Euro zone taxpayers are being punished by the European response to the Greek fiscal crisis

Sorry Shaun, but your blog on Eurozone taxpayers and Greek crisis has fallen into the black hole at the centre of the universe….perhaps others have the same problem?

Apologies
Todays article is now there and I will tidy it up as the prargraph headings are not in bold type etc. There was something of a glitch this morning and I am still a little unsure of how the title came up as if there was no article there should have been no title either…

‘…
and we were told this by the Greek Finance Ministry.’
That says it all, Shaun, rather succinctly. This whole fiasco is gathering its own momentum. Crash coming!

But seriously, the problem with ‘restructuring’, haircuts and the like is that they affect the balance sheet but not the deficit situation going forwards. The past is corrected but you still have to work on the future. Do you have any confidence that the Greeks will be able to cut their living standards and/or increase their tax take? I don’t. If the markets also think that way, their ongoing bond coupons will be just as bad, that is, unaffordable. What Greece needs is either a two speed Euro that can offer crawling peg devaluations vs Germany or the New Drachma. These will force a living standards adjustment and probably there will be serious social unrest as the adjustment impacts the relatively poor majority while the rich continue to avoid the issue. The alternative of a permanent subsidy from the north is, rightly, not on offer.

Excellent article, Shaun. However adding further muddy water, and also as an addendum to barncatus, irrespective a any level of ‘crash’, if there is no mechanism in place to a country to “leave” the EU, how can this happen? And surely, as a ‘democratic’ organisation, any decision to pass legislation on this topic would have to be put to referendums in many countries – and the results from those are an unknown unknown….

Great blog today.
I think (agreeing with Barncactus) that there is a complete failure to differentiate between a balance sheet issue and sustainability.
The Eurocrats made this mistake when setting up the Euro, with the ludicrous idea that “convergence” on a particular date would lead to countries behaving in an identical fashion in future. A nine-year old child could have told you that this would never work.
The second mistake that was made was to suspend all judgment. First, it was obvious that the rules on convergence would make countries fudge figures for the relevant years. Secondly, the very systems to ensure that all countries account for things in the same way simply did not exist.
They are still making the same mistake. Again, a nine-year old would be able to tell you that, after the haircuts (even assuming the improbable outcome of resolving the annual deficits for the PIIGS), Greece et al will still be in no shape to compete with Germany. Nor will it be possible to pay back the debts.

We now have a situation where no-one but a moron would expect the Eurocrats’ solution to either the balance sheet (debts) or cash flow (deficits) to put Greece into a sustainable position.

If you take it right back to basics:
1. Greece cannot pay back the debt
2. Greece cannot compete with Germany in the Euro
Then the solution can only lie in leaving the Euro and defaulting on the debts.

I apologise to Mr Juncker in advance for making such a stupid idea!!

“debt restructuring the Euro zone has by a combination of incompetence
and dithering got itself into a position where a lot of the
restructuring would take place on the books of the European Central
Bank”

Incompetence
and dithering ? Not in the least. This is exactly what the federaists wanted and they are the masters now, so what they want is what they get.

Shaun
So if it all goes as you predict what is the likely impact on the UK’s economy and its relationship to the Euro?

The European Commission will break any rule as it chooses, a recent example being the no bailout clause. Referendums are no problem for the EC, they ignore results they dislike and just ask the voters to vote again and again until they get the commissions preferred result.

The EC is fundamentally flawed when the French use the CAP as a cash cow and people like Berlusconi have a veto on proceedings. Mr Juncker appears to be using the “crisis” as an opportunity for a power grab regardless of the cost to EU taxpayers.

However democracy may eventually triumph, when voters turn to fringe and possibly nasty nationalist politicians. The European Union is meant to prevent nationalism but it’s current behavior is promoting it.

The Irish also seem to be discussing default with the central bank being forced to respond. It would appear that some people think that the EU will not punish them if they steal the wealth of their fellow EU nations and default. This is the ultimate issue, if they default then they can no longer be in the EU. So Greece and Ireland have to evaluate the cost of default versus the cost of leaving the EU, I guess for now leaving is a bigger cost.

