There is very little evidence that the real interest rate in the Eurozone as a whole has come down. Only in the ‘catching up’ countries such as Ireland, Spain, Portugal, and Greece did the real interest rate come down significantly. It is in these countries (with the exception of Portugal) that we observe an acceleration of economic growth as predicted by the theory. Much of this growth, however, turns out to have been temporary.

Paul De Grauwe, Economics of Monetary Union, on exchange rate uncertainty and economic growth.

Image: Euro coin and banknotes by Avij. Public domain via Wikimedia Commons.

On April 24, Bloomberg reported on the Eurogroup talks in Riga (emphasis mine):

Euro-area finance chiefs said [Greek finance minister] Varoufakis’s handling of the talks was irresponsible and accused him of being a time-waster, a gambler and an amateur, a person familiar with the conversations said, asking not to be named because the discussions were private.

This irresistible factoid got widely cited, and quickly became part of the international narrative of why Varoufakis was ‘sidelined’ at that point in the talks. It did great damage to the Greek side and their case, and to Varoufakis personally.

Eurozone as of 2014 - Welcome Latvia

U5K0:

  • blue - Eurozone (18)
  • green - EU states obliged to join the Eurozone (8)
  • brown - EU state with an opt-out on Eurozone participation (2)
  • yellow - Areas outside the EU using the euro with an agreement (4)
  • purple - Areas outside the EU using the euro without an agreement (2)
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I won’t pretend to understand even the basics of what’s going on over in the eurozone, but it’s interesting to see that Greece’s new government understands that your clothes send a message.

It’s a refreshing reminder that clothes do matter, that choosing intention over apathy in such things can be powerful, and that “dressing up” is not the only way to take ownership of that message.

“A yawning gulf has opened in the world of financial diplomacy. It is not whether to bail out Greece yet again. It is how a Greek finance minister should dress when visiting a chancellor of the exchequer. Yanis Varoufakis arrived in Downing Street yesterday in black jeans, a mauve open-necked shirt that was not tucked in, and the sort of leather coat Putin might wear on a bear hunt.”

Greece’s new finance minister looks like a normal person – how refreshing

Alexis Tsipras, Greece’s new anti-establishment prime minister, makes a point in not wearing a tie when he meets the leaders of other countries.

Last week, he announced that he will only wear one once Greece’s debt problem is resolved, the Guardian reported.

Why Italy’s prime minister gave Greece’s new leader a black tie

Hat tips to Marginal Revolution and Journal of Style for the links.

As Greece staggers under the weight of a depression exceeding that of the 1930s in the US, it appears difficult to see a way forward from what is becoming increasingly a Ponzi financed, extend and pretend, “bailout” scheme. In fact, there are much more creative and effective ways to solve some of the macrofinancial dilemmas that Greece is facing, and without Greece having to exit the euro. But these solutions challenge many existing economic paradigms, including the concept of “money” itself.

At the Levy Economics Institute conference held in Athens in November 2013, I proposed tax anticipation notes, or “TANs”, as a way for Greece to exit austerity without having to exit the euro (see “Get a TAN, Yanis!” published here last month, for an updated version of that policy proposal). This proposal is based on a deeper understanding of what money actually is, and the many roles that it plays in the economies we inhabit. In this regard, Abba Lerner captured the essence of modern fiat currencies, which are created out of thin air by modern states with sovereign currency arrangements. Lerner’s essential insight is contained in the following passage from over half a century ago (and, you will note, Lerner’s view informs much of the neo-chartalist view espoused by advocates of what is called Modern Monetary Theory):

The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.

The modern state, then, imposes and enforces a tax liability on its citizens, and chooses that which is necessary to pay taxes. That means a state with a sovereign currency is never revenue constrained. In fact, the government has to first create the money before the private sector can find a way to get the money it requires to pay taxes and by government bonds. Taxes and bonds are therefore not really the source of government funding or finance. Wait, what?

The government itself ultimately is the source of money required to pay for government expenditures. Taxes simply give value to money, as households and nonbank firms cannot create money – that is counterfeiting.  Instead, they have to sell an asset or a product or a service to the government to get money, or they need to be beneficiaries of government corporate subsidy or household transfer programs to get money.

