you're reading...
Uncategorized

Restart

Upon returning to my blog after a very long pause, I faced a difficulty in finding which topic to start with, because so much has happened in the last few months and yet nothing at all. Looking for a point to start, I thought that perhaps the easiest way out of this block would be to start, well… from the beginning: the creation of this blog.

The idea of having my own blog dawned on me more than 3 years ago, I could not possibly say when exactly. My initial intention was to start a blog in which I would write about various issues related to finance, economics and politics, hopefully reaching out to other people with whom I could share their opinions and mine. My goal was not so much to communicate my ideas but rather to hear other people’s opinions. The idea lingered in my head for quite some time until the euro crisis started to break out.

In early 2009 it became apparent to me that Greece, my country, was heading to bankruptcy. Others probably figured this out earlier, but most didn’t see this coming until more than a year later. At that time I started pondering how things are going to unfold, what the sequence of events will be. Like every Greek I was well aware of the particularities of the Greek economy and the problems that the country would have to face. Clearly, the way ahead was destined to be very rough. And as I was contemplating the future, I also perceived that this path was the fair and inevitable consequence of a huge list of problems that the Greek society, economy and political establishment suffer from. By now, these problems are well known all over the world, the media have given their best effort to analyze and present each and every aspect of the economy that contributed to the country’s downfall. When one is aware of all these problems it becomes very easy indeed to recognize as a fact that all these problems lead eventually to the bankruptcy of the Greek State.

So here I have a confession to make: I was wrong.

As the crisis in Greece evolved I was one of those who supported the idea of swift and bold reforms and limits on government spending as the only way forward. There is no doubt that the country needs reform and the Greeks themselves do not deny it either. However, despite the draconian measures already taken, the State has not managed to trim its budget deficit to sustainable levels. For the rest of the world, this is due to some kind of incapability on behalf of Greeks to manage their own financial matters. But is it? No, it is not.

The moment that I made a U-turn in my way of thinking was when my mind stuck to the very simple realization that should be obvious to everyone (me including) from the very beginning. Since Greece does not use its own currency but shares it with other countries, its balance of payments cannot be balanced, except by mere coincidence. What implications can this have in the economics of the country? Enormous. And these implications explain everything, from the lack of the Greek economy’s competitiveness and the size of its public debt to the depth and the apparent insolvability of the euro crisis.

The idea of starting my blog at that stage was still infantile. But by that time I was already fed up like many others with the tsunami of news and analysis of what is wrong with Greece. Living abroad, for a period I felt that being Greek is something I should rather not reveal, especially in the country I currently reside. And that felt bad. It felt bad because I knew what the reality was and I could not accept that my country and its people would be treated like this first by the media, then by foreign politicos and ultimately by ordinary people. I have nothing against the people of course, nothing at all. Not everyone can understand economics. People rely on professional analysts to give their view on the media and explain to the public what is happening in the world and why. This uninstitutionalized institution, the fourth power, has erred massively in the covering of the euro crisis. And the politicos who impact my life (and your life too) just went along with the flow. Greece became the new paradigm of a failed state and of a failed society. Greeks have been widely portrayed as a lesser people.

Now that became personal. I refused to accept it. I started my blog with an immediate goal: to communicate my view of the origins of the euro crisis and expose the flaws of the economy of the eurozone. During this process, I managed to learn more and deepen my understanding of what is really happening. As I have reached the point of knowing exactly what happened and being most certain of how things can or will unfold I feel enraged and disgusted. Enraged because those really responsible for the crisis assign the blame and the onus of correction to those who are the direct victims of it. Disgusted because the political elite of the eurozone profoundly acts against the long-term interests of its own people, serving them with lies upon lies as a justification of the failure of their policies.

My thesis in this series of posts is simple. The euro crisis is a result of a fundamentally flawed economic system within the eurozone. The flaws are a) purely economic and b) purely monetary. Any explanation based on differences between cultures or managerial skills is either shortsighted or plainly moronic. And even if these differences have contributed to some extent to this disaster, this again is a flaw of the euro since these differences existed long before the common currency and should have been taken into account in the first place.

The economic aspect has to do with how the economy of the eurozone developed in its first decade and how it is evolving now. Modern, non-planned economies are based on one unwritten principle: that independent agents by pursuing their own economic interests they inevitably lead to the society accomplishing its collective interests. In the countries of the eurozone and particularly in the periphery however, this proved not to be the case. Money creation and capital inflow in the weaker countries increased aggregate demand too fast, giving the incentives in all the countries of the eurozone to realign their businesses into a bipolar surplus-deficit international macroeconomic model. This system was destined to unravel given the fiscal structure of the euro area first by destroying its weakest parts and ultimately the strongest. The unraveling is further accelerated by a rational response of individual agents who withdraw their investments from the areas that they are most desperately needed. Unless this basic principle is reestablished in the eurozone there can be no economic progress whatsoever.

The monetary aspect has to do with the self-destructing business model of the Eurosystem. The Eurosystem, like every central bank, has two basic goals, to maintain financial stability and to preserve the value of the currency it issues (which is synonymous with inflation management). The Eurosystem by negligence in the design of the euro has not contributed at all in the financial stability of the eurozone but instead has aggravated it. As the meltdown of the eurozone economy accelerates the Eurosystem allows the currency to be rebased exactly on those assets that it destroys in the first place. The countries of the eurozone have found themselves into a financial Babel: just like in the biblical myth the builders of the tower of Babel lost their common language (the means of exchanging their ideas), perhaps for the first time in modern history entire countries have lost the means to exchange products and services, they have lost their own money. At the same time, the rest of the countries in the eurozone have found themselves into an illusionary position of economic prosperity which is going to dwindle once the people realize that the money they use is in reality backed by hot air. The failure of the Eurosystem to accomplish its goals is as spectacular and suspicious as its reluctance to change its business model in view of its impending collapse.