You make interesting reading and I agree. I guess this will lead to an enlarged “Finnish Connection” as a counter-weight to the federalist group….

‘’ It is clear that during this meeting it was never
discussed or posed as an issue whether Greece would remain in the euro zone.’’

Wasn’t the question about leaving it? Could it be the Greek Finance Ministry are
telling the truth, literally……………..certainly worthy of Sir Humphrey Appleby!

At some point the Greek government will have to act in the
best interest of her people, and the exclusion of whatever is in the supposed interests
of other Euro taxpayers.

“When it becomes serious, you have to lie”
Jean-Claude Juncker

[On March 29, when speculation swirled that Portugal needed a
bailout, Prime Minister Jose Socrates denied — again — that that would
happen despite clearly unsustainable market pressures. "I'm sick of
saying we won't" be requesting help, he told journalists. Just eight
days later, in a chastened appearance on national television, Socrates
did just that.

Such stunning U-turns in the lead-up to big announcements
have by now become a familiar pattern in Europe's debt crisis — in
Greece a year ago, then Ireland in November — and show how policymakers
have had to adapt the way they speak publicly under the scrutiny of
jittery markets. With traders and journalists keeping track of every
utterance, officials have had to develop the bluffing ability of poker
players as much as anything else.

For Jean-Claude Juncker, the prime minister of Luxembourg,
the threat of immediate market turbulence means the usual norms of
transparency don't apply. "When it becomes serious, you have to lie",
Juncker, who as the chairman of the regular meetings of eurozone finance
ministers is one of the currency union's key spokesmen, said in recent
remarks.

Even confirming the existence of discussions on explosive
financial issues can quickly turn them into self-fulfilling prophecies
and have serious consequences for a country's economy by driving up
borrowing costs. "If you are pre-indicating possible decisions, you are
fueling speculation on the financial markets, throwing into misery
mainly ordinary people whom we are trying to safeguard from this,"
Juncker said.

One scenario that EU officials are now firmly denying is that
of a sovereign debt restructuring — namely allowing a country to
partially default on its debt by extending repayment deadlines or
reducing the total amount owed.

In recent weeks, rumours and press reports have grown louder
about secret discussions among eurozone finance ministers about
restructuring the massive debt of Greece — despite official denials.
Debt restructuring "is not part of our strategy and will not be," the
EU's Monetary and Economic Affairs Commissioner Olli Rehn said Monday,
echoing many of his colleagues in recent weeks.

Few people have had to answer more questions about the
seeming contradiction of official comments and market swings than Amadeu
Altafaj Tardio, Rehn's spokesman [..] “I know that every single word
that I pronounce can have an impact on markets,” said Altafaj Tardio, a
former journalist himself.

But those pressures cannot serve as an excuse to lie. “There
have been so many leaks and there are so many sources of a different
sort involved that there is never room for any lies,” he said of the
current crisis. “You don’t survive 24 hours if you lie in this
environment.”

Instead, the art of being a spokesman is to know when and how
to release your information. “When I’m standing there on the podium,
I’m doing political communication, I’m not an information desk,” said
Altafaj Tardio. “We don’t tell all the truth all the time, but we never
lie.”

“A European crisis, viewed from Brussels, is much more
complex (than a national one) because of all the member states,” said
Tim Fallon, head of corporate and financial affairs at the London office
of communications firm Hill & Knowlton [..]

Politicians and spokespeople “have to control the agenda as
much as they can”, said Fallon. That involves “putting out as many
positive character statements as you can” about a country under pressure
[..]

http://www.winnipegfreepress.com/business/breakingnews/market-jitters-bring-difficult-choice-between-truth-and-lies-for-politicians-spokespeople-121237554.html

Shaun, you should challenge Van Rompouy for his job. So, is this when markets now turn to the question as to how much can be recovered AFTER default?

Messrs Blundell-Wignall and Slovik of the OECD have made some interesting comments on sovereign default. I have been asking for some time why the EU stress tests do not apply a sovereign debt shock to the Banking book. These gentlemen say ” The rationale for excluding the banking books exposures is that over the 2 years considered in the stress test, a sovereign default is virtually impossible given the existence of the European Financial Stability Facility, which is certainly large enough to meet funding needs of the main countries of concern over that period.”

