Macroeconomic experiments: Abenomics versus Euro-austerity

The ABC’s (Australian Broadcasting Corporation) online periodical, THE DRUM, commissioned me to write an article comparing and contrasting the policy responses to the Crisis of Japan and of the Eurozone. Click here for the ABC’s website. Or read on below…

The Japanese and eurozone economies are very different, but their current predicaments are eerily similar. Yanis Varoufakis compares the radically different recovery experiments each economy is undertaking.

In the long, unending wake of the global financial crisis, desperate governments and central banks are trying their hand at experimental economic policy mixes. Japan and the eurozone offer a glimpse of how radically different anti-crisis experiments can be.

Recently, Japan has been making the news with reports that its new leaders – the new prime minister and the new governor of the Bank of Japan (BoJ) – have joined forces to stop their nation’s so-called ‘lost decade’ from turning into three lost decades.

Shinzō Abe’s government has committed to a stimulus package (an impressive 2 per cent of national income in 2013 alone) that will attempt to rekindle the real economy. Mr Haruhiko Kuroda – Mr Abe’s choice of BoJ governor – has audaciously declared that the BoJ will fight deflation by purchasing financial titles (e.g. government bonds, mortgages) to an extent and at a pace never seen before in economic history (in fact doubling the country’s monetary base in two short years).

Quite clearly, the two men are aiming their double-barrelled shotgun at the great foe of deflationary negative growth which, like a rogue samurai, is slashing into Japan’s capacity to reproduce itself as an advanced, prosperous social economy.

What makes the escapade remarkable is not just the size of their commitment but also their starting point: Japan’s national debt is by far the highest in the civilised world, making the decision to allow the budget deficit to rise to more than 11 per cent in 2013 the boldest Keynesian move since Ronald Reagan’s expansionary fiscal policies in the early 1980s.

Similarly, the BoJ’s decision to spend $1.5 trillion in order to accomplish in two years what Ben Bernanke’s Fed did during the past six years of ‘quantitative easing’ (and without controlling the world’s reserve currency) is perhaps even more daring.

Turning to the eurozone we are faced with another audacious experiment. In an aggregate economy that is in recession, the deepest austerity is being imposed upon the fastest shrinking national economies (that make up the eurozone), while the European Central Bank (ECB) is watching idly, too neutered by Berlin, and too constrained by its charter, to follow ECB president Mario Draghi’s instincts.

Total eurozone debt is less than 100 per cent of the eurozone’s annual income (compared to Japan’s 230 per cent), the aggregate budget deficit is running below 6 per cent (about half that of Japan), while the ECB is exposed to a molehill of paper assets (when compared to BoJ’s already mountainous ones).

Clearly, of the two economies, the eurozone is the one that has significantly more room within which to accommodate expansionary fiscal and monetary policies. And yet, it is Japan that is taking the plunge, firing both its barrels at its stagnation nemesis.

One possible justification of the two diametrically opposed policy settings in Europe and in Japan might be that these two advanced economies are facing different challenges. Europe’s leaders like to imagine that, unlike Japan, Europe is not facing a long-lasting recession, let alone deflation. For them, there is no need for eurozone governments to loosen up the purse strings, or for the ECB to flood the financial markets with digital euros. What matters to them is that the crisis is utilised to force upon the eurozone’s laggards (the Club Med nations in particular) the reforms that will help them regain their ‘competitiveness’.

While the two economies are very different, their current predicaments are eerily similar. If I am right, this means that Europe’s leaders may be deluding themselves in thinking that the eurozone’s crisis is fundamentally different to Japan’s.

Japan’s and Europe’s crises began when their financial sector imploded following the burst of gigantic bubbles caused by earlier capital inflows into the money and the real estate markets. In both economies, governments tried to keep the banks afloat with injections (capital and liquidity) that failed to restore their capacity to borrow and to lend.

Both in Japan and in the eurozone, the zombification of the banking system was ‘bought’ at the cost of taxpayers and to the detriment of the real economy; the result being a fall in the incomes from which the banking losses and the public debts had to be repaid.

In both realms politicians had too cozy a relationship with bankers and did not dare expropriate them, cleanse the banks and sell them back to the private sector (as Sweden did in 1992 or South Korea in 1998). The result of these political failures, both in Japan and in the eurozone, have been a carbon copy of one another.

Put differently, Japan and the eurozone are in different phases of the same type of crisis, with Japan at a more advanced stage of this common disease courtesy of having had an earlier start.

The eurozone is unique in world economic history in that it comprises governments with no central bank (to back their economic policies) and a European Central Bank with no government to work with. In this sense, the eurozone is a very different kettle of fish, when compared to Japan.

These differences reveal deep weaknesses that the eurozone has and Japan is free of. The eurozone’s complacency in the face of stagnation means the ‘Japanese disease’, which is now spreading throughout Europe, is going to do even more damage to Europe than it did to Japan over the past two decades.

Moreover, when the time comes for Europeans to reach the same conclusions that Mr Abe and Mr Kuroda have now turned into policy, the eurozone will lack the institutions to put them into practice. The most likely result will be the eurozone’s disintegration; a development which, ironically, will undoubtedly damage Japan’s recovery – just as it will damage the rest of the global economy.

66 thoughts on “Macroeconomic experiments: Abenomics versus Euro-austerity

  1. This(source: Greek Central Bank) tells you what you need to know about the “Greek experiment”.

    Focus on the heading called “Long term debt”. All Troika has been doing for the last 3 years is to convert Greece’s debt from primarily “bonds and notes” into “loans”. So after 140 Bil. of PSI haircuts, Greece is made to hold today more debt than ever before and you don’t even want to know what 2013 looks like.

    Therefore for that 3 years or so, and under the guidance of Troika, Greece has managed to convert its debt from one category to another, while in the meantime piling on more debt. This is the so called “bail out” of Greece: debt conversion + additional debt.

