"Slow Death" in Europe

There is a concept in economics known as the "snow-ball effect" on debt. It involves the self-reinforcing effect of debt accumulation arising when the growth of the national economy is less than the interest paid on public debt.
In math it looks like this:

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I'm not going to focus on the mathematics here when the way the financial markets are reacting to Greece is all you really need to know.

Insurance costs against a Greek government default leapt to a record after leading debt analysts warned the country's economy could face a 'slow death' because of its deteriorating finances.

The concern is that Greece's economy is fundamentally uncompetitive in the world market, that it must borrow just to maintain its basic needs, and that interest payments on the debt accumulation is now reaching levels that has forced Greece to drastic action. Raising taxes and cutting social services to pay the interest will smother the economy further, making more borrowing necessary.

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There is still some confidence out there that Greece can pull out of the vortex it is currently circling, but that confidence might be unwarranted.

Ideally, Greece needs solid GDP growth, inflation, and a low spread on Greek bonds vis-a-vis German ones. The problem is the Greek Stability Programme may achieve none of these.

The European Central Bank effectively ruled out a bailout for Greece, while the markets began seeing a greater risk of default in the short-term. There are whispers that Greece is the next Argentina.
At a certain point in the not to distant future, the markets are going to realize that Greece's predicament is terminal. When that happens things are going to move fast.
That's a very big problem, because so much of the rest of Europe is also fragile. For instance, Portugal is also mentioned on the "slow death" list, not far behind Greece. It's being called the worst crisis for the Euro since its introduction.

"On the one hand, they can't let Greece get away with pursuing unsustainable policies; on the other hand, at the same time they can't be too tough with the Greek government, because there is only so much the Greek government can do, there is already risk of social instability in Greece," Tilford says.
Analyst Tilford sees no "chance at all of Greece being able to reduce its deficit as quickly as they are suggesting; with growth prospects so poor, with demand for their exports set to be so weak," which he attributes to Greece becoming uncompetitive within the eurozone, as well as the strength of the euro itself.

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Normally when a nation becomes uncompetitive the default option is a currency devaluation. However, that's a problem within the Eurozone, where both strong and weak nations share the same monetary policy. This leaves Greece with only one option: austerity.
Austerity does not come without risks. In the case of Greece, there is almost certain to be social unrest. The other risk is that the austerity will by itself cause the snow-ball effect on the economy, thus becoming self-defeating.

While everyone is focusing on Greece, these very same issues are being debated on the northern side of the continent in Latvia.

'In two years Latvia has lost 25.5 per cent of GDP and the only example worse than that is the Great Depression in the US,' said Mark Weisbrot, co-director of the Washington-based Center for Economic and Policy Research speaking at the University of Latvia.
But with the economy continuing to contract the total loss will ultimately top 30 per cent and represent 'the worst two years in the recorded history of the world in terms of output,' Weisbrot said.

Things are so bad in Latvia that Prime Minister Dombrovskis said recently: “We will just go bankrupt if we observe all legal norms.”
Latvia isn't part of the Eurozone, but has pegged its currency to the Euro as a precondition to becoming part of the Eurozone. It is this situation that is causing the economic debate so similar to Greece.

“It makes no sense to continue to shrink the Latvian economy, with no end in sight to the recession, simply to maintain the pegged exchange rate,” he wrote. “Maintaining the fixed, overvalued exchange rate also creates enormous uncertainty that undermines investment and causes capital to leave the country.”

The whispers are so strong that the PM felt the need to officially deny the devaluation rumors.
According to the IMF, 1.5 Billion Euros of investment will flee Latvia this year, an enormous amount for such a small economy.

Ukraine's economy has been hit nearly as hard as Latvia's, shrinking 15% just last year. Both Latvia's and Ukraine's debt levels are listed far below investment grade.

The first stage of this global credit crisis involved the weakest links: subprime borrowers. Once they began defaulting en mass, credit-worthy consumers and corporations suddenly discovered that they couldn't get any new credit. The defaults and bankruptcies then moved up the ladder.
Eventhough governments were compromising their balance sheets to save these shaky banks and corporations, investors ran to sovereign bonds for safe haven. The problem is that governments borrowed more than they could pay back.