It is in this context that one has to look at the TAN proposal.  It is important to note that the tax anticipation note is by design a debt issued by the government, just like any other bond. It is a debt instrument that could be returned by the TAN bondholder to the Treasury to settle tax payments due on a 1 TAN = 1 euro basis. By imparting a value to these TANs (i.e. letting them be used to extinguish national tax) this will ensure a natural source of demand for TANs. In addition, it is very likely that consenting adults in the Greek economy would be willing to use TANs in settling private transactions as well, and this is an important element if the TAN approach is going to provide a way out of fiscal austerity without requiring an exit from the euro.

Skeptical? Well, there are other historic examples of local currencies operating in parallel with national ones. As economist L. Randall Wray has noted, in Argentina as the financial crisis deepened after 2000, local governments began to issue “Patacones” (bonds with interest) as local currencies, paying workers and suppliers, and accepting them in tax payment. Utility companies began to accept them—knowing they could pay part of their taxes with them–and acceptance spread even to international corporations such as McDonald’s.

Those who are not of a neo-chartalist persuasion might be skeptical of the claims that a 1 TAN for 1 euro exchange rate could be sustained. Their argument centers on the fact that even if one imparted value to the tax anticipation notes by allowing them to be used to extinguish tax liabilities, TANs would still plummet in value relative to the euro and so wouldn’t do much in terms of boosting aggregate demand via their use in financing fiscal expenditures.

Let’s consider that scenario in more detail for a moment. Say TANs plummet and start “trading” in private exchanges in Greece at 4 TANs to 1 euro or some such horrible disaster. Say you are a Greek citizen. You have tax arrears (as many do) and you hear Syriza has made tax compliance a high priority, and is required to do so by the Troika/Institutions if it is going to get any further loans from external official sources. Your tax arrears are equal to say one years’ worth of your salary. You will then use euros to buy discounted TANs and deliver them to the Treasury, who are obliged by law to accept tax payments in TANs at the prescribed 1 TAN= 1 euro. This gets you a huge effective tax deduction in the process – but one you had to earn by selling euros and buying TANs – thereby bidding up the price of TANs relative to euros.  If this is done over and over again by many citizens with tax arrears and tax payments forthcoming, whatever “depreciation” of TANs to euros has occurred will be essentially arbitraged out of the market.

As any Wall Street investor would realize, the only reason why one would do not do that trade, all day, and every day, for oneself and all one’s relatives, would be if one believed that the “market maker”, the Treasury, would ever run out of its capacity or willingness to accept TANs as a means of settling tax payments, at 1 TAN= 1 euro. And recall that the market maker, in this case the Greek Treasury, has virtually unlimited authority to impose new taxes and raise existing tax rates, which directly influences the demand for TANs. Of course, there is a political constraint (recall tennis superstar Bjorn Borg threatening to emigrate from high tax Sweden in the 70s), and Greece has got to get its tax compliance dealt with properly before TANs can be implemented. But if that adjustment mechanism doesn’t do the trick, the Treasury can vary the proportion of government spending financed through TAN issuance, directly influencing the flow supply of TANs.

In other words, by design, there is a self-correcting mechanism through arbitrage that should keep the 1 TAN to 1 euro “exchange rate” in a pretty tight band, as long as it is clear that tax liabilities can and will be settled with the Treasury at a 1 TAN =  1 euro exchange rate. Anybody who works on Wall Street or the City would understand this self-correcting process.  After all, “arbs” on Wall Street scalp minuscule basis point discrepancies in various financing instruments at the speed of light these days in automated arbitrage programs and in high frequency trading. TANs have a built in self-correcting mechanism that work precisely in that same fashion.

As for the unusual hybrid structure of the TANs (as zero coupon, perpetual, bearer bonds) it is worth noting the following irony:  isn’t it peculiar how we marvel at, and handsomely reward, financial engineers on Wall Street when they create all kinds of debt instruments that get counted as equity (as an example, consider that perpetual bonds are ruled Tier 1 capital for banks under the Basel Accord rules), and all kinds of equity that look like debt? Or even better still, how we applaud the ingenuity of financial engineers when they stitch together such Frankenstein monsters as total return swaps, exchanging one set of returns on one asset for another set of returns, while never nominally changing the ownership of an asset (and remember, according to research by Jan Kregel, these types of instruments played a critical role in the 1997-8 Asian Crisis, as well as the more recent 2008 Financial Crisis).