    This is the plan Greece’s European partners want Greece to “stay the course” on because it’s truly inconvenient – German elections and all – to have a better or alternate plan other than burying Greece under a mountain of debt.

  2. Με τριάντα χρόνια εμπειρίας στη Wall Street, ο Μαχόνι υπήρξε επί σειρά ετών αντιπρόεδρος στον οίκο αξιολόγησης Moody’s, υπεύθυνος για την παγκόσμια εταιρική χρηματοδότηση, τα χρηματοπιστωτικά ιδρύματα και το μακροοικονομικό κίνδυνο Δημοσίου στη Moody’s Investors Service. Ο ίδιος περιγράφει τον εαυτό του ως «μαθητή των αγορών» και «libertarian». Προτείνει την τακτική έξοδο της Ελλάδας από το ευρώ, αλλά προειδοποιεί: «Δεν ζηλεύω καθόλου τις επιλογές που πρέπει να κάνουν η ελληνική, η κυπριακή και η πορτογαλική κυβέρνηση».

    Ερ: Τους τελευταίους μήνες το ελληνικό τραπεζικό σύστημα βρίσκεται στην κόψη του ξυραφιού. Πώς βλέπετε την ανακεφαλαιοποίηση των ελληνικών τραπεζών;

    Πρώτ’ απ’ όλα το ελληνικό τραπεζικό σύστημα είναι και πρέπει να παραμείνει ενδεχόμενη υποχρέωση (contingent liability) υπό την κηδεμονία του κράτους. Σε αυτή τη φάση της τραγωδίας, οι τράπεζες έπρεπε να κρατικοποιηθούν και πιθανόν να συγχωνευθούν. Δεν υπάρχει νόημα να υπάρχουν πολλές διαφορετικές τράπεζες αν είναι να ανήκουν στο κράτος για την επόμενη δεκαετία. Οσο περισσότερες τράπεζες υπάρχουν τόσο πιο πολλές είναι οι πιθανότητες για διασώσεις και προσωπικές ενέργειες των διοικήσεων που οδηγούν σε κατάχρηση (self-dealing).

    Το χρηματοοικονομικό σύστημα και το κράτος είναι ένα, είτε αρέσει στον κόσμο αυτό είτε όχι. Η ιδέα τού να χωρίσει κανείς με κάποιον τρόπο τις τράπεζες από το κράτος και αυτές να χρεοκοπήσουν μόνες τους είναι συγκλονιστικά λάθος. Η προστασία των καταθετών πρέπει να είναι πριν και πάνω από τους ομολογιούχους και την τρόικα. Οι καταθέσεις είναι ιερή ευθύνη της πολιτείας. Δεν είναι «επενδύσεις» και οι καταθέτες δεν είναι «επενδυτές».

    Ερ:Ποιες είναι οι προοπτικές της ελληνικής οικονομίας μετά το νέο «πρότυπο» ή «μοντέλο» διάσωσης των τραπεζών που εφαρμόστηκε στην Κύπρο;

    Η Ελλάδα δεν δύναται να επαναλάβει το λάθος που έκανε η Κύπρος, να αγνοήσει ή να κατασχέσει τραπεζικές καταθέσεις. Ολες οι υπόλοιπες υποχρεώσεις (συμπεριλαμβανομένων των συντάξεων και των υπολοίπων του Target2) πρέπει να κατατάσσονται μετά τους καταθέτες. Κι αυτό γιατί οι τραπεζικές καταθέσεις είναι προσφορά χρήματος και χωρίς χρήμα δεν μπορεί να λειτουργήσει καμιά οικονομία. MxV=PxT. Οσο το Μ (ποσότητα χρήματος) πέφτει τόσο θα πέφτουν και τα Ρ (δείκτης τιμών καταναλωτή) και Τ (ποσότητα αγαθών και υπηρεσιών).

    Το σχέδιο της τρόικας για την Ελλάδα φαίνεται ιδιαίτερα ανησυχητικό, αν το αναλογιστεί κανείς. Με βάση τη νέα φιλοσοφία της Ευρώπης για αυτοχρηματοδοτούμενα bail-out, το σχέδιο για την Ελλάδα είναι, κατά πώς φαίνεται, να πεθάνει της πείνας, όπως η Ρουμανία τη δεκαετία του ’80. Η Κύπρος θα ακολουθήσει.

    Ερ:Πολλοί μίλησαν για δύο ευρώ στην Κύπρο. Είναι αυτό προάγγελος εξελίξεων;

    Η κυβέρνηση πρέπει να κάνει ό, τι μπορεί για να μην καταρρεύσουν όλα όσο θα ετοιμάζεται για την αναπόφευκτη μετατροπή του νομίσματος. Δεν υπάρχει τίποτα πιο σημαντικό για το μέλλον του ελληνικού λαού από το να χρησιμοποιήσει αυτό το χρονικό διάστημα για να χτίσει συναλλαγματικά αποθεματικά που δεν θα μπορεί να αγγίξει η ΕΚΤ.

    Ερ:Πώς μπορεί να γίνει αυτό;

    Δεν ξέρω αν είναι εφικτό, ιδίως να γίνει μυστικά. Ισως με κάποιον λογαριασμό στην Τράπεζα της Ρωσίας; Στο τέλος, η Ελλάδα θα πρέπει να αθετήσει όλες τις πληρωμές που είναι εκφρασμένες σε ευρώ και να αποκοπεί από την πίστωση της ΕΚΤ και του ΔΝΤ. Για ένα διάστημα θα είναι κράτος-παρίας όπως η Αργεντινή. Γι’ αυτό είναι απαραίτητα τα αποθεματικά σε ξένο νόμισμα, ώστε να πληρώσει η χώρα τις ζωτικής σημασίας εισαγωγές.

