This “just in” from the Eurozone: Greeks Aren’t Lazy

The unfolding crises spreading throughout the Eurozone continues to inflict unnecessary pain and poverty.  This pain has been continually made worse by the disastrous policies of those in charge of the Euro.  German Chancellor, Angela Merkel, is now starting to share in the pain her preferred policies have delivered to other Euro nations.  Today, Reuters is reporting that German manufacturing sector not only shrank last quarter, but shrank fast.

As the so-called “Sovereign debt crises” has hit several European countries, those countries have been forced to increase taxes and cut government spending.  These cuts have affected everything from social safety nets to education.  They “had to” because that was the deal when they started using the Euro.

The European Union is set up in a way that guaranteed that eventually, one of its members was going to have a debt crisis.  What makes the Euro so unique is that it was setup almost like a gold standard.   Each nation in the Eurozone does not issue it’s own money.  Money is always borrowed.  That borrowing must come from someone who has Euros.  This is very different from most other modern countries like the U.K., United States, Canada, or Japan.  The reason this becomes important is not during economic booms, but during the busts.  From my last Euro tirade:

During an economic bust – or recession – people are out of work and pay less taxes.  Therefore the nation brings in less tax money.  Additionally, the increasing unemployed add to the costs of the social safety net.  Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits.  This becomes a problem when you cannot have a budget deficit.  The U.S. states are having that problem right now.  Greece and other Euro zone nations aren’t supposed to have budget deficits greater than 3% of GDP.  That is impossible during a deep enough recession.

During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession.  Eurozone nations cannot do that.  They must cut back along with the rest of their private sector.  Well, when a recession is caused by people cutting back, and then the government cuts back… it’s only going to make the recession worse!

Sure enough, as nations like Greece, Italy, and Ireland cut back their spending, it only exacerbates the problems with their economy.  No matter how much they cut, they still find themselves with large budget deficits.  And each time, the other Eurozone nations – especially Germany – have forced more austerity on them to try and enforce fiscal discipline.

Now those years of bad policy are coming home to roost in Germany.

Markit’s manufacturing Purchasing Mangers Index (PMI) fell sharply to 46.3 from March’s 48.4, according to a flash estimate released on Monday, well below the 50 mark which would sign al growth in activity.

It marked the fastest rate of contraction since July 2009 in the sector, which has been hit by a decline in some exports as the debt crisis in the euro zone has choked demand from key trading partners.

Wow, years of recession and forced austerity on their trading partners is hurting German imports.  Who could’ve predicted that?(answer: anyone with a brain)  I wonder when Germany starts hurting if Chancellor Merkel will try to enforce the same amount of austerity. I also wonder if there will be a vicious campaign to call German factory workers “lazy” and “overpaid” like there was against Greek workers during the early days of the Greek crises.

I don’t blame the German people for their predicament.  Even on their government I cast only partial blame.  The root of the cause is bad economic policies driven by really bad economic theory.

Euro and Free Trade

No two countries are exactly the same.  One would think this would be obvious, but to many politicians and economists it is not.  Economists “assume” that they are to simplify certain models where the differences are irrelevant to what they are studying, but then forget to “unassume” for others.  No where was this more obvious than in the design of the Eurozone.

I explained before one of the reasons that the Euro failed was because it failed to take into account recessions.  Sometimes a country needs to run a currency deficit, and there is nothing wrong with that when done for the right reasons and at the needed level.  This is the primary reason the entire region is failing.

A secondary reason that the Euro is failing is because it provides no ability to account for trade deficits between regions.  Trade deficits occur, and there must be a mechanism to correct them when they start occurring.  Think of it as some kind of  regulator gauge.  Let’s look at 3 popular ways of balancing out a trade deficit.

  1. The first way is my preferred method.  To have a floating currency between the two regions so that as goods and services flow to one region(which means currency flows to the other) the value of the currency in that region goes down.  At that point it is now cheaper to produce in that region and they will start producing and selling more to the other region until the currency is brought back to even. Rinse & repeat.
  2. Another way of dealing with a trade imbalance is for the countries to implement protectionist trade policies to encourage exports and encourage imports until the trade deficit disappears.  This runs the risk of a so-called “trade war” erupting.
  3. The third method is the most popular method by market fundamentalists:  Wreck the economy through draconian cuts to government and have across-the-board tax increases.

Number 3 is the favored option by members of Europe.  Especially when it’s not their own country that must go through with it.

Let us take a look at a hypothetical eurozone country running a trade deficit.  If it is running a trade deficit, then that means Euros are leaving the country.  If the government makes no attempt to accommodate the loss of currency within the country, it can cause local deflation.  As we all know, deflation is bad for an economy and unemployment rises until the economy is so bad, people quit buying items and the trade deficit disappears, but only after rampant unemployment and other recessionary ills.

