On the true causes behind France’s downgrade

“[T]he financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called “periphery.” As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”  

S&P, extract from its rationale for downgrading France et al, 13th January 2012

  • That S&P have been part and parcel of the fraud-ridden financialisation game which led us to this Crisis, is beyond doubt.
  • That S&P have, previously, downgraded both the United States and Japan, failing to appreciate that their large debts are perfectly sustainable under the present circumstances (which was confirmed by the observation that their downgrade had no appreciable effect on these two countries’ bond yields), is equally on the record.
  • That S&P’s rationale, see above, for downgrading France is precisely right, there is no smidgen of a misgiving

Our ongoing Crisis is a crisis of Europe’s banking sector which was, in turn, caused by the underlying trade and capital imbalances within the euro system. Greece’s public sector pains, Italy’s refinancing cul de sac, France’s current predicament, these are all epiphenomena of the Crisis. The deeper causes are two:

  1. First came the outflow of capital from Germany to the periphery in the 1990s and beyond. It was the immediate repercussion of the Great German Experiment of the 1990s, when the growth rate of German labour unit costs was pushed well below that of German wages and of the equivalent French metric. In conjunction with German industry’s large investments into productivity enhancing capital goods, the wage-squeeze pushed German corporate profits through the roof. Unable to find a decent return within Germany, this capital headed South via the franco-german banks that jumped at the opportunity to expand into places no franco-german bank had gone before (and where interest rate premia abounded).
  2. Second came the manner in which the franco-german banks mimicked Wall Street and the City in leveraging (with leverage ratios often in excess of 50:1) the mainly German capital outflows into the periphery, in some places targeting the private sector (e.g. Spain) while in other countries finding it easier to peddle  their wares to the public sector (e.g. Greece).

Thus, when the Crash of 2008 hit us, it was inevitable that the deficit regions of the periphery would go bust, under the weight of these loans, and the silly franco-german banks would fall into the bosom of massive insolvency. And as if this were not enough, our politicians decided to prop both these ‘fallen’ partners up (the deficit states and the franco-german banks) by creating the mother of all CDOs: the EFSF. To see how the EFSF’s very structure foretold, and planned for, the eventual downgrading of France, see this post from last summer (in which I explained how the eurozone’s unraveling was guaranteed under the auspices of the toxic EFSF once the burden for the cheaper loans for the ‘fallen’ periphery states was placed on the EFSF’s shoulders).

In short, over the past two years, while the unraveling of the franco-german banks is the real game in town, the spotlight is on relatively insignificant ‘entities’ like Greece. The result is that the eurozone has now reached an advanced stage of disintegration. Markets are already planning for the post-euro era. So, why was only France downgraded? Why not Germany? (If I am right that the German banks are in similar straits.) The answer, of course, is that the breakup of the euro will lift German banks from the muddy seabed like a roaring tide (as capital flows into Germany courtesy of the fact that, in aggregate, Germany is a creditor state). As for France, it will be left tangled in the seabed’s mud, in between a few weedy posts that remind it of the lost dreams of becoming the command centre for a future federal Europe. This is inevitable now, unless the French elites wake up to their reality and demand of Germany something truly radical: a rational plan for exiting the Crisis before it is too late. One that resonates with the short paragraph with which this post began.

57 thoughts on “On the true causes behind France’s downgrade

  1. Pingback: Why, for Greece’s and Europe’s sake, the PSI ought to fail

  2. “Want to see the crisis from a much more interesting angle : Philosophical ?”

    There is nothing philosophical about the crisis when it pays you a visit.

    There is nothing virtual or fabricated about the people with no electricity, the poor and the homeless.

    Every time I visit the super market I see baskets filled with food donated for the common meals of the church.You think this is going to the “virtually hungry”?

    It is at least enraging to hear “intellectuals” (who wished their students looked like Naomi Campbell and who take about a week to finish a sentence cause they believe it makes them sound more credible) philosophizing about the origins of crisis like they do not belong in this society.

    As epilogue, let me quote some lines from an article I read today:
    ————————————————————————————————-
    Προχθές μοίρασαν κουβέρτες στους άστεγους. Και ο Δήμος άφησε ανοιχτό ένα γήπεδο για να βρούνε κατάλυμα. Μα αρκετοί δεν ακολούθησαν τη ζεστασιά που τους υπόσχονταν. Για να μη χάσουν τη θέση τους στο δρόμο. Μπορεί να τους έπαιρνε κάποιος άλλος «το σημείο», είπαν πολλοί. Το σημείο! Μια θέση στο δρόμο. Ένα παγκάκι. Μια εσοχή του τοίχου. Τι ζούμε; Πώς γίναμε; Πού φτάσαμε; Πού καταντήσαμε;

    ……………………………………………………………………………..

    Ένας στίχος του Kωστή Παλαμά: «Χειμώνας άγριος. Κι η φωτιά –καλοκαιριά στην κάμαρά μου. Ντρέπομαι για τη ζέστα μου και για την ανθρωπιά μου.»

    http://www.protagon.gr/?i=protagon.el.8emata&id=11787

  3. “We are a democracy” … This is where I laugh . An american democracy maybe … . If you are thinking that i am exaggerating , find the definition of democracy . What Δημος means is the key . Is it institutional ?

    Can you please elaborate more? I don’t understand what your point is.

    Btw, pure democracy (no written Constitution) is mob rule.

    • Try to read any book of Castoriadis. It will help you understand what really democracy is. For me mob is the mass of people created – mainly through bad education and mass media – in political systems like our ”democracies”. In real – the one and only – democracy there is no mob, there are only citizens taking part in all aspects of political life. Try also some Finley. If you want to know……….

  4. let me share a few thoughts:
    1. EFSF is as DOA (dead on arrival) as PSI sequel. That is why ESM permanent rescue mechanism will be effective and enter into force one year earlier (this summer, instead of 2013)
    2. Van Rombuy’s comments on “extraordinary” and “impressive” work done so far by Monti’s government shows much more enthusiasm compared to similar assesments of peripheral countries’ programs (esp Greece). Note that : “we should re-focus on GROWTH and JOB creation”.
    3. But why such a divergence with peripheral countries being punished and almost sentenced to social death in favor of fiscal descipline? Simply because Italy exiting euro and switching to own currency or club MED currency will hurt Germany’s heavy industry (eg Fiat vs Volkswagen), while PIGs (Portugal, Ireland, Greece) are no more feeding the Minotaur but have instead become a burden.

    • I know that you Dean are a fan of Mr Lygeros.

      I don’t think Dean will be a fan after this, Ilias:

      Ilia thank you! . . . Nikos Lygeros is divine

      What do you have to be thankful about, Dean? You have just been exposed as a buffoon . . . again.

      In case you didn’t know, Dr. Nikos Lygeros was against the awful Annan Plan that the Europeans and Americans were trying to shove down the throats of the Cypriots. Why was he against it? Because the shitty Annan Plan violated international law, UN Cyprus resolutions, EU principles — you know, rules that the civilized world regards as binding.

      Are you with me so far? Good, because when I wrote in the recent Jan. 11 thread . . .

      “How many times did the Europeans revise the dreaded Annan Plan at the behest of Turkey? All of Turkey’s demands were met — which explains why the Cypriots — rightfully and courageously — voted NO.”

      . . . you replied by calling me a “Turk” whose “aim is to sink and defame Greece.”

      So, Dean . . . Is Dr. Nikos Lygeros a “Turk” whose “aim is to sink and defame Greece”?

      Have a nice day, Dean.

  5. Pingback: The Frau Has Got Her Knickers in a Twist! « parina

  6. One possibility is, indeed, that the Euro crisis will end in France, and the rest of the south, going down the drain, and the north forming some strong currency zone which will eventually suffer and stagnate from its diminishing markets. Of course a breakup of the Euro will be too dramatic an event for anyone to predict what the day after will be like.

    But another possibility is that Germany will maneuver around the icebergs in these dark waters and continue to prosper -at the expense of its dependents. After S&P’s move on Friday there is now one single sheriff in town, which means Merkel -and not Merkozy- gets to dictate policy. It shall not be surprising if most of the trading in Europe eventually gets concentrated in Frankfurt.

    Meanwhile the south can be kept on a drip-feed of ECB liquidity on the condition that their development out of their current mess is achieved by doing business primarily with German companies. Sovereignty in the dependent “democracies” is already gone, and social tensions have so far been satisfactorily controllable. The rate of drip-feed can be adjusted to avoid collapse and social explosions of the dependent states. The best outcome for German interests would be if the patients enter a steady state coma which will require a prolonged period of recovery. This guarantees both a cheap Euro, to the benefit of outside-of-the-EU exports, as well as an indefinite period of political subversion for the periphery.

    Maybe just science fiction, and not a single number behind these ideas, but just saying…

    • Waffle liberally sprinkled with doses of self-evident truths, served competently. [The one point on which I agree is that things will not get better if they get catastrophically worse.]

    • He is living on another planet .
      Taking historical examples and use them like that is just ridiculous .
      Comparisons between his examples is ridiculous . Taking the elements he wants and place them in other environments in order to create an impression rather than conclusions .
      Completely un-scientific .
      I could hear such arguments in Syntagma square but from a political scientist , NO . I would anticipate much more solid analysis .

      “The difficulty is that people imposed by the system are trying to change the system itself . ” I guess this is our problem …

      If a person outside the system was trying to change the system , everything would be fine … .

      “We are a democracy” … This is where I laugh . An american democracy maybe … . If you are thinking that i am exaggerating , find the definition of democracy . What Δημος means is the key . Is it institutional ?

      “The problem of Greece is that the change to make is hard , and the more we delay this transition , the harder it gets … ” Implying : Just accept it and move on .

      “If international events affects us , then there is no point in thinking about it ” Easy to say it if you are living in US . Ημαρτον ! Έλεος .

      Δεν περιγράφω άλλο …

      The solutions a person produces is strongly dependent on his/her thinking framework .

      Want to see the crisis from a much more interesting angle : Philosophical ?

    • According to my thinking , Mr Varoufakis’s effort to produce a solution shares interestingly more similarities with Mr Rozanis approach than other economists in terms of building a structure that is reflecting the way he sees the world and encompasses values such as justice , prosperity and a principled and balanced european integration .

      Justice : he doesn’t want the german worker to pay the price

      Growth and prosperity : Use of european investment bank (an inactive institution ) to stimulate growth .

      Irrelevant : In my opinion , there must be a change here as well , as to what investments have more chance to succeed in each country . Each member state has different strategic advantages , therefore different investments are required . That is another subject .

      Principle and balanced european integration : The shared european institution to issue eurobonds and borrow on behalf of member states is as trustworthy as the willingness of eurozone member states to believe in a common prosperous european future . In other worlds , his solution is strongly reflecting his aspiration of a different Europe .

      In short , according to Mr Rozanis , Mr Varoufakis is trying to change Europe , via his modest proposal , into a place that reflects more his “dreamland” . You may say that this is self-evident and this applies to every human being .
      In my opinion , this is rare and original .
      Most economists are reproducing textbooks or schools of thought and not themselves through their work .

      Finally , i urge you not to judge too harsh on what i wrote . This is not a scientific paper . It’s merely an accumulation of thoughts .

    • Ilia thank you! Socrates once said: “All men’s souls are immortal, but the souls of the righteous are immortal and divine.” I think we can all agree that Nikos Lygeros is divine.

  7. should we be surprised. no!

    did they react too quick: yes.

    is there a conspiracy to ruin the Euro: of course.

    so what is the tyrue cause of the downgrade: the demise and death of the Global Minotaur, NIMBY, beggar thy neighbor

    in 50 years from now this will be official, for now it is under cover, as was Watergate before a true investigative journalist got a hold on that tapes.

  8. That S&P have been part and parcel of the fraud-ridden financialisation game which led us to this Crisis, is beyond doubt.

    Too bad that the fraudulent opinions of the rating agencies are not subject to legal liability.

  9. PCARX is right Klaus, capital is flowing into Germany, Holland, Finland and Luxembourg. It is the flight capital or hot money from the southern countries.

    • PCARX is always right. Thats why he sold all his French stock in mid 2011, is short EUR, long gold, CNY & BRL.

    • Marcus, yes, enormous capital flight out of deficit countries has been taking place for a couple of years now. Greece alone lost over 60 BN EUR of bank deposits (much of which presumably went offshore). Still, on a net basis Greece has been an importer of capital and not an exporter. Evidence of that is that Greece’s foreign debt today is about 100 BN EUR higher than it was 2 years ago. What was that increase in foreign debt used for? Well, among other things to finance capital flight… (but the larger portions were the financing of the budget and current account deficits).

    • Klaus Kastner January 16, 2012 at 01:18 #
      You say :
      “Greece alone lost over 60 BN EUR of bank deposits (much of which presumably went offshore).”

      Me thinks you presume too much. How do you think the middle class payed for the extra taxes and withholdings on salaries and pensions? When 10,000euros a year are taken from a family budget economies can only go so far, at least the first year before drastic life style changes come in. Most people payed taxes and head taxes by withdrawing from savings.

      All those people in the private sector who lost their jobs (1000000), they lived on savings, as long as it lasted. That is where a lot of those billions went.

  10. I think Francois Baroin just answered what France will do:

    “If feels like a student who has always being getting 20 and now is getting 19. It is still a very good grade.”

  11. Another sign for the bad situation of the Euro is the Negative yield of short term German bills as were priced in the last week auction. The only logical explanation for the negative yield is the perception of a possible demise of the euro which will appreciate the new German “Euro” / Dm ? in comparison to the current Euro . In such case, it is logical to buy bills in “cheap” euro and receive back the money in “dear ” Euro. For more details

    http://www.enriquefleischmann.blogspot.com/2012/01/negative-german-yields-and.html

  12. Yani:

    I disagree. You make it sound like rating agencies action is a bad thing.

    To the contrary, it is an extremely positive thing. It’s all part of the game of systematically foreclosing any possibilities of escape for the Merkel nonsense and finally forcing Germany to do what she has been refusing to do all along: namely to go the way of the Modest Proposal or a variation thereof.

    BTW, Germany will not escape the downgrade either as now the overwhelming assumption is that Germany will bear the cost – one way or another -of the tremendous mess it has created.

    The signal has already been given to Germany about a month ago with two months remaining on the clock. A downgrade for Germany is already in the works.

    Every time the rating agencies issue a downgrade for a eurozone country it’s like another escape hatch window is closing forever for an increasingly panicky Merkel. When a rating agency like S&P is issuing a bunch of downgrades all at once it’s like the equivalent of a bombing run on Dresden during WWII. There is no escape for Germany. There are more agencies with downgrades coming (i.e. more bombing runs) and the German construct will be systematically and relentlessly leveled to the ground.

    This is it. Game over. Until Germany cries uncle and does what she should have done two years ago to begin with.

  13. If I understand correctly, the German banking sector will make huge profits from the EZ breakup. And if they can persuade Merkel, Germany will soon bail itself out of the Euro. But then, who would have enough money to buy German industries’ products? Can the German market alone support its industry?

    • No, it could not! The major problem of the German economy, since 1945, has been that it could not employ its people if it didn’t have so many customers outside of Germany. Let German exports decline in any significant measure in a shorter time frame and you get high unemployment immediately. From that standpoint, one could even argue that the German economy is exposed to very significant risks.

      The amazing thing is that Germany, before the Euro, managed to compensate the appreciation of its currency through increases in productivity. So they remained competitive internationally. Also bear in mind that, since inception, the Euro had appreciated against the USD sometimes by up to 30% and the German automobile industry still registered record car sales to the US. One would think that one cannot increase productivity forever but so far Germans always found a way to do it.

    • They don’t make anything worth buying – not all Germans make BMWs and VWs – besides I would rather buy a Renault or Citroen which will be cheaper (I own five new Fiats;) However most of Germany is not manufacturing anything, Germany is also ‘re-labeling” power when stuff is brought from the Far East, from components to chemicals, and then relabeled as German. Generally speaking, the EU expansion and the current dilemma that was caused by it is ideological. The EU incorporates now openly Nazi apartheid states like Estonia and Latvia which export manpower, consume goods largely produced from outside of the EU, the reason why they were “incorporated” is because they are Nazi and because of their racial anti-Russian and pro-American orientation. The largest shift to the “East” by incorporating fake European states (which never existed on the map before 1918 – that is the important trait of this expansion) cost enormous losses to real Europe in terms of jobs and manufacturing. strengthened Germany – but not manufacturing by its retail (assorted Lidls) and financial sector and advanced ideological goals of encroachment into Russian territory. Euro was to become the new Reichsmark but it would not and could not have worked out because not just recently urbanized peasant parasites of “New Europe” or Estonian Nazis but I believe even old Europeans viewed European Union as a supermarket club – which only provides benefits and demands no true sacrifices (can you see someone sacrificing his own life and those of his children for the glory of the European Commission?) – so as any system encounters crisis of one sort of another, and EU has not yet faced any major crisis, the euro debacle is minor comic opera stuff, it is subjected to stresses and I don’t believe the EU would survive because nobody wants to sacrifice anything and because there are ideological barriers to self-salvation. German market cannot support its industry because Germany is rapidly de-industrializing itself or becoming relabeling superpower.

  14. Yanni,

    Another (smaller I must admit) aspect of the lack of recycling mechanism is how centralised the EU and its institutions are. Pretty much everything is centred in the Brussels, Luxembourg, Frankfurt area. The ECB, the parliament, EU courts,…everything….

    How many EU-wide institutions or other facilities you know in Patras, in Palermo or in Porto ?

    Compare this with the US, where government and other facilities are spread from San Diego to Washington, and Portland to Miami….

    just a thought…

    • And of course the US has at least some elements of accountability and self-rule while the EU system is deliberately undemocratic, not just special apartheid states exists like Estonia where someone who is Slav does not have same rights as an urbanized Finno-Ugric Estonian peasant (and EU made an ideological point of incorporating Estonia and Latvia despite the fact that those our obviously tribal states, “ethnic homelands” as is Croatia, another fascist candidate that is in the accession pipeline) but even on the wider scale in the EU the core principle of democracy is undermined – one person does not have one vote. Because states matter and individuals on’t (!), one person’s vote can weigh only 30% of anothers. If you look again at Estonia, a darling of the neocons and the Russophobe expansion pusher, if you take into the account that a third of population are disenfranchised because they are Russian, it would come that in the European Parliament a vote by an Estonian ethno Nazi weight twice as much as that of an Italian worker for example, What EU is, is a the reincarnation of the Holy Roman Empire and resurrected Third Reich centered around same area (the Holy Roman Emperor was elected at Frankfurt) with a few core states and tribal entities supervised from a small geographic area where imperial bureaucracy is based (roughly Frankfurt-Brussels-Strasbourg) corner, largely Germanic, unelected, unaccountable, undemocratic, but one which – unlike Holy Roman Empire (I am not going to bring up Voltaire’s famous one line classification of it) is not based on any tradition and whose subjects are only as loyal as members of a supermarket club expected to be.

    • The EU institutions in Brussels, Frankfurt etc. are headed with genii (plural of genius) from PT, IT etc.

      It is a disgrace to the continent that a fat Maoist from Portugal thinks he represents Europe in the world.

  15. Standard and Poor is right in so far as they go in that regional imbalances and shifts of wealth are causing instability in the Eurozone.

    They leave out the strains of overproduction, downward pressures on the rate of profit, the increasing gap between the rich and the rest, and the growth of the non productive finance sector.

    The main reason for the extreme vilification of Greece, in spite of it being a very minor part of the European economic problem, is in the inspiring resistance of the well organised and unionised Greek working class to the liquidation of their economy to pay off bad, reckless loans made by private banks. The removal at the behest of Merkel and Sarkozy of the elected Greek government and replacement one led by a bankers rep and that includes the LAOS fascists was intended to put an end to any such nonsense as democratic expression and as a message to the rest of Europe not to resist.

    http://blogtok.wordpress.com/2010/01/19/strains-on-the-eurozone-centrifugal-forces-in-the-eu/

    A union as diverse as the EU clearly needs the capacity and the political will to transfer resources from richer to poorer parts of the region, and needs to be driven by a spirit of mutual support and shared responsibilities. The present institutions are beyond reform and a new union of peoples needs to be built from the bottom up.

    C. Flower

  16. what everyone seems to forget is that in a post EU era, with the tensions that will be and the narrow-minded political opinions forced onto the public, war against Germany will be practically unavoidable. It seems to me that its WW2 all over again just without using gunpowder. Yet.

    • Why would that be happening? Expansion of the EU was not just German project (though I myself think that a unified Germany is a very bad project to begin with anyway, but what’s done is done). Nobody asked Greeks to cook their books? What Germany has to do with the system that is so flawed by design?

    • I think the only state that has wholesale defaulted on its gold obligations and in fact on its entire financial system was the USA as it was too busy with exterminating poor people of Vietnam and feeding Israel and could no longer afford to maintain the gold peg it pledged and guaranteed to the entire world that it will maintain as long as the US dollar is “kept” as international reserve currency.

    • Jerry, this brings memories of Michael Lewis’s Liar’s Poker. Here’s a hilarious excerpt on those “famous gold linked bonds” from his book (it’s from google books, so I guess there is no copyright violation):

      “The fuckin’ frogs are getting their faces ripped off.” said the Piranha [nickname of the top Salomon Brothers bond salesman], meaning that the French were losing a lot of money on the bond issue now that the bond had indeed become convertible and the price of gold was five hundred dollars an ounce. The stupidity of the fuckin’ frogs disgusted the Piranha. He associated it with their habit of quitting work at 5:00 p.m. The European work ethic was his bête noire, though he put it differently. He had once derided Europeans who complained of being overworked by calling them “Eurofaggots.”