    Ερ:Δεν θα είναι δυσβάσταχτο το κόστος της εξόδου από την Ευρωζώνη για οποιαδήποτε χώρα με αυτά τα χρέη;

    Αυτή τη στιγμή γίνεται πολύς λόγος στα οικονομικά media αναφορικά με τη διαφαινόμενη αναγκαιότητα μιας εξόδου της Κύπρου, καθώς ζυγίζονται το κόστος και τα οφέλη από μια τέτοια κίνηση. Δεν θέλω να υποτιμήσω το κόστος. Αλλά για να το αντέξουν οι χώρες, στο τέλος θα πρέπει να βγουν. Τα κόστη τελικά θα μειωθούν με αποτελεσματική αποκήρυξη του χρέους. Κάποιες από τις χώρες του Club Med θα αναγκαστούν να φύγουν όχι μόνο από την Ευρωζώνη αλλά και από την ίδια την Ε.Ε. Εκτός, βέβαια, αν στη φράση «ευρωπαϊκή αλληλεγγύη» μπορεί να συμπεριληφθεί και το ενδιαφέρον για τους απόρους, πράγμα για το οποίο πολύ αμφιβάλλω. Στο Βορρά δεν θα αρέσει όταν ο Νότος κηρύξει στάση πληρωμών στο χρέος της τρόικας και τις υποχρεώσεις του Target2.

    Λυπάμαι που το λέω, αλλά πριν τελειώσει όλο αυτό θα υπάρχει ανθρωπιστική κρίση στον κόσμο (world). Δεν ζηλεύω καθόλου τις επιλογές που πρέπει να κάνουν η ελληνική, η κυπριακή και η πορτογαλική κυβερνήσεις.

    Ερ:Ποιος μπορεί να πάρει το βάρος μιας απόφασης που μπορεί να φαίνεται σωστή σε έναν άνθρωπο της αγοράς, αλλά δεν έχει επιστροφή για έναν άνθρωπο της πολιτικής;

    Φανταστείτε να είχα την αντίθετη γνώμη και να έλεγα πως η Ελλάδα πρέπει να μείνει στο ευρώ. Τι θα έλεγα; Ποια θα ήταν τα πειστικά επιχειρήματα υπέρ αυτού του κολαστηρίου; Ολες οι χώρες πέρασαν μακροοικονομικά σοκ. Η Γερμανία έχασε δύο πολέμους. Αλλά λίγες χώρες καταδικάζουν εαυτούς σε μόνιμη ύφεση -αυτό σημαίνει να μείνει η Ελλάδα στο ευρώ. Ο κόσμος εγκατέλειψε τον Κανόνα του Χρυσού στις αρχές της δεκαετίας του ’30 και τα πράγματα καλυτέρεψαν. Οι περιφερειακές χώρες τελικά πρέπει να βγουν απ’ το ευρώ και τα πράγματα θα πάνε καλύτερα. Θα τους πάρει μία πενταετία.

    Ερ: Θα μείωνε τις σκληρές συνέπειες της εξόδου μια κοινή στάση των χωρών της περιφέρειας;

    Δεν βλέπω κάποιο λόγο να αναβάλλεται κάτι που τελικά θα γίνει. Οι περιφερειακές χώρες θα βγουν από το ευρώ ανάλογα με τα προγράμματά τους, που θα καθοδηγούνται από τα σπρεντ των ομολόγων και τη φερεγγυότητα των τραπεζών. Όσο η τρόικα επιμένει στις πολιτικές αποπληθωρισμού, δεν υπάρχει ελπίδα για ανάπτυξη. Μια έξοδος από το ευρώ θα είναι πολύ άσχημη. Αλλά γιατί να έχουμε παρατεταμένη ύφεση πριν από τη μέρα της εξόδου, αν η έξοδος είναι αναπόφευκτη; Νομίζω πως το πιο σημαντικό ερώτημα είναι αν υπάρχει ελπίδα για διαπραγμάτευση με την τρόικα μιας τακτικής εξόδου, που θα περιλαμβάνει μεταβατική οικονομική βοήθεια. Αυτό θα βοηθούσε πολύ, μόνο που η τρόικα δεν είναι πολύ πιθανό να δεχτεί μια συμφωνία που περιλαμβάνει μαζική διαγραφή χρέους και διαγραφή των υπολοίπων οφειλών του Target2. Γι’ αυτό προτείνω να μαζευτούν αποθεματικά σε ξένο νόμισμα πριν από μια μονομερή έξοδο. Δεδομένου του κινδύνου η τρόικα να βάλει την Ελλάδα στη μαύρη λίστα, η Ελλάδα θα χρειαστεί ξένο συνάλλαγμα για να πληρώσει για ζωτικές εισαγωγές μέχρι να ορθοποδήσουν οι εξαγωγές της. Σημαντικό είναι ότι το σοκ της εξόδου θα μετριαζόταν από μια στάση πληρωμών και έναν επαναπροσδιορισμό ολόκληρου του εξωτερικού χρέους. Η Ελλάδα μπορεί να αρχίσει από την αρχή με καθαρούς ισολογισμούς (αλλά χωρίς πρόσβαση σε εξωτερική χρηματοδότηση). Για ένα χρονικό διάστημα η Ελλάδα πρέπει να ζήσει με ισοσκελισμένο ισοζύγιο τρεχουσών συναλλαγών.

    Ερ: Σε κάθε άκουσμα εξόδου από το ευρώ υπάρχει φυγή καταθέσεων και εκροή κεφαλαίων που επιβαρύνουν το ισοζύγιο τρεχουσών συναλλαγών. Πώς θα σπάσει ο φαύλος κύκλος;

    Οποιοδήποτε σχέδιο μετατροπής του ευρώ σε δραχμές θα χρειαστεί συναλλαγματικούς ελέγχους ώστε να αποκλείσει τη φυγή κεφαλαίων. Εάν η κυβέρνηση επιλέξει την έξοδο από την Ευρωζώνη, πρέπει να εξασφαλίσει τις υπηρεσίες παγκοσμίου κλάσης συμβούλων, όπως ο Στάνλεϊ Φίσερ (σ.σ. διοικητής της Κεντρικής Τράπεζας του Ισραήλ, ο οποίος αποχωρεί από τη θέση αυτή στις 30 Ιουνίου) ή ο Τζόζεφ Γιαμ (σ.σ. πρώην επικεφαλής της Νομισματικής Αρχής του Χονγκ Κονγκ, μέλος του δ.σ. της UBS).