This is the position I have advocated in my previous posts and that I am going to explain in even more detail in the forthcoming ones. Am I too late? Most possibly. The potential solutions that are lately being discussed do not seem to even remotely touch on the basic flaws of the euro, and therefore a viable, economically sensible solution of the crisis is not visible on the horizon. Still, no matter what absurdity European leaders are going to invent next, I maintain my position that at least Greece, will soon solve most of its problems by shredding the straitjacket it has been given as “assistance”.

I hope you will find my next posts interesting to read and hopefully share your opinions and debate mine. I might not write very often and indeed in the last months I have not written almost anything at all. Do not interpret this inactivity as me having stopped writing though. In fact, I have not yet even really started.

Discussion

2 thoughts on “Restart

  1. I can share some of your feelings because they match feelings which I have had myself since the beginning of the year. I, too, think that the point of no return has been crossed (at the latest with the first election) so that it is no longer a question of a possible happy ending but primirily a question of how society will cope with the chaos ahead of it. Personally, I would envisage some form of a more authoritarian form of government, perhaps something like an emergency government governing with emergency laws (like de Gaulle in France in 1959).

    Where I do not quite share your logic is when is you consider what happened as inevitable. As much of a deficient structure which the Euro had from the beginning, a deficient structure does not need to lead to failure. It depends how one deals with the deficiencies. The EZ dealt with them about as irresponsibly as one can imagine. And as much of a crisis Greece had fallen into about 3-4 years ago, that it led to where we are today was not inevitable.

    “Since Greece does not use its own currency but shares it with other countries, its balance of payments cannot be balanced, except by mere coincidence. What implications can this have in the economics of the country? Enormous. And these implications explain everything, from the lack of the Greek economy’s competitiveness and the size of its public debt to the depth and the apparent insolvability of the euro crisis” — I am glad you had this insight because I think that even to this day EU-elites are more or less ignoring the BoP-issues (particularly the issue of current account balances). And Greece is, too!

    In the worst year (2008), Greece spent 1.530 Euros abroad for every 1.000 Euro it earned abroad. It exported 3.200 Euros (!) for ever 1.000 Euros it imported. Anyone who looked at such numbers and didn’t see Armaggeddon around the corner must really have been an optimist!

    Now, I recognize that the Euro-structure is such that one cannot deal with such imbalances like one would have dealt with them in local-curreny-times. Then, one would have had import tariffs and foreign currency allocations. The EU-freedoms do not allow that. But there are other ways to “manage” such a development.

    We have all followed endless debates about the budget deficit and fiscal austerity measures. I have not heard a single debate about the current account deficit and external austerity measures. This year, the 4th or 5th year into the crisis depending when you start counting, Greece is still spending 1.320 Euros abroad for every 1.000 Euros earned abroad. When you have a budget deficit, you at least pour resources into the economy. When you have a current account deficit, you withdraw resources from the economy.

    Often, countries export their way out of a crisis. This is not a short-term possibility for Greece. Thus, Greece can have quick growth and new employment only through import substitution. I would have expected the government to hammer into the heads of the population things like: we must limit imports to only the very necessary things. Whatever we can substitute with domestic production we will do and create jobs. We will weaken the import lobby and strengthen the export lobby. We will go for foreign investment because that’s the kind of foreign capital we want to have (it requires no interest payments and it stays in the country; and it offers know-how transfer). And so forth.

    By the same token, the EU could have blown into the same horn and offered Greece support with their import substitution program, with their foreign investment program, etc.

    A crisis can also unleash tremendous energies and resources in a society. To think that all of the possibilities for creative improvement have now been reduced to one simple question (pro or anti memorandum) is actually a declaration of defeat for all parties involved.

    Posted by Klaus Kastner | July 25, 2012, 16:03
    • What can I say, you are spot on in each and every point that you made. Concerning my logic about the inevitability of the collapse of the eurozone’s economic model, what I meant was that with the structures already in place, the euro was destined to fail. Of course the crisis can be resolved, I have even posted my own proposal for solving it. It is just that the eurozone’s structures have to change and unfortunately there is no incentive for the incumbent officials (in contrast to the interest of the institutions that they are running) to take the necessary decisions. I will elaborate more on that in a future post so I won’t get into more detail here.

      In my own view, the only way forward is that the deficit countries, together or even separately but with reduced powers, submitted an unnegotiable proposal to the Eurosystem backed by a threat of an independent, legal resolution. In clear evidence of the deficit countries’ representatives deficient analytical capabilities they have done nothing at all in this direction.

      Indeed as we get deeper and deeper into this mess, the capability of the European nations to find the solutions to their problems has and will be tested. I do not really care much about the mistakes in the design of the euro in the first place. Civilizations will try multiple economic and social models before “getting it right”. Let’s face it: the economy is a way too complex system to design it without any flaws. But it is the ability to adjust and correct oneself that drives progress. This is as true for individuals as for entire nations. It is just sad that in a place as advanced as Europe this crisis did not bring forth the best self of us but rather the worst.

      Posted by 2mtm | July 25, 2012, 21:39

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: