history of fiscal adjustment which, under plausible assumptions, could allow its debt to stabilise at a manageable level. Spain and Italy could be made insolvent by a long period of high interest rates. But none has the near-inevitability of Greece.
Europe’s policymakers must make those distinctions clearer. The vulnerable economies must step up the reforms they need to rein in deficits and boost growth. Portugal, especially, needs action. The European Central Bank should demonstrate that it has the tools to maintain liquidity even if there is panic. Euro-zone governments should pre-emptively create inter-governmental liquidity lines. Thanks to extraordinary incompetence, Europe’s leaders have almost ensured that the Greek rescue failed before it began. They are paying for that today.
http://www.economist.com/displayStory.cfm?story_id=16009099
April 29, 2010
Save Greece, Protect Germany
By FLOYD NORRIS
China is to the world as Germany is to Europe.
Industries in both countries are much better equipped to compete in export markets than are most of their rivals. That is due in part to fixed exchange rates that they zealously protect.
Both countries tend to see their advantage as the result of their own moral superiority: They save; others spend too much.
Germany’s fixed exchange rate is the euro zone, which legally includes 16 countries but in practice includes a number of others that seek to tie their currencies to the euro. It is enshrined in treaties and laws that assume that no country that adopts the euro can ever change its mind.
Now the world is riveted on the spectacle of Greece being forced to choose between default and seemingly permanent austerity. Other European countries, most particularly Germany, want to see many Greeks take pay cuts. If, that is, they hang onto their jobs. They also think unemployment should rise, and that many Greeks should consider moving to more economically attractive countries.
Sympathy and solidarity are in scarce supply. A few weeks ago, one German who has been involved in some of the talks regarding Greece put it simply: “They had their fun.”
The euro states have been talking about bailing out Greece for months now, hoping that a simple promise to do that would calm markets and reassure investors. But they are remarkably hesitant to actually part with the money.
About the only thing Europe has so far accomplished is to make the International Monetary Fund look good. When the I.M.F. does a bailout, it imposes strict austerity terms, which makes it wildly unpopular, but it provides money at very low rates. Europe wants strict austerity and high rates. Subsidizing the irresponsible Greeks is simply wrong, or so they say in Germany.
Angela Merkel, the German chancellor, made clear this week what she believed to be the primary purpose of the European rescue package. It was not to spare Greeks pain, or even to help that country’s economy regain competitiveness.
“When Greece accepts these tough measures, not for one year but several, then we have a chance for a stable euro,” she said.
All this brings to mind the American politician William Jennings Bryan, who was nominated for president three times more than a century ago. He campaigned against the “cross of gold,” arguing that American prosperity was being sacrificed so the country could stick to a gold standard.
Now the Greeks — and soon, perhaps, the Portuguese or the Spaniards or the Irish — are being told to accept higher unemployment and lower wages for the indefinite future. Not for their own good, necessarily, but to preserve a currency.
At the moment, the euro has weakened because of the Greek crisis. For Germany, that is another bonus. Its already competitive manufacturing industries get an extra boost.
Valéry Giscard d’Estaing, the former president of France, has said that his dream is to see Europeans subsume their national identities, so that a woman might say, “I am a European from Italy,” not an Italian. This crisis has made it crystal clear that the people running the more successful parts of Europe do not think in that way.
Greece needs many things, including labor market reforms and large reductions in government payrolls, some of which may come from the austerity being enforced from Brussels, Frankfurt and Berlin. But none of those will help the country’s industries regain competitiveness. Instead, domestic demand has been slashed by the austerity, while export demand remains weak.
Throughout most of Europe, manufacturers report a surge of new orders as the global recovery takes hold. But in Greece orders continue to plunge.
European markets were shocked this week when a bond rating agency, Standard & Poor’s, talked of Greek bond investors losing half their money. But it is hard to see a way out for the country without some kind of debt restructuring — and without a way to be freed from the harsh strictures of the euro.
The euro is not, of course, directly to blame for creating Greece’s problems. The country borrowed too much and spent too much. It has a tax system that is inefficient at collecting revenue, and a political system that has encouraged politicians to put people on the national payroll rather than fix problems that led to unemployment.
Were the country not in the euro zone, a devaluation of the drachma — perhaps several of them — would have taken place long before now. The country would have paid higher interest rates for years, not just recently, and the crisis would have hit earlier.