    Δημοσιεύθηκε στην «Κυριακάτικη Ελευθεροτυπία» το Σάββατο 4 Μάη 2013

    • Running a current account deficit in your own currency is way different from running a current account deficit in the eurozone or the gold standard.That’s a fact you are finding hard to grasp.

      As for the article.It’s funny how the very same author selectively uses either absolute numbers or per gdp ratios just to prove a point.
      There’s available data since 1980.Greece has been running a current account deficit which has mostly been below 5% of GDP.Any economy with normal growth and inflation can run such deficits sustainably for a very long time.It is obvious when the current account position started deteriorating.Similarly everybody knows when the German surplus started exploding.

    • Greekdefaultwatch is a 30-some year old blogger with limited experience.

      Read the 2 books by Morgens Pelt to understand what happened before and after WWII with Greek trade and how Germany gradually replaced the US as the major trading partner leaving behind a trail of huge trade surpluses in favor of Germany and corresponding trade deficits for Greece. This is a methodical and deliberate game going on for years.

      “The just don’t buy” mantra does not apply here since the majority of Greek commercial bulk merchant distribution system is gradually taken over and fed by German industry regardless of demand. Germany has established a huge ground network in Greece whose only purpose is to feed German trade surpluses in both good and bad economic times. It’s a rigged game and it can’t be easily stopped as you suggest. When the dealers feeding the consumer market give you one choice (i.e. a German product) the question of choice is thrown out of the window and replaced with forced lack of alternative products. Choice gives away to a mono-culture of product availability.

    • Before the Greeks blamed the Germans, they blamed the US. It is difficult to accept that one is not capable of running a country any better than Afircans do.

    • According to you US is an African type country too.Have you seen their deficits ?

    • Well at least in the US it is clear to whom which peace of real estate belongs. I was talking about functioning state, not deficits.

    • @EUDSSR: “Before the Greeks blamed the Germans, they blamed the US. It is difficult to accept that one is not capable of running a country any better than Afircans do.”

      You sound like a complete jerk. Just what went wrong when your mother was pregnant with you?

    • It was a great time. We still had one of the best fiat currencies in the world!

  3. As for my repeated claim that the Germans were never asked if they want to be in a currency union – the traitor Helmut Kohl, Chancellor back then and responsible for the desaster, conceded in a recent interview: I acted like a dictator in this case since I knew exactly that if I’d give the populace the choice, I’d lose the popular vote 3:7

    (in German language:

    • @VSS. “the traitor Helmut Kohl”

      So for you Helmut Kohl was a traitor?
      The man who united Germany, was a traitor?
      The man who positioned Germany right in the heart of Europe, was a traitor?

      Spare us with such crap here!

    • Nobody denied that Germans were never asked.You are the one denying that the same happened to almost anyone in the Eurozone.

    • I think if “traitor” is the right label is questionable. I don’t think Kohl did it because he wanted to harm Germany. But he also did not do it as some part of a sinister German plan to take over the world either.
      He was just obsessed with the idea of binding European countries closer together, irreversibly. To ensure there’s peace.
      A noble aim, I’d say.
      If it worked out is another question: there are countries like the UK and Sweden that are outside the Eurozone and are therefore forther away then they’d be if the Euro wasn’t there.
      And then there are huge tensions within the Eurozone. Basically between Germany, Austria, the Netherlands, Finland and the Baltic states on the one side – and the periphery that would love to devalue the Euro and inflate the debt away (like they handled it before the Euro was there with Drachma, Lira, etc).
      Neither side is wrong – they just want different things.

      In a way I’d say the Euro has pushed Europeans further away from each other.

      If anything, there’s more tensions and hostility between the countries today than before the times of the Euro.

      What’s just really thick is to see it as an evil German plan – read the linked article (if you can read German): I think Kohl is quite authentic I about his motives.

    • @Martin: “In a way I’d say the Euro has pushed Europeans further away from each other.

      If anything, there’s more tensions and hostility between the countries today than before the times of the Euro.”

      It wasn’t the Euro per se!!!

      Here is the real reason but some boneheads on this blog might argue that Nomura Research is also anti-German 🙂

      “Ironically, the Germans are now complaining about the lazy southern Europeans who refuse to implement the tough structural reforms that enabled Germany to become so competitive. They do not realize that the ECB effectively sacrificed Europe’s periphery whose balance sheets were not affected by the IT bubble in order to save the German economy. Their confusion is born of a lack of understanding of balance sheet recessions.”

      Here is the full article:

      Here it is in Greek:

    • Kohl like many Germans who grew up close to the French boarder have this idiotic dream of unity with France. It will never work.

  4. Hard to disagree with any of IMF’s conclusions:

    Greece – 2013 Article IV Consultation Concluding Statement of the IMF Mission
    May 3, 2013
    1. Greece is making progress in overcoming deep-seated problems in the midst of a very serious and socially painful recession. The adjustment challenges facing Greece in 2010 were daunting, with fiscal and current account deficits both well into the double digits, reflecting runaway increases in public expenditures and the emergence of a large competitiveness gap in the years following the adoption of the euro. For any country belonging to a currency union, addressing dual imbalances of this magnitude would carry very high risks to growth, as recognized at the outset. In the event, the recession in Greece has been much deeper than expected. But Greece’s achievements must also be recognized:
    •Progress on fiscal adjustment has been exceptional by any international comparison, with the primary balance set to have cumulatively improved by 10 percent of GDP by end-2013, amid a contraction in GDP of more than 20 percent.

    •Greece has also made a significant dent in its competitiveness gap. Far-reaching labor market reforms have helped to realign nominal wages and productivity at the enterprise level. We estimate that the competitiveness gap as measured by Unit Labor Costs (ULC) has been reduced by close to two-thirds since 2010, while the current account deficit has come down cumulatively by about 10 percent of GDP.