    • photoroobit,

      Just to add … Dollar convertibility to gold, since the 1944 Bretton Woods Agreements, had only been limited to foreign central banks. It was not possible for John Q. Public to exchange his dollars for gold. Moreover, the decision by Nixon to close the gold window did not so much shock foreign governments as was his decision to add a 10% surtax on all imports coming into the United States. The surtax was in effect a currency devaluation. And even though this was a violation under GATT (one of many to follow by the U.S., just ask Canada), the Americans couldn’t of cared less. Why? Because being a superpower has its (exorbitant) privileges.

    • S&P did an admirable job to negate years of endless lies and propaganda by Europe’s incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone’s idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman “economic” religion that has taken the world to the brink of utter financial collapse and, gradually, world war.

  17. The capital outflow from GErmany in the 1990 was caused by the negative real interest rates in the periphery. There is no reason corporate profits would go to other countries unless it seems more attractive. This was caused by the (now proven wrong) interest convergence.

    Capital is already flowing into Germany. Please check Target2. The German Bundesbank is not a lender to banks anymore. The banks do not know what to do with the money.

    Capital flight from Italy and France has been about EUR 50 billion per month each. Noone talked about France. But france is in just as bad shape (if not worse) than Italy.

    “As for France, it will be left tangled in the seabed’s mud, in between a few weedy posts that remind it of the lost dreams of becoming the command centre for a future federal Europe”

    This is the deserved punishent for a nation of socialists that succeeded to turn the ECB from a Bundesbank copy into a socialist state central bank. Bye bye Euro. We will miss you, not.

    • PCARX, regarding the “driver” behind capital inflows/outflows, I suggest to look at current account balances (since I am not an economist, I may be wrong, though). A Balance of Payments must mathematically balance. If the current account is positive (exports exceed the sum of imports and services), the capital account must be negative. Germany, for example, had a current account surplus of 141 BN EUR in 2010. Conversely, Germany must have, in sum, exported 141 BN EUR of capital that year (loans, equity, etc.). So it’s not really interest rates which drive capital outflows (nor the fact that exporters invest their profits offshore). It’s the simple fact that with a current account surplus, a country’s banking system receives more liquidity from the outside than it can invest domestically; thus, capital has to be exported.

      Capital is NOT flowing back to Germany these days! Germany still has a huge current account surplus, thus capital outflows. What is happening is that bank loans which used to be in Greece have been called back to Germany but the offset to that one can find in Target-2, rescue loans, etc.

      The introductory paragraph in the post describes beautifully why even a balanced budget would not solve the structural problems of the Greek economy. It is the huge structural current account deficit of the country which must be addressed. Otherwise, Greece will “forever” need enormous amounts of capital from abroad but foreigners will not “forever” make that capital available (the current account deficit for 2011 will still be 20 BN EUR at least, despite the recession).

      Thus, I come back to the point which I have made over and over again: if the current account deficit is probably THE most important process which got the Greek economy into trouble (more so than the budget deficit, in my opinion), then a recovery plan requires the reversing of this process. Key elements of such a plan would have to be: import substitution with new domestic production combined with an export drive; and capital inflows more in the form of non-interest-bearing equity (foreign investment) than as interest-bearing debt.

    • Euro is of course very convenient, They botched it though. Might still be salvaged. Not that they will salvage it but one has to have the political will and to be able to think outside the box, and I think “they” can’t quite do that. Forces are too divergent – some are driven by ignorance and delusions of grandeur – some – like the parasites on the Eastern periphery of the EU (not Europe, though EU rather unceremoniously usurped the word Europe) are driven by hatred and profound sense of inferiority. The EU in its present form may be (and I hope is) unsalvagable

    • Klaus, you can have capital outflow independent of account surplus/deficit.

      Imagine a country X with zero international trade of goods and serives (= account surplus = account deficit = 0). Now people in this country start sending their cash to Spain where a huge real estate bubble is attracting investors. Country X will have capital outflow.

      And trust me, capital is flowing into Germany (Switzerland, Czech Republuc, Sweden and Norway) like there is no tomorrow. If you are in greece aska real estate broker that used to sell Greek real estate to Germans. ost likely he is selling German real estate to Greeks these days.

      I will repeat myself: Capital flight from Italy and France has been about EUR 50 billion per month since October each. Noone talked about France. But France is in just as bad shape (if not worse) than Italy.

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