Yet for some odd, unspeakable reason, we simultaneously refuse to entertain even the possibility of a similar level of creativity and hybridization to the realm of government finance.  Or we hand wave it away, declaring it dead on arrival, simply impossible, fraught with all sorts of inconceivably difficult complications, and bound to eventually lead to fiscal irresponsibility, outright misallocation of resources, and ultimately, the dreaded source of much hyperventilation at the Bundesbank in particular, the eruption of hyperinflation…even despite the fact more and more eurozone nations are sinking into outright price deflation (and others, like Greece, have suffered outright income deflation).

This appears to be the case even with things we should know nations have done successfully before (like no less than five different currency types running side by side in the US in the ‘20s), but no one seems to remember, or at least no one bothers to mention this “verboten” subject.  Money matters in Greece. Understanding the nature of money, and designing financing instruments informed by that understanding, matters if we are going to find a practical and effective solution to Greece’s conundrum of trying to exit austerity without having to exit the euro.

Ignorance, both of these essential financial principles, and of economic history, is no excuse for sadistically demanding the deepening of a humanitarian crisis, and thereby potentially creating a failed nation state, all in the name of pursuing what is called sound finance or fiscal responsibility, but upon saner reflection, is far from either of these things.  It is high time to drop the charade, and it is well past high time to solve the problem.


yeah, i’m basically all in on modern monetary theory now

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The European project is currently teetering on the edge of failure. Growth is anemic at best and socio-economic inequality is on the rise. The countries of Eastern and Central Europe, even relatively successful Poland, have failed to bridge the income gap with the richer half of the continent. And the highly indebted periphery is in revolt.


Politically, the center may not hold and things seem to be falling apart. From the left, parties like Syriza in Greece are challenging the EU’s prescriptions of austerity. From the right, Euroskeptic parties are taking aim at the entire quasi-federal model. Racism and xenophobia are gaining ever more adherents, even in previously placid regions like Scandinavia.

Is the EU’s end in sight?

Their gambit marked the first time since the party came to power at a general election in January that the hardline faction has publicly voiced its opposition to economic policy choices, even raising the option of a Greek departure from the euro.

“We have to choose between signing what is obviously an austerity agreement and making a break with lenders . . . Syriza can’t become a party of austerity and this government cannot implement a memorandum [bailout agreement],” the rebels said in a text published on Monday on a leftwing Greek website.

Syriza hardliners have been fomenting opposition to a deal with the EU and International Monetary Fund for several weeks. The text, due to be discussed at a public meeting on Tuesday, points to an escalation of anti-austerity campaigning in Syriza that, if sustained, could split the party in a parliamentary vote.

“Our only choice is a rupture with the creditors — suspending loan repayments, [imposing] measures to restrict free movement of capital, putting banks under state control, taxing capital and the wealthy to finance measures to support ordinary people . . . and even a break with the euro,” it said.

anonymous asked:

It's less an issue of Northern Europeans, in this case Germans, thinking of Greece as less European; some of people here think like "weh weh greedy Greeks take our money, kick them out so we can keep our money!" Either way, the host's joke was shitty

Imo I feel like there’s still a bit of a cultural dimension behind it? Like Europe has this North/South and West/East dichotomy.

So while not everyone might be thinking “Greece is not really a part of Europe” the underlying ideas that Southern Europe is “not really European” due to it historically having North African influence does feed this tendency to frame what should purely be an economic problem into a “they’re not really part of Europe” dimension. Like at the end of the day this is about an economic problem, and Northern European countries like Iceland and Ireland also ended up in this mess but I feel like a number of people in Northern European countries unfairly treat it as if Southern Europeans culturally are lazy, parasites etc.

(The way I see it, Europe’s always been quite a divided continent, as seen from the Roman era where it was the Northern Europeans regarded as the backwards savages by the Mediterranean Europeans.)

Greece election: Anti-austerity Syriza wins election

January 26, 2015. BBC News.

With nearly 75% of the votes counted, Syriza is projected to win 149 seats, just two short of an absolute majority, though that number could change.