    • Financial sector stability has been preserved, despite large losses associated with the debt restructuring and a sharp rise in NPLs associated with the deep recession.

    2. These achievements have been facilitated by unprecedented support from the international community, including €173 billion to date from Greece’s European partners. This has significantly cushioned the adjustment need, preventing what would otherwise have been much more serious social hardship, while containing negative spillover to the rest of the euro area. The achievements to date are evidence of a very strong and persistent determination on the part of Greece and its European partners to do whatever it takes to restore Greece to a sustainable situation inside the euro area.

    3. However, insufficient structural reforms have meant that the adjustment has been achieved primarily through recessionary channels, with unequal distribution of the burden of adjustment. Three problems stand out:
    •Very little progress has been made in tackling Greece’s notorious tax evasion. The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension.

    •While labor market reforms are causing a notable decline in nominal wages, this has only to a very limited degree been reflected in lower prices, because of failure to liberalize closed professions and more generally open up to competition. This is another reason for why too much of the burden has so far fallen on those earning wages and pensions.

    •While the rebalancing of the economy has been associated with a surge in unemployment in the private sector, not least among the young, the over-staffed public sector has been spared, because of a taboo against dismissals.

    Decisive corrective actions are needed in each of these areas to promote an early supply response and achieve a more balanced distribution of the burden of adjustment. The mission welcomes that the government is refocusing its program in recognition of these problems.

    4. Major fiscal challenges remain. With no more room for tax increases or major cuts in discretionary spending, the government has been forced to focus on socially difficult cuts to wages and social transfers. The fiscal program for 2013–14 is unequivocal evidence of the government’s determination to meet its commitments in the fiscal area. Greece’s European partners have responded by agreeing to reduce the medium-term primary balance target from 6½ to 4½ percent of GDP and to length the adjustment period to 2016. But Greece will still need some further structural fiscal adjustment to reach its medium-term fiscal target. The key challenge is to define a way for the Government to achieve this while adhering to its promise to avoid further across-the-board spending cuts. Three key issues must be addressed:

    • Tax administration reform. The government’s medium-term program assumes an improvement in tax collection by 1½ percent of GDP. Substantial technical assistance has helped give the tax administration the technical tools it needs to succeed, but this target remains very ambitious against the backdrop of the disappointing progress in this area so far. To finally deliver, deeper political commitment to tax administration reform is critical. To insulate the administration against what is still pervasive political interference, a key step over the next year will be strengthening its independence, by giving it new powers to manage its personnel and budget. Recent changes are an important step in this regard.
    •Public administration reform. The plan is to primarily achieve medium-term targets for reduction in staffing levels through voluntary attrition. This is understandable. However, it is not credible without some limited mandatory redundancies. Thus, while projections suggest that attrition will be just about enough to meet medium-term staffing targets, the provision of important public services is already hampered by lack of qualified staff in key areas, like banking supervision and tax administration. Mandatory redundancies that provide room to hire new, well-qualified and motivated staff will thus need to be a key component of the plan for modernization of the public sector, and in the process lend credibility to the policy of relying primarily on attrition. The taboo against mandatory dismissals must be overcome.

    •Preserving and enhancing the social safety net. The government has kept its adjustment policies progressive, but there is a need to go beyond this to strengthen specific features of the safety net, to assist those most affected by the crisis. Job training programs and income support programs for the unemployed both need to be geared up, leveraging European Community funds where available.

    5. Effective financial intermediation is crucial to contribute to a strong recovery. The program’s bank recapitalization framework is set to deliver a fully recapitalized system by mid-2013, and banks should be in a position to support a gradual recovery in credit as deposits and wholesale market access returns. The reduced sovereign-bank link—banks now have little Greek government debt on their balance sheets—will also help to facilitate a return to market access. Thus, we expect that the deep de-leveraging that has taken place in recent years will soon come to a halt. However, serious policy challenges still exist in this area:
    •A major concern is to ensure that the large injection of public capital does not give rise to undue government interference and attendant problems of misallocation of credit. Greece’s experience with state run banks is very poor. A reinforced governance framework, supporting strong oversight and supervision, and above all very rapid re-privatization, must be a critical objective of the strategy for the four-pillar banking system to be developed by June.

    •A key priority for the banking system is to contain and reverse the mounting tide of nonperforming loans. Working out debts, within the recapitalization envelope, will help both the banks and the debtors normalize their activities faster. A more comprehensive debt resolution framework should be developed and introduced as soon as possible. In this respect, the mission welcomes the authorities’ commitment to put in place a framework for dealing with distressed household borrowers.

    6. A strong recovery will need to be built primarily on deepening structural reforms. The focus should be on invigorating Greece’s export and import competing industries. This will require a more determined and ambitious effort to reduce barriers to entry into various markets, including opaque and lengthy licensing procedures. Moreover, too many assets remain in state hands. The government’s welcome public commitment to improving the business environment and accelerating privatization now needs to be matched with results. Achieving a critical mass of change will be possible only with a broad, forceful, and sustained political commitment.

    7. Attempts to artificially engineer growth should be resisted. International evidence is mixed at best on the usefulness of development banks, tax-free zones, and subsidies (or tax expenditures) targeted at specific sectors. Greece cannot afford to divert resources to unproductive uses nor to devote limited implementation capacity to designing and establishing such policies. And in particular, Greece cannot afford a more complicated tax system, which would work directly against the crucial effort to improve tax collection.