Competitiveness gained from devaluations can be a temporary thing, as Italy showed repeatedly before the euro came into being more than a decade ago. But with the euro, the devaluation alternative is not available as a partial fix. That makes the other possible actions less powerful and more painful.
Normally, a country in a deep recession would have a loose monetary policy. But Greece cannot have its own loose monetary policy; that is up to the European Central Bank, which must pay attention to the entire euro zone, not just to Greece’s problems.
The Chinese fixed exchange rate regime is, by contrast, less official and more flexible. But it, too, faces strains that come from the country’s difficulties in maintaining its own monetary policy.
China ties its currency to the dollar, and despite American jawboning, there is little that the United States can do about that. China has taken in so many dollars that it now owns a significant slice of Treasury securities issued by the Americans to finance the federal budget deficit.
When, or if, the Chinese currency is allowed to appreciate against the dollar, that will produce losses for China in that portfolio. But China has so far considered that cost to be well worth it for the stimulus it gives to export industries.
There have recently been hints that China would soon allow a gentle appreciation in the value of its currency against the dollar. Just how much that will do to relieve political pressures from America and Europe is unclear, but it would do little to cut into China’s trade advantages.
For China, the exchange rate policy has stimulated exports and employment. But there is a cost for the Chinese.
China has been trying to slow its own economy, but the fixed exchange rate regime has made that a lot harder. By tying itself to the dollar, it effectively appointed Ben Bernanke, the chairman of the Federal Reserve Board in Washington, to run Chinese monetary policy.
China will eventually have to deal with problems created by having a wildly inflationary monetary policy — a policy chosen based on American conditions, not Chinese ones. But for now the pressure is elsewhere.
Greece, it appears, has good reason to be fearful of Germans bearing bailouts. But having lied about its economic condition to get into the euro zone, Greece now has no easy way out, even though it badly needs one.
http://www.nytimes.com/2010/04/30/business/30norris.html
Greece's debt crisis
On the edge of the abyss
Apr 28th 2010
From Economist.com
Europe's leaders must act fast to stop Greece’s market contagion spreading
IF A sense of panic has started to grip Europe over the potential for Greece to default on its debts, and the contagion to spread rapidly to the continent’s other struggling economies, it has not yet struck Herman Van Rompuy, the president of the European Council. He insisted on Wednesday April 28th that there was “no question” of Greece's debts being restructured. He also said leaders of the euro-zone countries would meet next month to consider how to activate their proposed joint lending programme with the IMF to support Greece. Jean-Claude Trichet, president of the European Central Bank, delivered an almost identical message, saying that a Greek default was “out of the question”.
The calm demeanour of Mr Trichet and Mr Van Rompuy is not shared by the markets. On Wednesday Greece said that it would ban the short-selling of shares for two months to prevent speculators doing further damage to the country’s banks. The previous day, shares in Greek banks had plunged by nearly 10% and the Athens stockmarket as a whole fell by 6% on fears that the country would soon suffer another downgrade of its debts. Those fears proved entirely justified. After the markets closed Standard & Poor’s heaped indignity on Greece by cutting the rating of its sovereign bonds to “junk” status. It also cut Greece's banks to “junk” because of their hefty exposure to government debt.
The markets still see the risk of a Greek default as high
Although the move to ban short-selling steadied Greece's stockmarket somewhat on Wednesday, the chances of the country defaulting on its debts were still perceived by the bond markets as high. Spreads on Greek government bonds (the risk premium compared with German bonds) reached a 13-year high as investors worried that the proposed rescue plan for Greece could stall. Talks between Greece, the European Union and the IMF got under way last week.
Greece was initially seeking up to €45 billion ($60 billion) in emergency loans from euro-zone governments and the IMF this year, the first chunk of which will be needed by May 19th, when the Greek government must refinance a €8.5 billion bond. But as the crisis has worsened it has become clear that Greece could need much more. On Wednesday it was reported that the EU and IMF were preparing a package worth up to €120 billion over three years—if so, the biggest sovereign rescue yet attempted. Nevertheless, even aid on this scale might only postpone an eventual default, if Greece's economy fails to grow faster than its debt pile.