A good example of this is Iceland. Last week the citizens of Iceland balked at bailing out foreign banks. In turn the rating agencies downgraded Iceland debt to junk, and there are questions about whether the IMF will halt their aid package.

The issue of unpayable debts and Odious Debts have been around for many decades. As long as the nations were places like Chad, Iraq, Haiti, and Jamaica, for example, no one seemed to care. Now that the problem is hitting the fringes of Europe, the taboo issue is finally being discussed.

The final and, in truth, most important question is whether these demands are reasonable. After all, in every civilized country it has long been accepted that there is a limit to the pursuit of any debts. That is why we have introduced limited liability and abolished debtors’ prisons. Asking a people to transfer as much as 50 per cent of GDP, plus interest, via a sustained current account surplus is extraordinarily onerous.

Not just onerous, but impossible to maintain as well.

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Comments

jez, halt their aid?

Because the people didn't want their tax dollars going to bail out foreign investors?

As far as the IMF goes I know examples are Thailand from 1998, where they forced Draconian measures upon them.

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Greece's first move should be

leave the EU. Not having control over fiscal AND monetary policy is crazy. Same goes for Spain.

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Choices. Yes there is a price for freedom.

Choices: be a slave to IMF/EU vs. potential for isolation.

Here is an interest take Greece, Spain, Ireland:

Exiting the Euro?

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Re: Greece

Greece has control over its fiscal policy, but not its monetary one. It benefits from being part of the EU by having open borders with wealthy nations and relatively lower borrowing costs.
Leaving the EU would allow it to devalue its currency, but its borrowing costs would explode.

In the end, Greece's problem, not to mention Latvia, Iceland, and others like Haiti, is how to retire Odious debt.

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"Benefits" Who is benefiting from EU membership?

Ireland, Spain & Greece cannot use fiscal policy to get themselves out this mess because EU tells them they cannot - no benefit there.

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benefits

Think of it as Vermont suddenly decided to succeed from the U.S., create it's own currency. Then, dinky Vermont, with a state GDP of say ? $5 billion and a massive oversupply of dairy products and maple syrup for the actual population, will now be subject to trade law in trying to sell it's products to the United States. Any transport, transaction would then be going across it's borders and require a change of money, and problem some sort of registration or inspections while operating in another nation.

It's the same deal with the EU. Each country, by itself has a small GDP, often specializes in some product manufacture, say Belgium chocolate, Finnish advanced machinery that can pummel through any frozen tundra on Earth and so on....

Because all of those GDPs are basically equalized, i.e. the EU spent a lot of time making sure each country had similar PPP, wages, costs, standards of living to harmonize each country into the other one, they also had other similarities, such as no overpopulation issues, a highly advanced education and skills culture, existing social safety nets, infrastructure, similar unemployment rates and so forth...
so when one has individual nations which most of their major economic elements have been rectified to be of similar status....

joining forces, well, it basically has a similar effect of say Vermont being in the U.S. Vermont can freely exchange it's diary and maple syrup for other state manufactured goods...

You might even say this is what free trade was meant to be originally....but do note the equilibrium of all individual member state economies (for the most part) before membership is allowed or done. This is why the EU spent years and years rectifying currency differences before starting the Euro, a sudden jolt without harmonizing all of the differences would bring down each member state (EU countries), not raise it.

Then the "federal government" or in this case, the EU, also can "spread around" social safety nets, they share in civil defense costs and so on to create even more harmonization between all of the member states.

It's like water reservoirs and merging them (almost) as a concept. Too much out of balance and one is going to run right into the other one in a flood, bringing destruction and havoc...but if both has about the same water levels...same volume, etc....
no big deal to merge the two water reservoirs.

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Are you sure they were really equalized?

My point is EU membership severely limits fiscal policy of a country when they may need it the most.

Are sure about "spread around" social safety net?

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well

I haven't studied everything they have done, but it's one of the reasons a petition to get into the EU takes so long.

Seems the Eastern block has had a lot of problems.

One thing I do know about is the reunification with Germany (East and West). That was political, they just "tore down that wall" and did it and it is still bringing havoc to Germany's overall economy, esp. the unemployment rate. The two economies were so different and as a result it did pull down W. Germany's overall economy, well, to this day.

Also, the EU isn't like the states, it's more like a co-op or something, with country rights trumping EU type of deal.

