Friday 17 February 2012

Greek austerity debate is a dangerous chimera

Ambrose Evans-Pritchard, one of my favourite business journalists along with Jeff Randall and Alistair Heath, writes a interesting piece in the Telegraph today.

It sticks to the theme of this week and is about the growing war of words between Germany and Greece and how the austerity measures really are very high impact and yet are being discounted by the EU.

Thinking about this along with the Moody's warning on the UK AAA rating this week and US growth stories though leads to me to two conclusions:

1) Lots of the focus on the Greeks is on their non-performance since 2010 to get their budget under control and now a sense of disbelief they they will ever manage to get a grip on it. This leads to much criticisms that the austerity is too much to bear and that Austrian style economics is to blame when they need a Keynesian boost.

Neither position is correct. What has happened is that the Greeks borrowed too much before 2010 - since then it has been like watching a car crash with the final end inevitable. More or Less austerity is not going to stop the rot when the debts are too high and a default is the only answer.

2) The UK is on the precipice itself. When looking at Greece the Labour party and BBC seem to be in unison in saying the cuts here are too fast. In reality it is not the cuts now, but the past spending. A fiscal stimulus now will boost the economy, but not as fast as the debt pile - so creating a future car crash like Greece.

Yet the US has pulled out some growth and has been more stimulative in its approach than the UK. This though is a red herring - the US debt position was not as bad as ours, they have deleveraged their economy more quickly and even so, their debt is increasing at $32 billion a day (the UK is doing that a month by comparison). What the long-term damage of QE is to the US and UK is not yet known either.

The debate 'too far, too fast' etc has become far too simplified and also as the months and years go by the real reason for the collapse - the huge bubble of debt still needing to be lanced - is being forgotten in the discussions.


Old BE said...

I think there is a huge opinion gap between The BBC and The Electorate. The soft left journalists and public sector types love the idea that there is a button the government can press to get the economy growing again. Ordinary earners don't believe it.

Sebastian Weetabix said...

The Yanks akso have the "exorbitant privilege" so it is easier for them to monetise their debt. Fully agree with your comments on Greece; yes they borrowed (insanely) too much, but this austerity is utterly counter-productive and vindictive. Why they didn't just default/exit the Euro/devalue when whole the thing blew up is mystery to me.

Unless the Greek elite just wanted time to get their cash into Switzerland, and the Germans & Frogs wanted time to print money for their banks. But that would be cynical.

Timbo614 said...

Have to agree with SW, the whole thing is being stretched out until Germany, France, banks and the whole EU/EZ are ready. This is their method of achieving a "controlled" default.

Meanwhile the Greeks are
being ruthlessly exploited and the man in the street is suffering badly. The magnates and elites will always be comfy because they have multiple options, locations and access to as many banks as they wish.

It's turned into a total farce. I hear the same bargaining between 3 year old kids as the "negotiations" between Greece and the Troika.

Do this! Greece: "OK we've done that", Err what about this: Greece: "OK if we must" ah but what about that: Greece: "Sh*t getting tough now well, OK we agree" Ah But we forgot about this 0.0001% Euros over here, so do that too!: Greece: "We've gone this far so dammit OK(Bastards)". Now cut your wrists and sign with the blood of your forefathers and your your children that will now never be: Greece: "F**k Off".

Its about time...

Budgie said...

Modern governments control their economy by raising and lowering interest rates. This works because people within the economy behave rationally: when money is cheap they use more of it. Governments depend upon this.

Roll the clock back to the mid 2000s - Germany was in the doldrums. The ECB lowered the euro interest rate to stimulate the German economy. What happens? The Greeks behave rationally and use more money.

Don't blame the Greeks. They are subject to the "one size [doesn't] fit all" euro experiment.

Anonymous said...

SB@11:37 That's my analysis. The whole QE business has been to allow the global elite to quickly turn toxic assets\bonds\intangibles into bullion\land\property.

This has all been arranged so that the tsunami of capita taxation will sweep past them but pauperise the middle-classes, who mistakenly thought being bled-white be income tax would be the end of it and their house would be their pension! Silly-billys!

andrew said...

@anon 6.04
i prefer incompetence over any type of conspiracy.
the pattern of behavior mirrors that of the less useful project managers i have come across where when things go behind budget / over time, 1 we have lots of denial
2 then many meetings
3 then money is thrown at the problem
4 then there is much anger as things dont get better
5 then the project is re-defined so success can be claimed

i think we are at about the end of step 3

remember the riots are about the prospect of losing 20% of pension, or reducing the min wage - not having spent the last 6 months living on that wage

Electro-Kevin said...

People speak of 'austerity' as though it is optional.

"More or less austerity will not make much difference"

Austerity is what comes with being broke and indebted.

As the former PM of Malaysia said, "Europe has lost a lot of money and now you must be poor."