Investors do not seem convinced that euro-zone governments will be able to muster the political will to hammer out an agreement. Germany, as the largest euro member, is vital to any effort to save Greece, but it is wavering. German public opinion is firmly set against dipping into the public purse to help the profligate Greeks. Angela Merkel, Germany’s chancellor, is in a tight spot. If she agrees to extend aid quickly to Greece a voters’ backlash back home may send her party crashing to defeat in regional elections set for May 9th. But if she sits back and watches Greece slide towards default, the contagion is sure to spread rapidly to other, bigger EU countries with debt problems—Mrs Merkel could then end up being blamed for triggering a far worse conflagration across Europe, including a fresh banking crisis.
Fears that Greece's fiscal crunch would spread to other euro-area countries have sent the region’s single currency reeling to a one-year low against the dollar. S&P's decision on Tuesday also to downgrade the debt of Portugal by a couple of notches pushed European and world stockmarkets lower. Portugal, despite a smaller budget deficit and lower public debt than Greece, is widely touted as the next European country that may suffer a sovereign-debt crisis. Portugal's slow-growing economy, drastic loss of competitiveness and high public and private indebtedness are all weaknesses that markets might put to greater test.
If Portugal comes under intense pressure, contagion might then spread to Ireland, Italy or Spain, the other euro-area countries with some mixture of big budget deficits, poor growth prospects and high debts. Only swift and decisive action by the leaders of Europe's big economies is likely to head off the current crisis. Default by a smaller member such as Greece would be a body blow to the euro's standing but it need not spell the end of the currency. However, that might not be the case if the problems spread further afield.
http://www.economist.com/business-finance/displaystory.cfm?story_id=16003202
以下四篇從紐約時報與經濟學人所選出來的評析，可以發現英美兩國的專家都是希望德國出面解決這希臘的債信問題。雖然歐元區有一個中央銀行，但是卻有15個政府，每一個政府的經濟實力與財務紀律也都有很大的差距。
歐元區主權債信岌岌可危的四國在英語裡被用PIIG的acronym來稱呼，或有人譯為歐豬四國，分別為：Portugal, Ireland, Italy, & Greece. 然而以下報導中所提的多為 Greece, Italy, Spain 與 Portugal. 這四篇報導都主張的德國應迅速金元希臘，不僅為希臘政府，最主要的是讓世人對歐元的信心，不會對其他主權債信不佳的國家抽銀根，造成連鎖反應，使經濟進一步惡化。
I remembered before Germany joined with Euro, many German economists openly called their govt to think twice and warned of different financial situation with each country would result in big burden, if not failure, to Germany.
Since 15 governments shared Euro, therefore each member state lost a powerful tool of monentary policy, appreciating its own currrency, so it looks that there are few options left with Euro and Greece. It seems only way out is for Germany to bear higher inflation and Greece, deflation, which both countries do not want.
However, without strong industrial fundation which can generate strong export, so we can hardly expect Greece stand up in the world like South Korea in 10 or 20 years. Is it possible for Greece to exit from Euro and embrace its Drachma again? Paul Krugman said if Greece exited from Euro, it would be a catastrophe.
S&P degraded Greek to "junk" status few days ago. Could it be possible that US financial institutions wish to take this opportunity to short Greek securities, or even Euro? My friend Ricky thought it might be about power struggle between US and Europe, or said dollar vs. euro. Well, timing is actually "inopportune", but could it be a driving force for European leaders to act to the issue more aggressively?
One thing worth paying attn to is that Germany in Eurozone enjoys the advantages of "fixed exchange rate" as China have been doing. Since in Eurozone, all the country use the same currency, Euro, therefore no exhange rate issue. China has been pegging RMB to US dollar, which resulted in high inflation China is facing now. Since the menotary policymaker in US is aim to boost economy, while RMB peg to USD, then it's virtually Mr. Bernanke, not 周小川, is managing China's monetary policy.
April 30, 2010
Op-Ed Columnist
The Euro Trap
By PAUL KRUGMAN
Not that long ago, European economists used to mock their American counterparts for having questioned the wisdom of Europe’s march to monetary union. “On the whole,” declared an article published just this past January, “the euro has, thus far, gone much better than many U.S. economists had predicted.”