First of all, great blog post @ShaunRichards. I
happen to be quite busy with work and what have you for the next couple of
days, so I decided to write my comment on my trusted PDA while commuting back
home. Yes, a QWERTY keyboard helps there!

Now, first of all – I do not know the Greek
government’s strategy, assuming they have one other than “Play nice with
EU, hope for the best”. It is a fact that several of the reforms promised
thus far have stalled. Perhaps the government is afraid… Perhaps it’s
incapable of completely alienating their “party clientele”. Still,
many things that should have taken place more aggressively have not. A notable
example of that is the restructuring of the tax & revenue collection
management:

The corporate tax & book-keeping law is
supposed to be totally scrapped and replaced by a friendlier legislation.
Individual tax offices are also supposed to be scrapped in their majority, with
the burden of collection falling to the Ministry of Finance at a central level.

These two reforms have been postponed for Q2-Q3
2011. The introduction of a “tax card” that will track one’s
purchases and associate them with a business VAT number is delayed until June
at the earliest, onwards from January. And so on, and so forth.

Meanwhile, unemployment continues to
sky-rocket. In effect, official figures would be probably doubled if they
included employers owing money to their own employees (suppliers are already
used to not being paid…until bankruptcies occur eventually). My employer has
withheld for 6-7 months one monthly salary to us, until “they are able to
pay it”, and this is a “good” situation. Thousands of others
remain unpaid for larger time periods, and of course, totally ineligible for
social care support – They are all “employed normally” you see.

Hospitals and universities, all entirely
public, tend to shut down for temporary time periods, in order to save on
operational funds and / or supplies. Not all of them, of course, but there is a
worrying trend here. Even the National Technical University of Athens, one of
the largest in the country, publically admitted that it is considering
temporarily suspending its operation as whole – certain Depts. such as
Architecture have already done that.

And of course, several thousands of small shops
and businesses have been shut down permanently. You know, I do blame bad
business decisions for a good portion of these, and their entrepreneur owners
“living the dream” in the Greek bubble of the last…decades, but
now, even good businessmen can’t escape – Banks have shut down credit, and they
only refinance corporate loans, when they do even that, because they hope that
some of these may be repaid…

All in all, the situation seems to have
deteriorated by quite much. Allow me a little example that illustrates the
state mentality:

During the most recent Troika
“check-up”, supposedly the Troika employees visited certain central
tax offices. The situation they found there was pathetic – not only revenue
targets were missed by considerable margins, but also, the State refused to
refund / pay VAT returns to businesses – for many, many, months. When the
Troika employees asked “Why are you not returning VAT to businesses?”
they got the response “Aren’t you glad? More funds are recorded as being
available in the state coffers!”

Need I say more? The Greek state is already
bankrupt – the fact that the deficit is being revised boils down to servicing
past debt of the wider public sector, and that’s about it… Hospital suppliers
alone are owed several hundred million Euros, and they’re still only partially
paid, not “to-date”.

How much of the day-to-day situation is
reflected “on the record” to Troika? Not much, of course… I suspect
their employees visiting Greece will have lots to say “off the
record” though, with their reports boiling down to: “They’re both
bankrupt and cannot miraculously fix the situation in mere months. Handle with
care”.

But when I read that, for instance, Mr. Trichet
does not want to end his term with “radical departures” from usual
ECB policy, or Ms. Merkel opposes easing of the “austerity packages”
to mitigate her political cost, I can’t help but wonder if I’ll be ordinarily
resident overseas in the next 5 years – The way things stand right now, Greece
will be a wasteland by then.

The above assume that the Mayas are wrong, and
in the end of 2012 the world will not end. Of course, such a development would save
EU the hassle of having to deal with its own EFM in 2013, but who knows…?

First of all, great blog post @ShaunRichards. I
happen to be quite busy with work and what have you for the next couple of
days, so I decided to write my comment on my trusted PDA while commuting back
home. Yes, a QWERTY keyboard helps there!