But I do know, Finland, for example, had to make all sorts of changes to harmonize their economy for membership and this is one of the reasons the U.K. passed. Finland was (I think top 10 of overall world economies? something like 6th in overall economic competitiveness and in terms of PPP, something like top 14 or top 10) but as time has worn on and more and more countries petition for membership, on this I don't know how rigorous the equalization due diligence has been. I'll bet Jerome A Paris knows this stuff upside now, we should try to get him to post on here (he has an account).

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I would take that with a grain of salt

Italy fudged it's books to enter the EU, they miraculously established within the parameters of budget deficits to GDP % when for decades the opposite had been true. And I believe a few years back, France was fined or something for violating certain fiscal restrictions after it joined. Who is to say that many of these countries simply didn't cook the books in some periods? There was a reason why many were hesitant on allowing former Warsaw-Pact nations from joining the EU besides irking their friendly neighborhood gas company (Russia).

The problem with the EU, which was warned by many, was that it was a half measure of integration. If we had the same structure here in the US, Michigan and Ohio would be in the same situation as Greece. They all share the same currency, and get a host of subsidies and regulations. But at the end of the day, this confederation of sovereign states needs to realize the situation on integration if it wishes to have more harmonization (which was one of the goals going back to the Maastricht Treaty, wasn't it?)

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Dr. Doom is predicting a Sovereign Debt Crisis

Roubini, but what is kind of strange is he mentions "aging population" over and over and I'm sorry, unless one has institutionalized age discrimination such as in the United States, that shouldn't hurt an economy necessarily.

I'd claim the U.S. has an age discrimination problem and is literally cutting off a good 30 years of career achievements as well as earning time for many workers.

Anywho, the domino of sovereign debt default is what I'm interested in. I noticed more and more we are seeing our favorite animal, credit default swaps, now on sovereign debt. I understand the problems with these in terms of ABS as well as CDOs, but not too up on the differences w.r.t. sovereign debt and currency. Anyone want to take a tutorial stab? i.e. what kind of contagion is going on these days with just sovereign debt and defaults through tumbling derivatives, specifically CDS?

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Age makes a difference

At least when it happens on a huge scale.
The fact is that old people spend less because they've accumulated most of what they need during their lifetime. Also, old people have no need to save. They will instead sell their accumulated financial assets. Finally, old people will use more social services, such as Medicare because their health will get worse, and Social Security because they deserve it.

None of this would matter if every generation was roughly the same size.
The problem arises when one generation is much bigger than the next (America's problem), or if people simply stop having kids (Japan's and Italy's problem).

It's not age discrimination. It's just the way it is.

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I'll challenge that

because there are a host of assumptions that are not so valid these days. #1 being older people have money stashed.....so many people have zippo who are in the 50's, 60's they must work.

Then, longevity has increased dramatically. People don't drop dead at age 65.

So, the problem is we have a very outdated world view of age in comparison to what's happening.

I mean one can get a Bachelor's degree in 16 years from zero education, yet here we have 45 years, 30 years where people are being deemed "useless" and it's just not so.

Tell me if you have been in any large corporation and beyond the executives, seen any perm (permanent employee) over the age of 45? That's 20 years of earnings killed right there.

My argument on pensions as well as lifetime earnings being vastly reduced bears out my argument.

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It's not about employment.. well sorta

It's about the usage of health/social services. As the population ages, it will require more medical attention. Some countries have national pension plans, these will also start to be tapped. The combination of healthcare and social/pension requirements is what Dr.Roubini is focusing on, correlating that with revenues to fund demand in addition to make up for any slack from an aging workforce.

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yeah well

with socialized medicine, maybe the costs increase (unlike the US) but I still say there is enormous age discrimination in assumptions going on.

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Greece, a smaller USA?

Is Roubini still with the Peterson Institute? I know he's with the Bretton Woods Committee, which is the penultimate in anti-worker, anti-union, anti-citizenry. That Peterson Institute has long been pushing for the abolishment of Social Security and Medicare, and promoting the offshoring of as many American jobs as possible.

Seems they are anti-tax base as well. (Since very few of those corporations are paying fed taxes [GAO-08-957].)

Greece's situation and economy sounds awfully similar to the U.S.!

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cherry pick Economists

That's a good point, Roubini is an obvious globalization type. We should pull up others who don't get so much press, but are a lot more on the money overall maybe.