Oops. The article summarized the euro-skeptics’ views as having been: “It can’t happen, it’s a bad idea, it won’t last.” Well, it did happen, but right now it does seem to have been a bad idea for exactly the reasons the skeptics cited. And as for whether it will last — suddenly, that’s looking like an open question.
To understand the euro-mess — and its lessons for the rest of us — you need to see past the headlines. Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.
The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus. And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.
Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.
What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.
But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.
The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.
Hence the crisis. Greece’s fiscal woes would be serious but probably manageable if the Greek economy’s prospects for the next few years looked even moderately favorable. But they don’t. Earlier this week, when it downgraded Greek debt, Standard & Poor’s suggested that the euro value of Greek G.D.P. may not return to its 2008 level until 2017, meaning that Greece has no hope of growing out of its troubles.
All this is exactly what the euro-skeptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.
So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.
So is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.
Meanwhile, what are the lessons for the rest of us?
The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.
And when crisis strikes, governments need to be able to act. That’s what the architects of the euro forgot — and the rest of us need to remember.
http://www.nytimes.com/2010/04/30/opinion/30krugman.html
Europe's sovereign-debt crisis
Acropolis now
Apr 29th 2010
From The Economist print edition
The Greek debt crisis is spreading. Europe needs a bolder, broader solution—and quickly
THERE comes a moment in many debt crises when events spiral out of control. As panic sets in, bond yields lurch sickeningly upwards and fear spreads to shares and currencies. In September 2008 the failure of once-stellar Lehman Brothers almost brought down the world’s banking system. A decade earlier, Russia’s chaotic default on its sovereign debt rocked the credit markets, felling Long Term Capital Management, a hugely profitable American hedge fund. When the unthinkable suddenly becomes the inevitable, without pausing in the realm of the improbable, then you have contagion.
The Greek crisis—or more properly Europe’s sovereign-debt crisis—looks dangerously close to that (see article). Even as negotiators from the European Union and the IMF are haggling with the Greek government over an ever-growing bail-out package, the yield on Greek debt has ballooned: two-year bonds soared towards 20% this week. Portugal’s borrowing costs jumped. Spain’s debt was downgraded, along with Portugal’s and Greece’s, and Italy came worryingly close to a failed debt auction. European stockmarkets have slumped and the euro itself fell to its lowest level in a year against the dollar.
The road into Hades…
It will strike some as mystifying that a small, peripheral economy should suddenly threaten the world’s biggest economic area. Yet, though it is only 2.6% of euro-zone GDP, Greece sounds three warnings that reach far beyond its borders.
The first is economic. Greece has become a symbol of government indebtedness. This crisis began last October when its new government admitted that its predecessor had falsified the national accounts. It is labouring under a budget deficit of 13.6% and a stock of debt equal to 115% of GDP. It cannot grow out of trouble because of fiscal retrenchment and its lack of export prowess. It cannot devalue, because it is in the euro zone. And yet its people seem unwilling to endure the cuts in wages and services needed to make the economy competitive. In short, Greece looks bust.
Few, if any, European countries suffer from all of Greece’s ills, but many scare investors. Portugal has a high budget deficit and is chronically uncompetitive. Spain has a low stock of debt, but it seems unable to restructure its economy. So too Italy, which is heavily indebted to boot. Non-euro-zone Britain has let its currency fall, but its budget deficit is unnerving.
The second lesson is political. Two weeks ago, having concluded that an eventual Greek restructuring was all but inevitable, we said Europe’s leaders had “three years to save the euro”. We presumed that they would quickly get a proposed €45 billion ($60 billion) deal to stave off an imminent and chaotic Greek default, buying time for an orderly rescheduling and for the other weak economies to begin overdue structural reforms. We overestimated their common sense.
The chief culprit is Germany. All along, it has tried to have it every way—to back Greece, but to punish it for its mistakes; to support the Greek economy, but not to spend any money doing so; to treat this as just a Greek problem, when German banks and German citizens, who lend to Greece, stand to lose money too. German voters do not favour aiding Greece. But rather than explain to them why it is in Germany’s interest, the chancellor, Angela Merkel, has run scared of upsetting them before a big regional election on May 9th.
Playing for time has backfired. Now the mooted rescue plan has climbed above €100 billion because no private money is available. The longer euro-zone governments dither, the more lenders doubt whether their promises to save Greece are worth anything. Each time politicians blame “speculators” (see article), investors wonder if they understand how bad things are (or indeed that investors have a choice). Euro-zone leaders initially refused to seek IMF help because it would be humiliating. Their ineptitude has done far more than their eventual decision to call in the IMF to damage the euro.