Now, first of all – I do not know the Greek
government’s strategy, assuming they have one other than “Play nice with
EU, hope for the best”. It is a fact that several of the reforms promised
thus far have stalled. Perhaps the government is afraid… Perhaps it’s
incapable of completely alienating their “party clientele”. Still,
many things that should have taken place more aggressively have not. A notable
example of that is the restructuring of the tax & revenue collection
management:

The corporate tax & book-keeping law is
supposed to be totally scrapped and replaced by a friendlier legislation.
Individual tax offices are also supposed to be scrapped in their majority, with
the burden of collection falling to the Ministry of Finance at a central level.

These two reforms have been postponed for Q2-Q3
2011. The introduction of a “tax card” that will track one’s
purchases and associate them with a business VAT number is delayed until June
at the earliest, onwards from January. And so on, and so forth.

Meanwhile, unemployment continues to
sky-rocket. In effect, official figures would be probably doubled if they
included employers owing money to their own employees (suppliers are already
used to not being paid…until bankruptcies occur eventually). My employer has
withheld for 6-7 months one monthly salary to us, until “they are able to
pay it”, and this is a “good” situation. Thousands of others
remain unpaid for larger time periods, and of course, totally ineligible for
social care support – They are all “employed normally” you see.

Hospitals and universities, all entirely
public, tend to shut down for temporary time periods, in order to save on
operational funds and / or supplies. Not all of them, of course, but there is a
worrying trend here. Even the National Technical University of Athens, one of
the largest in the country, publically admitted that it is considering
temporarily suspending its operation as whole – certain Depts. such as
Architecture have already done that.

And of course, several thousands of small shops
and businesses have been shut down permanently. You know, I do blame bad
business decisions for a good portion of these, and their entrepreneur owners
“living the dream” in the Greek bubble of the last…decades, but
now, even good businessmen can’t escape – Banks have shut down credit, and they
only refinance corporate loans, when they do even that, because they hope that
some of these may be repaid…

All in all, the situation seems to have
deteriorated by quite much. Allow me a little example that illustrates the
state mentality:

During the most recent Troika
“check-up”, supposedly the Troika employees visited certain central
tax offices. The situation they found there was pathetic – not only revenue
targets were missed by considerable margins, but also, the State refused to
refund / pay VAT returns to businesses – for many, many, months. When the
Troika employees asked “Why are you not returning VAT to businesses?”
they got the response “Aren’t you glad? More funds are recorded as being
available in the state coffers!”

Need I say more? The Greek state is already
bankrupt – the fact that the deficit is being revised boils down to servicing
past debt of the wider public sector, and that’s about it… Hospital suppliers
alone are owed several hundred million Euros, and they’re still only partially
paid, not “to-date”.

How much of the day-to-day situation is
reflected “on the record” to Troika? Not much, of course… I suspect
their employees visiting Greece will have lots to say “off the
record” though, with their reports boiling down to: “They’re both
bankrupt and cannot miraculously fix the situation in mere months. Handle with
care”.

But when I read that, for instance, Mr. Trichet
does not want to end his term with “radical departures” from usual
ECB policy, or Ms. Merkel opposes easing of the “austerity packages”
to mitigate her political cost, I can’t help but wonder if I’ll be ordinarily
resident overseas in the next 5 years – The way things stand right now, Greece
will be a wasteland by then.

The above assume that the Mayas are wrong, and
in the end of 2012 the world will not end. Of course, such a development would save
EU the hassle of having to deal with its own EFM in 2013, but who knows…?

Hi Phwill and welcome to my blog.

We are back to my theme of “expect the unexpected” where we are in a time where things are very uncertain. However I hold to the view that longer-term interest-rates will rise in the UK. We have advantages that Greece does not in that we control our own monetary policy and we have our own exchange rate but I feel that a ten-year yield of around 3.5% is simply too low. Also we have let out inflation rate rise…

As to other factors we are most likely to be affected by the recession in Ireland as she is near and a bigger trading partner, ironically one of the few places in Europe we have a trade surplus with. So we will have a little dragging anchor on economic expansion.

I think that looking 2/3 years forward the Euro will be very different to now, we could even have a Euro-lite and a Euro or countries could have left….The federalists will be trying to use it as an excuse for full European Union but I feel that countries will split off from this.