This is a problem generally, you can have completely accurate, sane data points and so forth then go to another subject and it's just outright denial of the stats, facts and even the theory.

But on the other hand, it seems Roubini does have a reasonably better handle on global economies and how they interact. (with your points entirely intact!)

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Excellent point, Mr. Oak

But on the other hand, it seems Roubini does have a reasonably better handle on global economies and how they interact.

Yeah, I agree with that, and I suspect he still has direct communiction with old man Soros, who is funding his chair at NYU (if he's still there?? and they've enjoyed something of a mentor-mentee relationship).

It simply strikes me that so many of these "objective" econ types push forward an agenda for, let's say, offshoring and destruction of any public good/public commons' structures, while claiming other reasons why it's necessitated (as in Peter G. Peterson always pushing for the abolishment of Soc. Sec. and Medicare, and the offshoring of as many jobs as possible, proclaiming demographics to be the reason --- meanwhile he's the biggest bandit on the planet with his plunder and pillaging as chair of the Blackstone Group --former chair, now, I guess). His record on unemploying people while destroying companies and corp/national wealth is unparalleled.

Like all those people now proclaming China to be America's sworn enemy --- the very same ones who have always pushed for offshoring both the jobs and technology there. The very same ones who claimed that they would now be a fully democratic nation by this time if all those jobs and technology transfer went there!

Demons all.....

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two types of econ

I've noticed that too and I've also noticed if an economist mentions the "offshore outsourcing" and a few other topics, it is like they are "kicked out of the club". No more papers getting published, assuredly not invited on talk shows and especially not invited for any op-eds in the NYT or WSJ, not invited to various talks....

very obviously a "boys clubs" type of deal with "unwritten rules" that there are certain things one is not supposed to talk about.

Then, there is the theory and the mathematics. In all of my diggings, every time to date, I find the theory itself does tell you that "trading people", i.e. making people a variable as if people are "something to trade", is a disaster for workers, middle class....it shows wage arbitrage, displacement, i.e. a "race to the bottom" for workers.

Take Alan Blinder. I've never seen someone "soft shoe" around offshore outsourcing like he does....he excuses things, preferences his talks, discounts his conclusions...

Pretty incredible. Even the "godfather of economics", Paul Samuelson, now he wrote up (he died recently) a short paper showing exactly that offshore outsourcing does hurt workers and also hurts an economy, through basic mathematics..

and even he was attacked and he's probably the premiere economist of this century.

Anywho, this is yet another reason for EP to exist. To get regular folk, who "can" basically, take that education or sister fields of study or even Econ grad school or whatever it is, look at the data, the stats, the mathematics and start talking about all of this.

That's why I'm always pointing out "bad math" because right now there is some sort of belief that all of the theory is crap, well, from what I've been digging around looking at, that isn't quite so, it's more the politics of people that's a real problem. That's with trade theory, labor econ, etc.....

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Alternate view on 'sovereign debt crisis'

This comes from "The further down the food chain you go, the more the zealots take over". Warning: this stuff truly questions are current thoughts on economics.

First some background. Estonia and Latvia are not unlike Ireland is some ways but very different in other ways. The three nations were held out by the neo-liberals as the World’s so-called economic success stories in the period leading up to the crash although a significant component of the growth was tied in with real estate booms.

I would add Iceland to this list as well. Heck, it is said that the former Prime Minister of Iceland was heavily influenced by Milton Friedman. So, basically another neo-liberal cluster fu*k.

Both Latvia and Estonia chose, as a precursor to entering the EMU (which remains their blind aspiration), to peg their currency to the Euro and run currency boards.

Estonia pegs its currency at 15.60 krooni per Euro (after joining the European Exchange Rate (ERM) system in June 2004. Latvia pegs its currency at 0.71 lat per Euro and joined the ERM in 2005. Estonia initially pegged against the German mark when the Soviet system collapsed and they abandoned the rouble. Latvia switched their currency anchor from the IMF Special Drawing Rights bask to the Euro on January 1, 2005.

So Estonia and Latvia are both running currency systems similar to Argentina in the 1990s which ultimately collapsed and led to its default in 2001 (Argentina pegged against the US dollar). Pegging one’s currency means that the central bank has to manage interest rates to ensure the parity is maintained and fiscal policy is hamstrung by the currency requirements.