This political and economic failure leads to the third Greek warning: that contagion can spread through a large number of routes. A run on Greek banks is possible. So is a “sudden stop” of capital to other weaker euro-zone countries. Firms and banks in Spain and Portugal could find themselves shut out of global capital markets, as investors’ jitters spread from sovereign debt. Europe’s inter-bank market could seize up, unsure which banks would be hit by sovereign defaults. Even Britain could suffer, especially if the May 6th election is indecisive.
What then is to be done? The mounting crisis—and the fact that Greece will almost certainly not pay everybody back on time—will renew some calls to abandon it. That would spell chaos for Greece, European banks and other European countries: the effect would indeed be Lehman-like. Hence the necessity, even at this stage, of a show of financial force, linked to the construction of a stronger firewall between Greece and Europe’s other shaky countries. The priority for European policymakers is to do the same as governments eventually did with the banks: to get ahead of the crisis and to convince investors that they will spend whatever is necessary.
…and the expensive way back
The economics starts with the politics. Europe will not stem this crisis unless its decision-making apparatus is overhauled and Germany radically changes its tune. Mrs Merkel needs to go on German television and explain to her people what is at stake—laying out how much Germany has gained from the euro and what it has to lose from a cascade of chaotic sovereign defaults. Germans need to understand the risks to their banking system and their prosperity. They need to understand that stemming Greece’s debt crisis is less an act of charity than of self-interest. However unfair it seems—and the frugal Germans are as furious about the profligate Greeks as the rest of the world was about bankers—a bail-out is justifiable on the same logic: doing nothing would cost them even more.
The resolve cannot stop at Germany’s borders. Financial markets have no idea who is in charge. Europe’s Byzantine decision-making structure does not help but Germany needs to ensure that decisions are reached fast, that Europe speaks with one voice—and that co-ordination with the IMF is smooth. As a way to convince financial markets that the political weather has changed, the euro zone should set up a single crisis-management committee, with the power to take decisions.
Political resolve won’t work unless the underlying economics make sense. The first test of this is the Greek package. In return for fiscal and structural adjustments that give the economy a hope of stabilising its debts, this must provide enough money to prevent a forced default. Up to €150 billion may be needed over the next three years—better to err by offering too much. But the firebreak between Greece and the other embattled sovereigns of the euro zone is even more important. In economic terms, that should not be too hard to justify. Despite their problems, no country other than Greece is manifestly bust. Portugal is in the greatest danger, but it has a better history of fiscal adjustment which, under plausible assumptions, could allow its debt to stabilise at a manageable level. Spain and Italy could be made insolvent by a long period of high interest rates. But none has the near-inevitability of Greece.
Europe’s policymakers must make those distinctions clearer. The vulnerable economies must step up the reforms they need to rein in deficits and boost growth. Portugal, especially, needs action. The European Central Bank should demonstrate that it has the tools to maintain liquidity even if there is panic. Euro-zone governments should pre-emptively create inter-governmental liquidity lines. Thanks to extraordinary incompetence, Europe’s leaders have almost ensured that the Greek rescue failed before it began. They are paying for that today.
http://www.economist.com/displayStory.cfm?story_id=16009099
April 29, 2010
Save Greece, Protect Germany
By FLOYD NORRIS
China is to the world as Germany is to Europe.
Industries in both countries are much better equipped to compete in export markets than are most of their rivals. That is due in part to fixed exchange rates that they zealously protect.
Both countries tend to see their advantage as the result of their own moral superiority: They save; others spend too much.
Germany’s fixed exchange rate is the euro zone, which legally includes 16 countries but in practice includes a number of others that seek to tie their currencies to the euro. It is enshrined in treaties and laws that assume that no country that adopts the euro can ever change its mind.
Now the world is riveted on the spectacle of Greece being forced to choose between default and seemingly permanent austerity. Other European countries, most particularly Germany, want to see many Greeks take pay cuts. If, that is, they hang onto their jobs. They also think unemployment should rise, and that many Greeks should consider moving to more economically attractive countries.