    8. Restoring growth remains the overarching precondition for whether Greece succeeds. Looking over the period 2010–2012, the much deeper than expected recession was overwhelmingly due to a progressive loss of confidence, culminating in acute concerns about euro exit, as political uncertainty continued to grow, making it increasingly evident that there was no strong political resolve to stand up to vested interests fiercely opposed to reforms. This led to a dramatic contraction in investments not only through poor sentiment, but directly through deleveraging and an attendant sharp credit contraction. Looking forward, two crucial considerations stand out:
    •With fiscal adjustment set to remain a drag on GDP growth for several years to come, the key challenge is to generate the improvement in confidence needed for a recovery in investment to begin to more than offset this drag. This cannot happen unless Greece can secure broad domestic support for the program and the political stability that would come with this. The lessons of the recent past are that only with full and timely policy implementation and commitment to the program can the fundamentals for a recovery be put fully in place and the fear of adverse outcomes permanently put to rest.

    •Greece’s public debt remains much too high, despite the restructuring of privately held bonds and recent support by official creditors. It is, therefore, very welcome that Greece’s European partners have now accepted that Greece could need significant exceptional support on below-market terms in order to restore debt sustainability and that they have committed to provide additional relief, if needed, to keep debt on the programmed path, i.e. to bring it substantially below 110 percent of GDP by 2022. With Greece’s debt now overwhelmingly held by the official sector, such a commitment is essential to assure creditors that a credible framework for dealing with Greece’s debt overhang is now in place.

    9. Overall, while it will yet take some time for the country’s situation to fully normalize, the government of Greece has come a long way in its adjustment effort. Adopting the necessary policies for the next leg of the adjustment effort, which may well mark a turning point for Greece, must take priority.


    The mission is grateful to the authorities for the constructive

    • IMF is full of horseshit. Here it is in #8 – “the much deeper than expected recession was overwhelmingly due to a progressive loss of confidence…” are you kidding me? The confidence fairy… again.

      Here’s a quote from the EC’s quarterly report on European Economic and Financial Affairs. Same old neoliberal nonsense.

      “High unemployment points to the need for continuing the course of structural reforms. Moreover, in a still fragile macro-financial context, it is essential to dispel doubts about the implementation of crisis resolution
      measures and structural reforms, which could result in another flaring-up of the crisis. Therefore, it is of the utmost importance to press ahead with the implementation of the Banking Union in order to overcome financial fragmentation as part of completing the architecture of EMU, facilitate structural adjustment and unlock domestic demand. By moving forward with the necessary reforms, the EU and the Member States can create the conditions for the improved financial market situation to feed
      through to growth in the real economy…”

    • David:

      No one is perfect. The IMF admits a major error in the Greek case, a position not shared by the EC and Bundesbank. The IMF has always made the right calls on the Greek situation form the get go but the other 2 parties of the Troika would have none of it.

  5. The original question – is there something the EU can learn from Japan – seems to have been neglected in many comments. Perhaps even in the original article.

    If the causes of the bubbles are different, can the prescriptions be compared?

    If the trade patterns of the two areas are not the same, can the prescriptions be compared?

    If the demographics are different, can the prescriptions be compared?

    If the internal purchasing patterns are different, can the prescriptions be compared?

    There are so many differences between the EU and Japan that comparison of prescriptions must be done very carefully.

    There are so many difference within the EU – what caused each failure, what are current and potential trade patterns, what is the current level of political/banking corruption, what are the demographics and personal debt patterns – that even within the EU comparison is difficult.

    What is clear about the EU is that the current political system allowed the problems to grow. That system seems unable to solve those problems. Change will be essential.

    The problem is finding analogies that do make sense.

    Even if the correct analogies are found, any solution will affect some groups more than others. The affected groups will squeal. In Japan, the squeals of the groups most needing reform have prevented reform for 20 years and continue to shelter those groups from taking the losses they should.

    Problems and power balances in the EU are at least as bad as Japan.

    A solution within the next 20 years that retains the EU is unlikely. Given the winding down of the energy boom of the last 150 years and the thinning of commodities, it is possible that the EU will never recover to it past peaks.

    Perhaps it is time instead for the EU to think small – to rethink itself as a much smaller economy.

    • “Perhaps it is time instead for the EU to think small – to rethink itself as a much smaller economy.”
      You mean to shrink itself…because there’s no other way to describe it.
      This might be about the US but the point it makes is precisely the same as the one that applies to the EU:

  6. Pingback: Macroeconomic experiments: Abenomics versus Euro-austerity | gold is money

  7. Speaking of Japan, it seems as if it played a major role in “helping” R-R come to the conclusion that debt/gdp above 90% provokes slow or negative growth.

    “We find that the correlation between government debt-to-GDP ratios and future growth in Reinhart and Rogoff’s . . . dataset results from outliers which come from the country most suggestive of the hypothesis that slow growth causes high levels of government debt – Japan. . . .

    That is, the Japanese data disproportionately distort the overall relationship and create a misleading picture, because of the unique history of Japan. But, nevertheless historical examination of both Japan and the other nations provide evidence consistent with the “reverse causation” causation hypothesis that growth causes debt to-GDP ratio levels rather than the alternative hypothesis of a debt-GDP ratio causal ordering priority. Berg and Hartley show this with distributed lag/impulse response analyses and LOWESS regressions with and without the Japanese data. The analysis, for all practical purposes, shows that there is no relationship between current year association between GDP growth and the debt-to-GDP ratio as claimed by R-R.”

  8. The banks scaled up beyond national borders both in Europe and Japan.
    This reduces internal redundancy,

    External goods & energy need to become expensive while internal goods can become cheap.
    However the damage to social & physical systems is titanic.

    The destruction of Spain after 1986 says it all.
    They are still building this in Southern Spain.

    Its has if Spain had a large blue water navy to steal external goods or vast internal resources.
    But it does not.
    The euro system stopped Spanish Nuclear development for a reason.

    It became no more then a Imperial market for the cores goods with nothing to fallback on but dead concrete,

  9. Χρόνια Πολλά Γιάννη και Καλή Ανάσταση! – Ανάσταση Ηθική Πνευματική και να μπορεί στην τελική ο δίπλα μας να τηνε βγάζει με αξιοπρέπεια και με δυνατότητες επιλογών.

    Νίκος Κούτρας.