Point is these countries are giving up a lot - mainly sacrificing tools to manage an economic crisis.

The best way for a country to work its way out of a private credit binge is to ensure people can save and that means they have to be in employment. The worse thing for both Estonia and Latvia can do is to drive unemployment up further which just continues to undermine the capacity of workers to pay their way.

It also withdraws essential personal care services (particularly health care) at a time when the stresses would indicate more of these services are required.

The path to reform should be to float the exchange rate, as in the case of Argentina, and once that is accomplished, fiscal policy can be used to promote activity in the domestic economy and to encourage import-substitution and investment in productive activity.

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FYI YARP

I'm going to label this YARP or yet another research project

That's one of the best things about EP (to me). If one has a hypothesis, say membership in the EU isn't that great after all vs. being solo, or say JV's conclusions that numbers are fudged....

digging out some research on this and writing it up after digestion for the rest of the class is a great feature for EP and gives original writing.

As previously mentioned, there are a host of topic areas that main stream economists will not touch because they are somehow against the current political religions and will get you kicked out of the club.

Be too safe, be very sorry.

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Great additional remarks, RebelC!

I would add Iceland to this list as well.

Thanks for that excellent addendum. And great remark on Iceland. I was pointed in that direction by Prof. Michael Hudson (who, along with Steve Keen, and the last decade or so, Paul Craig Roberts, has been correct in all his long-term macroeconomic pronouncements, as well as always getting those piddling details correct).

In looking at Iceland, and more so deeply due to that Norwegian-French lady magistrate who has been investigating their banking practices, the entire government and banking system appears to have been highly, highly securitized. They truly bought into the securitization/credit derivatives scam in a major way.

Regarding Milton Friedman, I will never, ever comprehend who anyone regards him as anything other than a looney tunes. Everything he ever commented on (OK, one exception about those central bankers not being reliable) was so truly bizarre, as well as the fact he never walked his talk (everyone else should exist in a "right-to-be-immediately terminated" status, except him, who had tenure).

What's even worse, his ignorance on the mitigating factors of the Great Depression. Anyone who professes to be an economics or economic history scholar of that period, yet doesn't grasp the importance of securitization back then leading up to the Great Crash of '29, is strictly out to lunch.

The sad thing about the American public today is that sales of books written by Ayn Rand have really exploded recently! During the Great Depression at least a large number of Americans had a grasp on what was taking place; today far too many are oblivious, befuddled and can't even begin to understand who their enemy is in this scenario!

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I am working on a story.

Instead of "class warfare" it is truly a war over economic policy. Monetarism and neo-liberalism is great for certain groups including corporations (and those who control them). The foundation or logic behind neo-liberalism is a re-direction of income from low & middle income families to corporations and upper class.

As for Ayn Rand, it is scary and too many people truly don't understand it. Objectivism is a utopian society and it runs contrary to our Constitution. Objectivism and libertarianism may work if everyone were equal and had the same opportunities. We are far from that.

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stories/site upgrades

Good deal! I'm trying to get these code modifications done, I keep having to deal with other stuff, to get the site upgraded.

People are complaining and rightly so, on the CAPTCHA, and a huge part of the upgrade is better security that isn't so obnoxious!

So, ya all, if you're in the mood to write up blog posts, Instapopulists, now is the time for myself, I've got a pipeline and each one takes a good 3 hours of research to be worth a damn, really behind in the queue!

Also, Rebel, the reason I give you so much $hit on "Progressive" is we're really linked into the economics blog communities and also to not "turn off" someone to read the post details due to political labels. i.e. they see political terms instead of the plain good ole fashioned ripoff details and kind of just bypass the post due to association with political terminology instead of economic terminology or "rip off info" terminology.

Hope that makes it more clear as to why I'm pinging on political labeling.

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What It Is Is....

This isn't debt repayment; it's reparations. It's penalties imposed on the losers in the economic wars. And we know from experience how well reparations work. The 1930 payments sent the Weimar Republic into a death spiral that led to Hitler and pushed France into the Great Depression.

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Neo-liberalism is a scourge on the world.

Interesting little blurb from Eyes on Trade.

The sooner we expose neo-liberalism for the fraudulent theory it is the better.

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