Sympathy and solidarity are in scarce supply. A few weeks ago, one German who has been involved in some of the talks regarding Greece put it simply: “They had their fun.”
The euro states have been talking about bailing out Greece for months now, hoping that a simple promise to do that would calm markets and reassure investors. But they are remarkably hesitant to actually part with the money.
About the only thing Europe has so far accomplished is to make the International Monetary Fund look good. When the I.M.F. does a bailout, it imposes strict austerity terms, which makes it wildly unpopular, but it provides money at very low rates. Europe wants strict austerity and high rates. Subsidizing the irresponsible Greeks is simply wrong, or so they say in Germany.
Angela Merkel, the German chancellor, made clear this week what she believed to be the primary purpose of the European rescue package. It was not to spare Greeks pain, or even to help that country’s economy regain competitiveness.
“When Greece accepts these tough measures, not for one year but several, then we have a chance for a stable euro,” she said.
All this brings to mind the American politician William Jennings Bryan, who was nominated for president three times more than a century ago. He campaigned against the “cross of gold,” arguing that American prosperity was being sacrificed so the country could stick to a gold standard.
Now the Greeks — and soon, perhaps, the Portuguese or the Spaniards or the Irish — are being told to accept higher unemployment and lower wages for the indefinite future. Not for their own good, necessarily, but to preserve a currency.
At the moment, the euro has weakened because of the Greek crisis. For Germany, that is another bonus. Its already competitive manufacturing industries get an extra boost.
Valéry Giscard d’Estaing, the former president of France, has said that his dream is to see Europeans subsume their national identities, so that a woman might say, “I am a European from Italy,” not an Italian. This crisis has made it crystal clear that the people running the more successful parts of Europe do not think in that way.
Greece needs many things, including labor market reforms and large reductions in government payrolls, some of which may come from the austerity being enforced from Brussels, Frankfurt and Berlin. But none of those will help the country’s industries regain competitiveness. Instead, domestic demand has been slashed by the austerity, while export demand remains weak.
Throughout most of Europe, manufacturers report a surge of new orders as the global recovery takes hold. But in Greece orders continue to plunge.
European markets were shocked this week when a bond rating agency, Standard & Poor’s, talked of Greek bond investors losing half their money. But it is hard to see a way out for the country without some kind of debt restructuring — and without a way to be freed from the harsh strictures of the euro.
The euro is not, of course, directly to blame for creating Greece’s problems. The country borrowed too much and spent too much. It has a tax system that is inefficient at collecting revenue, and a political system that has encouraged politicians to put people on the national payroll rather than fix problems that led to unemployment.
Were the country not in the euro zone, a devaluation of the drachma — perhaps several of them — would have taken place long before now. The country would have paid higher interest rates for years, not just recently, and the crisis would have hit earlier.
Competitiveness gained from devaluations can be a temporary thing, as Italy showed repeatedly before the euro came into being more than a decade ago. But with the euro, the devaluation alternative is not available as a partial fix. That makes the other possible actions less powerful and more painful.
Normally, a country in a deep recession would have a loose monetary policy. But Greece cannot have its own loose monetary policy; that is up to the European Central Bank, which must pay attention to the entire euro zone, not just to Greece’s problems.
The Chinese fixed exchange rate regime is, by contrast, less official and more flexible. But it, too, faces strains that come from the country’s difficulties in maintaining its own monetary policy.
China ties its currency to the dollar, and despite American jawboning, there is little that the United States can do about that. China has taken in so many dollars that it now owns a significant slice of Treasury securities issued by the Americans to finance the federal budget deficit.
When, or if, the Chinese currency is allowed to appreciate against the dollar, that will produce losses for China in that portfolio. But China has so far considered that cost to be well worth it for the stimulus it gives to export industries.
There have recently been hints that China would soon allow a gentle appreciation in the value of its currency against the dollar. Just how much that will do to relieve political pressures from America and Europe is unclear, but it would do little to cut into China’s trade advantages.
For China, the exchange rate policy has stimulated exports and employment. But there is a cost for the Chinese.
China has been trying to slow its own economy, but the fixed exchange rate regime has made that a lot harder. By tying itself to the dollar, it effectively appointed Ben Bernanke, the chairman of the Federal Reserve Board in Washington, to run Chinese monetary policy.
