Monday, November 14, 2011

Ancora! Ancora! Ancora!

While there seems to be a temporary lull in Eurozone action, I don't think the developments on Friday and over the weekend amount to a turning point.  Installing "technocratic" elites doesn't make a lot of sense, because it was unaccountable technocrats who created the mess in the first place.  That the specific technocrats have links to Goldman Sachs, which arranged the accounting fraud that allowed to Greece to enter the Eurozone in the first place, doesn't inspire confidence, either.  Stergios Skaperdas has written another op-ed on Greece leaving the Euro.  I wish Greek politicians would read it but, like national-level politicians everywhere, they seem to be tightly encased in their own little bubble.  Even when they make noises about the austerity being imposed on the country, it is to position themselves in the next election, not because they have a better alternative.

The most immediate impact of the change of Prime Minister in Italy has done is given everyone a chance to write about how awful Silvio Berlusconi has been for Italy.  It's not a new topic; people have been writing about Italy's Murdoch+Buffett for years.  A lot of Italy's "structural" problems would have existed if he had stayed out of politics.  And some of the uniquely Italian problems have been around for decades.  But having as Prime Minister someone who was arguably in politics to keep himself exempt from prosecution as much as anything else has taken amoral familism to a new level.

So while having Silvio gone will improve Italy's long-term prospects, in the immediate future the problem is basically one of math.  Unless bond rates come down, and the economy either grows or inflates (a.k.a. currency devaluation), Italy will probably join Greece in exiting the Eurozone.  The problem is that the economy is unlikely to grow fast enough to convince bondholders to accept lower rates.  And the ECB is still the ECB, so it's unlikely to help in one way or another.   That has prompted more calls to end the common currency.  Both a recession in Europe and a collapse of the Euro would affect the United States, something the country can't really afford on top of our own past and potential future stupidity.

Wednesday, November 9, 2011

Mio Dio, Cosa Hai Fatto, Silvio?

The ever-wise markets seem to have skipped ahead in their script by a few countries, because today the world woke up to find Italy on the verge of financial ruin.  Or at least that's what everybody is saying the markets are saying.  Unfortunately, as long as everyone believes it to be true, it's likely to come true.

I find it suspicious that right after the Greek mess has been "resolved" that the Italian crisis would suddenly come to a head.  Shouldn't the agreement of the Greek parties to unite to screw the Greek people give everyone else at least a few weeks of relief?  Apparently not.  Nothing else about Italy's underlying financial condition, which isn't that bad, has changed since last week.  But sharply increasing yields means that whenever Italy has to roll some debt, which most indebted countries do on a regular basis, it will have to pay substantially more.  Thus the problem in Italy has become self-fulfilling.

The failure to resolve the crisis is mostly the European Central Bank's fault.  It has basically refused to do the job of a proper central bank, which is to regulate the macro economy for the greater good.  The origins of the crisis are much more structural, which quite a few people still don't understand.  But rather than do the right thing and forgive gobs of debt, or exit the Euro themselves, the core Eurozone countries may be to be planning to kick the GIPS countries out.  I can't see how that would be a good solution economically or politically.  Not only would it create immense amounts of ill will in the region, it would still leave the GIPS countries with their external debt denominated in a foreign currency.  That class of debt is the only justifiable reason for Greece not leaving the Euro that I can see, and forcing the issue on multiple countries at once couldn't possibly help.

If things do really unravel in Europe, which they haven't done quite yet, I think US markets won't entirely collapse due to flight-to-safety inflows.  I could easily be wrong about that, though.  But obviously a breakdown overseas would fall through to front-line jobs within weeks, and that would exacerbate what is already a crisis.

Update 2011-11-09: Italy's problems may very well be Silvio's fault.

Update 2011-11-10: Italy's bond sale was successful but at a rate that is a good deal higher than last year.

Thursday, November 3, 2011

More Χάος

News is breaking on an hourly basis in Europe these days, with Greece still being the center of attention.  The latest loop is the sudden appearance and disappearance of plans for a referendum on the bailout and austerity measures being put to the Greek people.  It is quite likely that Papandreou was bluffing his fellow politicians into joining him in sharing the political pain, which he may have done successfully.

As I said over here, I just don't see how the situation can be sorted out while Greece still uses the Euro.  I don't know how much adjustment of one kind or another is necessary to bring Greek labor costs down to where they are in line with the productivity* of its workers, but I suspect it is a lot.  And by a lot, I mean 15-30%.  Deflation by that amount implies that as long as Greece still uses the Euro, its citizens will, on average, have to take pay cuts of 15-30%.  This would be painful but not devastating if individuals and businesses were basically debt-free.  But that's not the case in Greece, though it must be said that they aren't close to being the most indebted.  But debt doesn't automatically shrink when wages and prices deflate.  In fact, the real burden goes up.  And substantially greater real burdens means substantially more foreclosures, bankruptcies, and corporate bond defaults.  That's why devaluation makes a lot more sense, and which would happen automatically in the markets if Greece still had its own currency - provided, of course, nobody is manipulating their currency.

So the mystery continues - why are Greek politicians pursuing such awful policies?

* - saying that Greeks are less productive doesn't mean they don't work long hours.  It just means that for one or more reasons their output is less per hour.