Anonymous said...

"Default is the answer" comes up a lot on here.

Given that a lot of the debt and deficit is due to proping up the "people's" banks RBS /Lloyds/HBOS etc, should default be the answer here too.

Deficit would be cut at a stroke. Or is "default" too simplistic as solution?

electro-kevin said...

As though default comes without austerity ?

The UK is defaulting through QE, in effect. And a phoney war on state expenditure ... and a phoney war on bankers' remuneration. I don't know how we're getting away with it.

Anonymous said...

INteresting that the national minimum wage has priced the lower quartile out the jobs market. The response has been those on JSA being put on Mandatory Work Activity (a.k.a. slave labour) programmes. The law of unindented consequences! No doubt we'll see many more examples.

electro-kevin said...

Anon - Presumably then those 2million registered migrant workers have had to work below minimum wage to have have caused displacement of our 2 million unemployed ?

Seeing as they are registered workers then we can safely presume that they are working for at least the statutory minimum wage otherwise their employers would have been in court.

The problem is not that minimum wages are pricing our workers out of the market. It's that the gap between benefits and wages is not wide enough.

And that taxpayers subsidise Costa/Pret/Starbucks ... to the tune of one person's unemployment benefits for every UK job applicant that is rejected over a foreign national.

I'd sooner see UK nationals (of all races) keep their benefit entitlement and get their wages too than the rather devious system of undermining the British working class we have now.

electro-kevin said...

PS, At what point do bankers price themselves out of the market ?

Bill Quango MP said...

And that taxpayers subsidise Costa/Pret/Starbucks ... to the tune of one person's unemployment benefits for every UK job applicant that is rejected over a foreign national.

What is this subsidy though Ken?
Mr Costa does not get paid any extra for hiring Mayak from Budapest. Or pay any less NI for hiring him over Bilal from Salford.

The EU allows free migration and right to work within all member states.
The fact that a worker sending back there £1 left over after tax/rent/food etc to Poland is effectively sending back £3 is not a subsidy. Workers from India have been sending over sterling profits and buying large homes for retirement or family decades.

We do it too. The Costa Brava isn't full of UK oldies because its hot. Its because they could sell their UK terrace house and have enough for a bigger, newer, serviced apartment on a golf course, with a nest egg in the bank AND WITH free access to European health care AND [although they may not realise it} European benefits.

Not to say I don't agree with your many points about the foolishness of allowing unskilled migrant workers into the country whilst 1.6 million people were on unemployment benefit. Just that i can't see your solution as it would be illegal and probably lead to less overall employment.

{2005 figs - Not something that comes up much. Unemployment would not be 2.6 million today if we had started from the low 400,000 it should have been in 2007 IF the governments had done things differently. youth unemployment was around 700,000 in 2008.16-24. Today its just over 1 million.}

Old BE said...

I thought the lump of labour fallacy was, umm, a fallacy?

Perhaps a more fundamental issue is that immigration prevented inflationary wage rises during the bubble, keeping rates lower than would have been the case in previous decades.

This, coupled with the price collapse in consumer goods thanks to the industrialisation of China et al. gave us this insane illusion of sustainable growth.

I say "us" but many people noticed this and raised it but thanks to the arbitrary inflation target set and then watered down by Gordon Brown it all went wrong.

During the upturn the Bank should have been targeting zero inflation or perhaps even negative inflation.

Part of the re-building of the UK economy is going to have to include a better approach to monetary targeting.

Old BE said...

The argument about taxpayer subsidy of big employers is the issue of working tax credits which top up low wages. However this has existed for decades (it used to be called Income Support I think).

Some people argue that it's bascially a taxpayer subsidy to big business because it means that wages can be held down in the knowledge that the employees are being topped up. However others argue that it makes no difference to the wages that would be offered any genuinely just adds to the income of very low earners. Is there a way of finding out one way or the other?

Electro-Kevin said...

Blue - Thanks

BQ - The Costa Brava is full of oldies with lots of money to invest and pensions paid in sterling. The inverse may cause a property crisis here but over there their property market has still crashed. So they input a lot of dosh and have done no harm to their economy.

Starbucks et al - It's not that there is a difference in paying wages. It's that they can keep wages near or below benefit entitlement only because taxpayers fund the importation of labour via the welfare system.

And at what point do bankers price themselves out of jobs ?

Is really one rule for them and a different one for the rest of us ?

Phil said...

@Blue Eyes Whether tax credits / income support are a "subsidy to rapacious employers"™ or a transfer from the rich to the poor presumably depends on whether those companies could afford to pay market wages or not & still turn a profit.

Given that Starbucks et al turn over most of their cashflow to their landlords (IIRC), it's probably a net subsidy to however owns the prime commercial property in this country. The Duke of Westminster perhaps?

Phil said...

*whoever*. Sigh,