China will eventually have to deal with problems created by having a wildly inflationary monetary policy — a policy chosen based on American conditions, not Chinese ones. But for now the pressure is elsewhere.
Greece, it appears, has good reason to be fearful of Germans bearing bailouts. But having lied about its economic condition to get into the euro zone, Greece now has no easy way out, even though it badly needs one.
http://www.nytimes.com/2010/04/30/business/30norris.html
Greece's debt crisis
On the edge of the abyss
Apr 28th 2010
From Economist.com
Europe's leaders must act fast to stop Greece’s market contagion spreading
IF A sense of panic has started to grip Europe over the potential for Greece to default on its debts, and the contagion to spread rapidly to the continent’s other struggling economies, it has not yet struck Herman Van Rompuy, the president of the European Council. He insisted on Wednesday April 28th that there was “no question” of Greece's debts being restructured. He also said leaders of the euro-zone countries would meet next month to consider how to activate their proposed joint lending programme with the IMF to support Greece. Jean-Claude Trichet, president of the European Central Bank, delivered an almost identical message, saying that a Greek default was “out of the question”.
The calm demeanour of Mr Trichet and Mr Van Rompuy is not shared by the markets. On Wednesday Greece said that it would ban the short-selling of shares for two months to prevent speculators doing further damage to the country’s banks. The previous day, shares in Greek banks had plunged by nearly 10% and the Athens stockmarket as a whole fell by 6% on fears that the country would soon suffer another downgrade of its debts. Those fears proved entirely justified. After the markets closed Standard & Poor’s heaped indignity on Greece by cutting the rating of its sovereign bonds to “junk” status. It also cut Greece's banks to “junk” because of their hefty exposure to government debt.
The markets still see the risk of a Greek default as high
Although the move to ban short-selling steadied Greece's stockmarket somewhat on Wednesday, the chances of the country defaulting on its debts were still perceived by the bond markets as high. Spreads on Greek government bonds (the risk premium compared with German bonds) reached a 13-year high as investors worried that the proposed rescue plan for Greece could stall. Talks between Greece, the European Union and the IMF got under way last week.
Greece was initially seeking up to €45 billion ($60 billion) in emergency loans from euro-zone governments and the IMF this year, the first chunk of which will be needed by May 19th, when the Greek government must refinance a €8.5 billion bond. But as the crisis has worsened it has become clear that Greece could need much more. On Wednesday it was reported that the EU and IMF were preparing a package worth up to €120 billion over three years—if so, the biggest sovereign rescue yet attempted. Nevertheless, even aid on this scale might only postpone an eventual default, if Greece's economy fails to grow faster than its debt pile.
Investors do not seem convinced that euro-zone governments will be able to muster the political will to hammer out an agreement. Germany, as the largest euro member, is vital to any effort to save Greece, but it is wavering. German public opinion is firmly set against dipping into the public purse to help the profligate Greeks. Angela Merkel, Germany’s chancellor, is in a tight spot. If she agrees to extend aid quickly to Greece a voters’ backlash back home may send her party crashing to defeat in regional elections set for May 9th. But if she sits back and watches Greece slide towards default, the contagion is sure to spread rapidly to other, bigger EU countries with debt problems—Mrs Merkel could then end up being blamed for triggering a far worse conflagration across Europe, including a fresh banking crisis.
Fears that Greece's fiscal crunch would spread to other euro-area countries have sent the region’s single currency reeling to a one-year low against the dollar. S&P's decision on Tuesday also to downgrade the debt of Portugal by a couple of notches pushed European and world stockmarkets lower. Portugal, despite a smaller budget deficit and lower public debt than Greece, is widely touted as the next European country that may suffer a sovereign-debt crisis. Portugal's slow-growing economy, drastic loss of competitiveness and high public and private indebtedness are all weaknesses that markets might put to greater test.
If Portugal comes under intense pressure, contagion might then spread to Ireland, Italy or Spain, the other euro-area countries with some mixture of big budget deficits, poor growth prospects and high debts. Only swift and decisive action by the leaders of Europe's big economies is likely to head off the current crisis. Default by a smaller member such as Greece would be a body blow to the euro's standing but it need not spell the end of the currency. However, that might not be the case if the problems spread further afield.
http://www.economist.com/business-finance/displaystory.cfm?story_id=16003202