Left-wing party leader Alexis Tsipras, who wants to renegotiate Greece’s debt, said “the Greeks wrote history”.

The governing centre-right New Democracy has come a distant second.

Outgoing Prime Minister Antonis Samaras has admitted defeat and phoned Mr Tsipras to congratulate him.

Syriza’s result will send shockwaves through Europe, the BBC’s Gavin Hewitt in Athens reports.

A majority of voters in Greece have essentially rejected a core policy for dealing with the eurozone crisis as devised by Brussels and Berlin, our correspondent adds….

‘Thing of the past’

Addressing his jubilant supporters in front of Athens’ university, Mr Tsipras said Greek voters gave Syriza “a clear, powerful mandate”.

“You are an example of history which is changing… Your mandate is undoubtedly cancelling the bailouts of austerity and destruction.

"The troika for Greece is the thing of the past,” he added, referring to the country’s biggest international lenders - the European Union, International Monetary Fund (IMF) and European Central Bank (ECB).

He also promised to negotiate a fair and mutually beneficial financial solution.

Mr Tsipras earlier vowed to reverse many of the austerity measures adopted by Greece since a series of bailouts began in 2010.

(Read more)

Greece’s jobless rate rose to 26 percent in December from an upwardly revised 25.9 percent rate in the previous month as the economy shrank slightly in the last quarter of 2014, statistics agency ELSTAT said on Thursday.

December’s reading, based on seasonally adjusted data, is the lowest since September 2014 when unemployment stood at 26.1 percent. The record high was set in September 2013, when unemployment hit 27.9 percent.

One of the more intriguing aspects of the current Greek drama is the tragicomic way the country seems to be constantly condemned to live out well known themes from its own mythology.

In the first part of this article, I looked at how the cradle of European civilization has allowed itself to be converted into the role model for everything its fellow Europeans are not. Or at least, this is the story we are supposed to believe. The second part explains how critical mistakes were made right from the start and what European leaders need to do to rescue Greece from a deeper recession.

The “responsible”, the “irresponsible” and the Political Economy of the Sovereign Debt Crisis.


There are “irresponsible” countries (Greece, Ireland, Italy, Portugal and Spain) which caused the current crisis; and there are “responsible” governments (Germany), which for some reason are asked to repay others’ debts and have the right to refuse to bail “irresponsibles” out and to insist the “irresponsibles” mend their ways.
Well, this a still prevailing narrative of what is going on in Europe. But let’s look at the altenative elaborated by  Klaus Armingeon and Lucio Baccaro in “Political Economy of the Sovereign Debt Crisis: The Limits of Internal Devaluation” (open access).In this stimulating and interesting article  Armingeon and Baccaro argue that the common account is only partially true anf they amend it by proposing three interrelated arguments.First, the sovereign debt crisis is more complex than a simple story about fiscally irresponsible governments which now are being forced by international financial markets to tighten their belts. Ultimately, it is the result of a political decision to create a currency union among economically non-homogenous countries without making any provision for the use of democratically legitimated fiscal transfers to correct asymmetric shocks.Second, the internal devaluation policy which is being imposed on Greece, Ireland, Italy, Portugal and Spain is ineffective and counterproductive. Internal devaluation depresses growth, and the absence of growth requires further austerity for government to regain their fiscal credibility, thus generating a vicious cycle.Third, the current policy response has brought the time-old problem of the democratic deficit of European institutions to new and previously unattained heights. While national governments continue to be held electorally accountable by citizens, they have lost any meaningful ability to choose among alternative policy options and, as a result, implement everywhere pretty much the same, deeply unpopular austerity package. This has created a situation in which domestic politics matters much less than the views of international financiers and technocrats and has contributed to delegitimizing both domestic and European institutionsPlainly illustrating and explaining their arguments,  Armingeon and Baccaro alarms that the current state of affairs threatens not just the future viability of the Euro but of the European project as a whole.
If they are forced out of the euro, they will slam the door so hard the building will fall down.
—  Paul Mason, economics editor at Channel 4 News, appears on Democracy Now! to discuss the “cultural and political clash” between the new Syriza party members in Greece and European financial leaders. Watch it here.