  10. I think Ambrose-Evans Pritchard is hitting on the right notes:

    “As always in economics, there were many things going on. The euro was very weak a decade ago. The rise of China et al played to Germany’s strengths, since it was and still is producing the machinery that China needs for its catch-up growth. It played to Club Med weakness since Italy, Spain, and Portugal competed toe to toe with mid-tech Asian imports.

    But the point is that Germany was able to turn itself around during a global boom, never losing the advantage of the lowest borrowing costs in EMU, and with no fiscal austerity – indeed Schröder said it was NECESSARY for Germany to violate the Stability Pact’s deficit limits in order to smooth the way for supply-side reforms.

    To argue that the rest of the eurozone can replicate what Germany did in the midst of gruelling recession, debt-deflation, a credit crunch for small business, much higher corporate borrowing costs (than Germany today), and a strong euro, is to bark at the moon.

    It always comes back to the same point. The North-South gap cannot be closed within EMU by imposing all the burden of adjustment on the deficit states, forcing them into “internal devaluations” without an “internal revaluation” Germany to meet them half way.

    Such a policy has a contractionary bias and eventually drags everybody into vortex, as is now happening.

    It happened in the early 1930s under the Gold Standard, when US creditors did to Germany, what Germany is now doing to Spain. And yes, crass American bankers and journalists even accused the Germans of being “lazy”, the sort of conclusion people reach when they when they don’t understand the structure of the global payments system and the power of credit cycles.

    French and German leaders are now talking past each other. There is little common ground left on which they can find an understanding.”

    • violating “Stability Pact’s deficit Limits” are not the root cause of the crisis. It is diverging unit labor costs

  11. In theory there is always the possibility of avoiding disintegration, by accepting the sense of change needed, opting for immediate adaptation and not limiting what the adaptation can be. Putting the concept into adapting (activity) rather than integration (state) opens up possibilities.

    • What is so amazing, despite Soros being correct, is that no one seems to care. Nothing happens and this is more an “I told you so” contest. It is more about acquiring fame(not talking about Soros but of all his look alikes) with zero ability to effectuate outcome. And the pointless conversation drags on,,,and on…and on… Every day a new point of view is presented leading to an absolute nothing.

    • So? Soros is a pefect contraindicator. This senile guy simply is an anti German racist and would love to destroy Germany if he only could.

      Besides, it is a bad joke that the leftish community now cites Soros, of all people, to bolster their case. This ultracapitalist, who doesn’t hesitate to destroy good aprts of whole nation’s economies via attacking their currency. He proved it with the GBP. How can you ever forget it, and how can you believe he wouldn’t do exacactly the same stunt with the Euro if he only could?

    • VSS:

      Cool your jets please on Soros. None of what you say makes any sense. Soros had the full cooperation and in fact all the broad shoulders of the Bundesbank when he made his attack on sterling. In fact, Germany was Soros’ silent partner is cleaning up GB’s clock.

      Please. Enough of revisionism. Soros an anti-German? since when? Every time Soros speaks of Germany he does so with reverence. He never forgot who made him a billionaire.

    • If Soros is not anti German, then there are no anti Germans on the planet!

    • I would agree that Soros appears to have nailed the causes of the problem in a way that other commentators have not. Either the others simply do not understand, or they want to avoid the inevitable solutions.

      As for Soros hating Germany, I disagree. Without a solution, the Euro problem will gradually impoverish all of the EU. With a solution, and his Eurobonds with time limits and banking controls as outlined appear to be a good solution, a stronger EU and hence a stronger Germany appear at least possible, perhaps even likely.

      Eurobonds are not a free ride. They will again involve a loss of sovereignty for all countries. That loss was made inevitable and essential by the banking failure in 2008, which was in turn permitted by the incomplete integration of the banking and financial sectors.

      Are there the great pan-Europe politicians and bureaucrats to implement this change that there were when the EU was created? Perhaps not.

    • Eurobonds would make everyone who has assets in Euro or or gets paid in Euro poorer. They give incentive for everyone to increase debt more than the others. Result: The Euro will drop in value, most liekly even collapse.

  12. Japan is a sovereign and homogeneous entity. You can’t compare a homogeneous entity (and a well behaved and coordinated one) with the heterogeneous lose affiliation mess called the “euzone”. The eurozone is a malexperiment designed to benefit one country at the expense of all other members.

    The philosophy and strategy of the eurozone is to put the burden of adjustment solely on the victims of flawed euro architecture to make “their” economy more competitive through mass unemployment and wage cuts. But without Germany willing to buy more of their exports, this will not happen, bringing pain without end. Meanwhile Germany is more than happy with the current state of affairs and the pronounced misery of others because she is the only clear winner of this amorphous eurozone affiliation whose only purpose is to have a national currency for Germany by another name.

    • “Japan is a sovereign and homogeneous entity.”

      Exactly. The EZ is not a country. The comparison makes no sense.

      “have a national currency for Germany by another name.”

      Isn´t this what all the other countries wanted when they joined the Euro? As long as the reaped the benefits (=low interes rates) noone complained. You cannot only have the advantages. Noone was forced to join and everyone signed the same contract.

    • Look EUDSSR:

      Schauble and Germany are playing a competent game. When you listen to him below, you get the notion of a competent, folksy man on top of his game.

      My points here in this blog are frequently misunderstood. Politics are a showmanship game mixed with high intelligence. And it’s like a sport. When your opponent hits hard you have to hit back double hard if you want to win.

      Therefore, frequently here I get the complain about Germanophobia, racism and the like. None of that is true.

      The way I perceive the contest is not as an ideological debate, rather as a hard-nosed political contest.

      To my despair Germany is winning handily because the likes of Schauble are better prepared and have a plausible story to tell/sell.

      Now, I know you don’t want Germany to lose in this contest.

      But if it were to lose or at least negotiate her position down towards a “win-win” for other European states, there is only one way to do it. Hit the German trade surpluses hard and cut them them down by say 50%. Once you do that then you could invite Germany at the negotiating table and show them a way to regain the lost trade surplus via increased German imports from the most affected EU countries. Germany must buy, for example, more Greek products regardless of her suggesting that she does not need them or that she could do without them.