In a Eurozone country, a country’s government might try to accommodate a trade deficit by running a government deficit.  That way the local economy won’t deflate by keeping the same amount of currency in the local economy.  This creates an “unfair” condition, because it means the country can continue to import more goods and services than it exports.  The whole reason that Eurozone countries aren’t allowed to run perpetually high trade deficits.

Notice though, that the only alternative for a Eurozone country to fix a trade imbalance is through wrecking the economy.  This is what happened in so many of the Eurozone countries.  Greece, Italy, etc…  The other countries made them practice austerity which caused recession and unemployment.  That recession and unemployment causes a spiral because of reasons discussed before.

This is among the reasons why so many MMT economists predicted that the Euro would fail.  Besides having no mechanism to deal with recessions, it has no mechanism for dealing with trade imbalances that doesn’t wreck a local economy.

Euro Zone Debt Crisis Was Going to Happen Eventually

The European Union was set up in a manner that guaranteed that eventually, one of its members was going to have a debt crisis.  What makes the Euro so unique is that it was setup almost like a gold standard.   Each nation does in the Eurozone does not issue it’s own money.  It must be borrowed.  That borrowing must come from someone who has Euros.  This is very different from most other modern countries like the U.K., United States, Canada, or Japan.  The reason this becomes important is not during economic booms, but during the busts.

During an economic bust – or recession – people are out of work and pay less taxes.  Therefore the nation brings in less tax money.  Additionally, the increasing unemployed add to the costs of the social safety net.  Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits.  This becomes a problem when you cannot have a budget deficit.  The U.S. states are having that problem right now.  Greece and other Euro zone nations aren’t supposed to have budget deficits greater than 3% of GDP.  That is impossible during a deep enough recession.

During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession.  Eurozone nations cannot do that.  They must cut back along with the rest of their private sector.  Well, when a recession is caused by people cutting back, and then the government cuts back… it’s only going to make the recession worse!

Even if Greece perfectly managed their finances and economy, this would’ve just happened to another euro zone country.  Greece just happened to be first.  MMT economists predicted this would happen several times over the years(See here, here, and here and again here).

Governments must be able to counter act recessions.  The Euro was designed without thinking about recessions.

The Dilemma Faced by Greek Citizens: How to Vote?

Last week it appeared that a bailout deal between Greece and the rest of the EU was going to go through.   However, it seems that the prime minister of Greece is going to quite literally, “let the people decide“.  Now, the Greek people must decide if they want to vote for the bailout – which requires them to raise taxes and cut government services, or against the bailout which would cause them to default on their loans.  If the default on their loans, they won’t be able to deficit spend Euros anymore and will have to, in response… raise taxes and cut government services.  That is quite a dilemma for Greek Citizens.

If I were a Greek Citizen, I would vote ‘No’.  The reason is that there are other options.  If the Greek government cared more about their citizens then about foreign and domestic bankers, they would research those alternatives.  Those alternatives would give Greeks what they seem to want.  A more leisurely lifestyle – even if it’s ‘poorer’.  There is nothing wrong with wanting that and no reason they can’t have it.

One of the alternatives is the so-called Mosler bond.

turn the bonds it buys into Mosler bonds, by requiring the govt of issue to legally state that in the case of non payment, the bearer on demand can use those bonds for payment of taxes to the govt of issue.

That would allow Greece to continue borrowing and spending on demand and at will.

Another alternatives is one that, for some reason, seems to be way outside the policy discussion.  Greece could just drop out of the EU, and convert all debts back to a Sovereign currency like their original drachma.  Once they’re monetarily sovereign they will never again have to worry about government default.  They will be like most of the world in that the only limit on spending will be inflation.  If Greeks want a leisurely lifestyle and don’t mind having a week currency, they could go back to full employment for those who want employment.

Unfortunately, neither of these options seem to be seriously discussed even though it would give Greek citizens what they desire.  That is why I would vote no against this deal.  Vote it down, and force the government to seek alternatives.

Some, like Warren Mosler himself, would encourage Greece to vote yes.  His reasoning is very logical.  If you vote for the bailout, you can continue borrowing and only have to accept some cuts and small tax rise.  If the vote is no and you default and cannot continue borrowing, then you will have to cut even more spending and raise taxes even more.

In the end, it comes down to politics.  Mosler’s position is very pragmatic.  Vote for the bailout because it’s not as bad as default.  My position is very political.  Vote it down and force the Greek government to find an alternative solution.