Hi EJT and welcome to my blog
I agree with you in part. In my opinion the federalists will try to use the crisis to push for further European integration and for more fiscal integration. The idea from the weekend meeting that the EFSF can be used for Greece bond issuance in 2012 is plainly part of that as it is a small but significant stepping stone on the way.
However they have got here by incompetence and they simply use everything thay can to push for further integration. If thing were going well we would be seeing a push for it too…

Hi Shire
Thanks for the compliment but if I remember my Yes Minister correctly the honest and intelligent man did not get the job of Governor of the Bank of England because he couldnt be lent on to reduce interest-rates…

As to whether the two gentlemen you qoute from believe what they say or not I do not know and as I think about it I am not sure if it is worse if they do or do not! This is because the statement “a sovereign default is virtually impossible given the existence of the European Financial Stability Facility, which is certainly large enough to meet funding needs of the main countries of concern over that period.” is simply not true.

For a start no-one can honestly put their hand on their heart and guarantee the size of the EFSF due to the way it has to fund itelf but then we are back to honesty…

Hi Shaun.. I agree that the EU project will look very different by 2014.. but how different depends upon the societal stability of nations like Greece and Portugal which are being pushed to the brink by bankers. I have a feeling that this weekend was the first step down Restructure Alley for not only Greece, but Ireland and Portugal shortly thereafter. My guess is that they will all remain in the EMU (satisfying the federalists) and do a lot to guarantee the bonds owned by their own people (thus preventing instability and economic collapse).. and this will mean that the banks and other foreign lenders will be hit {hard} in the arse.

You guys must living in another world if you think this will lead to more federalism (indeed the opposite is more likely looking at the current state of Europe), perhaps you need to stop reading the Daily Mail and Telegraph. The final decision within the halls of Brussels always rests with the national governments, I seriously doubt Merkel and Sarkozy will support more Federalism, no matter what Juncker wants.

@d14decc3c8cafc3e5858e3628cbb17ce:disqus

Isn’t that what the national leaders were trying to avoid in the past year e.g. bank lenders taking the hit. Because at the end of the day that’s what the EFSF is: a German/French bank bail out fund.
Would they really change their mind like that?

@Ray_Fletcher:disqus

Countries are allowed to leave EU Greenland has done so in the past.

@f93388d0c79e67bcc1d73cfcf34101d9:disqus

Nobody can compete with Germany in the Euro, as long as Germany continues with her “beggar thy neighbour” economic policy the Euro will be doomed and PIIGS are nothing more than a canary in the coal mine for the other Eurozone countries such as France and the low countries.

I would say the imbalances within the Eurozone are exactly the same as the imbalances we see between China and USA on a world scale. Admittedly Greece and Portugal have other inherent problems.

You guys must living in another world if you think this will lead to more federalism (indeed the opposite is more likely looking at the current state of the EU), perhaps you need to stop reading the Daily Mail and Telegraph. The final decision within the halls of Brussels
always rests with the national governments, I seriously doubt Merkel and Sarkozy will support more Federalism, no matter what Juncker wants.

@d14decc3c8cafc3e5858e3628cbb17ce:disqus
Isn’t that what the national leaders were trying to avoid in the past year e.g. bank lenders taking the hit. Because at the end of the day that’s what the EFSF is: a German/French bank bail out fund. Would they really change their mind like that?

@Ray_Fletcher:disqus
Countries are allowed to leave EU Greenland has done so in the past.

@f93388d0c79e67bcc1d73cfcf34101d9:disqus
I would say the imbalances within the Eurozone are exactly the same as the imbalances we see between China and USA on a world scale. Admittedly Greece and Portugal have other inherent problems.

”

The alternative of a permanent subsidy from the north is, rightly, not on offer.”

Why “rightly”? I understand it is politically unthinkable (but then, much what happened lately is such). It has several disavantages, both for the core and for the periphery. The question is, are those disavantages greater or smaller than the alternative?

Puting it in another way, if there are advantages to a currency union, should such advantages be shared equally between all countries, with compensation mechanisms, or not? Of course, if no advantages are present, the question is moot.