      As is the German position is unassailable. Germany is sitting on top of close to 200 Bil euro trade surplus and she would be happy to maintain such position with zero German GDP growth for a while and negative GDP growth for others in the EU. Germany has reached her sweet spot with trade and as long as the present trade surplus magnitude is maintained, Germany is not engageable in alternative outcomes.

      This daily grievance regime we are going through in this and other similar blogs about what should be done vs. what is actually done is very corrosive for one’s soul. It’s a just a never ending discussion of a group with a common problem which group however is impotent to produce an alternate reality.

      I have a preference for practical politics. This daily lament of what it should be and what is not is a form of negative energy.

      So congrats for the German win but you must consider that there are also losers in this game seeking a way out.


    • Why do you want to regulate the trade surplus. It would be difficult and inefficient. It is much easier to reduce the trade surplus by going forward to market currency exchange rates of the current EURO countries.

    • For me it is not about win or lose. I care about law (as of adhering to contracts) and freedom.

    • EUDSSR:

      I you want to find the truth about trade rules and how Germany dominates the Greek market you have to read two books by the same author. His name is Mogens Pelt, a Danish therefore an unlikely sympathizer of the southern perspective. Here is his background:

      In the first book “Tobacco, Arms and Politics” you will find out that the whole Greco-German trade relationship started prior to WWII and it was in favor of Greek tobacco exports. You will also find out how Germany – using the rules you are such a fan of – bent the trade to its favor (by the exact same logic which you are asking me to abandon):


      In the second and much more revealing book, you will find out how West Germany eventually took over from the USA as Greece’s most dominant trade partner. This weak argument of “rules” you are invoking would make you feel ashamed after reading and understanding this one-sided trade relationship and its real meaning:


    • “Isn´t this what all the other countries wanted when they joined the Euro?”
      And isn’t a softer currency what Germany wanted and decided to join the Euro?I’m not sure where this type of argument can lead.

    • Maybe we should differentiate what the loobyists wanted and politicians delviered vs. to what the public was told it would get. The public never wanted it.

      And by rules I mean EU contracts.

    • And if the trade surplus DE/GR is such a big problem for you, I have nothing against fixing it via Greece imposing Import duties.

    • @EUDSSR

      “Maybe we should differentiate what the loobyists wanted and politicians delviered vs. to what the public was told it would get. The public never wanted it.”
      To this we totally agree.But just like VSS when he uses the same “we weren’t asked/ we didn’t want it” argument,which makes perfect sense, you too have to recognize that the same applies to most EZ members.You’re not going to find one country whose citizens were 100% informed about the implications of abandoning your own currency for a foreign one.They most possible have been informed about the positive changes that would come with it,but this was pretty much it.

    • EUDSSR:

      Trade is the crux of the issue. And as you could see Germany(link below), even at this period of declining overall trade volume, has found a way to keep increasing her positive trade balance. And this is done at the expense of, among others, Greece. So, I don’t know if import levies are legal within the EU context, because such would be targeting one country, but Germany must stop selling to Greece 3 euros for every 1 euro she buys from Greece.

      Every definition of sensitive politics would tell you the same thing. To come to one country and impose controls that no other EU country has ever seen or experienced in recent memory resulting in a GDP contraction of 25%+ and then on top of it outsell such country 3:1 during a period of economic duress is kind of outrageous. Don’t you think?

    • Dean,

      >>>I don’t know if import levies are legal within the EU context,

      Who cares? The EU violates ist own rules daily.

      >>> impose controls that no other EU country has ever seen or
      >>>experienced in recent memory resulting in a GDP contraction of 25%
      >>>+ and then on top of it outsell such country 3:1 during a period of
      >>>economic duress is kind of outrageous. Don’t you think?

      I agree. That is why I would not have started “to bail Greece out” in the first place. I would have let Greece go bankrupt (as all others) and let the (mainly French) Investors take their losses. Noone covered my losses I had in Greek and Irish stock.

    • EUDSSR:

      The reason no one covered your loses on Irish and Greek stock is because Merkel said so. The Cyprus case made such abundantly clear.

      If Merkel wants to play a rigged game how could anyone cover loses when in fact Merkel wants you – the investor – to specifically lose ? Not the other guy, just you. 🙂

    • @Dean Plassaras:

      “Meanwhile Germany is more than happy with the current state of affairs and the pronounced misery of others because she is the only clear winner of this amorphous eurozone affiliation whose only purpose is to have a national currency for Germany by another name”

      I agree with what you say! Also Sorros is absolutely right either Germany gives in or they shall leave the EU and live their dream of a Germanic Union of the North!

    • Finally we have Agreement. The South and France can keep the EU including ist socialist structures. The old DM Zone will form a union with Sweden, Poland, Czech republic & Slowakia. This Union will be extremely prosperous! Looking forward to it. We will compete the crap out of Japan, Korea, etc.

    • Excuse me EUDSSR, where is this agreement? I take it you occupy one of the highest posts in one of these northern countries / EU and are breaking the news on Yanis’ blog?

  13. One simply has to love Japan for the simple fact that it is the living proof that all this mass hysteria about hyperinflation due to mass increases in the monetary base and/or the danger of default due to high levels of deficits and public debt, has no valid grounds as long as there exists a coordinated effort of fiscal and monetary authorities.

    I surely have a lot more respect for them than our own politicians.

    • @Crossover:

      Buy Japanese products instead of German products.

      I bought two brand new BMW’s in the last 14 years for about 110K Euro, now my next car will be Mazda Zoom-Zoom!

      And guess what the car after this will be also not a German car 🙂

      And I also bought a fricken Dutch HD-TV which was even more expensive than Samsung or Sony TV’s but my next TV and consumer electronics won’t be Dutch or German or a Finish Smartphone no it will be Japanese or Korean or Chinese.

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