The Eurozone crisis, Is there a way out?

[liveco]

I was just reading now on LA times (McManus: Europe's continental drift), and a phrase really captured my attention; The author, while describing how bad the situation is in Europe (especially the southern countries) goes as far as saying:

"
Southern Europe is experiencing its worst drop in living standards since World War IITo anyone who has been

Comments

[liveco]

Well, I can sense a little bit of sarcasm here, :), economists usually argue what is the best approach to a fast recovery from an economic crisis. Austerity measure seem to cut the expenses, but also indirectly have negative effect on the economic growth, on the other hand, sound economic investments and reforms and restructuring seem to have high cost in the start but pay off on the long run

[mikeyxw]

It's also a dose of realism. Greece, Italy, and Portugal are already over 120%, which is generally the amount where one expects that they won't be able to pay back what they owe. There are exceptions, such as countries after WWII where the economy was dedicated towards a war effort that could be changed back, but this is not the case for these countries.

Because they are unlikely to be able to pay back what they owe, folks are not all that eager to loan them more and more money. Because folks with extra money aren't willing to support their attempt to borrow their way out of debt, austerity is the only alternative. You can criticize the Germans for being too prescriptive about where cuts need to take place, but cuts need to be made somewhere. Of course, if you'd be willing to invest your money in Greek government bonds, knowing you probably won't get your money back, feel free. Criticizing those who aren't so willing to do so seems hypocritical unless you're willing to put your money up first.

[mikeyxw]

* The public debt in Greece, Italy, and Portugal is already over 120%

[peristaltor]

Because folks with extra money aren't willing to support their attempt to borrow their way out of debt, austerity is the only alternative.

No, it's not the "only alternative." It's the only alternative supported by the lenders. Biiiiiiig difference.

If austerity continues, expect radical governments in the future and wars soon thereafter. When you leave the desperate no alternatives. . . .

[mikeyxw]

The Greeks and Italians are going to start a war with the Germans? I don't expect that will end well.

So the alternative would be for the Germans and other lenders to give the Greeks and Portuguese, and to a lesser extent, Italians and Spanish, more money that they can't pay back? You can see why this is the alternative supported by the lenders.

I guess you can also say it's also supported by the US and China as we are unwilling to loan them money they can't pay back either, so we're forcing austerity on them even more than the Germans. As a US taxpayer, I'm certainly in favor of Greek austerity over higher US taxes.

[peristaltor]

So the alternative would be for the Germans and other lenders to give the Greeks and Portuguese, and to a lesser extent, Italians and Spanish, more money that they can't pay back?

Nope. I was thinking more along the lines of debt forgiveness and/or modification, not increasing the loan burden. As the money supply decreases, the chance that loans would be repaid decreases along with it.

You might enjoy Irving Fisher's After Reflation, What? from 1934, a book that deals with why any given economy gets screwed when the loan terms agreed upon in a time of plenty are not modified in times of scarcity.

[mikeyxw]

The Greeks have had quite a bit of their debt forgiven... enough to require a bailout for Cyprus. They will have more of their debt forgiven in the future as well. They could have their debts completely erased and they'd still need to borrow more to make this year's budget, even with their current austerity measures. They have been projecting primary budget surpluses but have yet to deliver. That said, they're getting close, but still, debt forgiveness won't get them there alone.

Of course, if all of Greece's debts were erased, the economy of Europe would take a big enough hit that Greece probably wouldn't be close to hitting a primary surplus for quite a while, with nobody to make up the gap.

[peristaltor]

Change "the economy of Europe" to "Deutchebank" and you might be on to something. Seriously, they issued some really, really dodgy loans there, and need to take a major haircut.

The fact that these loans may spill over into Europe as a whole shows how badly the whole Eurozone was formed, not how bad Greece alone is acting.

[mikeyxw]

Greece was faking up their economic data when they were getting loans, they were the worst of the bad actors. That said, various central banks in Europe were pretty silly to go along for the ride and will be taking some cuts. They'd probably be better off taking them now instead of later. Those who criticize the US government should take note. You may not have liked the FED/Treasury's plan, but it was decisive, it worked, and it really didn't cost taxpayers anything. When you compare this to the mess that has been the series of plans by the EU, the US federal government looks down right decisive and competent.

[peristaltor]

That said, various central banks in Europe were pretty silly to go along for the ride and will be taking some cuts. They'd probably be better off taking them now instead of later.

Absolutely. It has boggled the brain for a while now, how a bank could look at Greece with its recent history of coups and destability and say "Oh, sure, give them money" without considering whether they'll get the bucks back. I'd say the answer was an automatic No.

Those who criticize the US government should take note. You may not have liked the FED/Treasury's plan, but it was decisive, it worked, and it really didn't cost taxpayers anything.

Neal Barofsky calls bullshit on that. I just finished his book. The "didn't cost taxpayers anything" bit you just fell for quoted was widely published but not challenged as to substance. Oh, the taxpayers enriched the banks, yes they did. It will cost us, big time.

[mikeyxw]

Okay, this is the first time I've gotten a serious link to comedy network. I'll check out his book and I'm certainly glad Barofsky is watching out for this. In the interview, he mostly talked about nobody going to jail and the homeowners who weren't bailed out. These are valid concerns, but not the point

[peristaltor]

Okay, this is the first time I've gotten a serious link to comedy network.

I thought I'd mix it up a bit. ;-) I heard about his book through that interview.

Previously, he's brought up that the Treasury is counting money that the FED actually made, which I'm not thinking is a big deal. The FED and Treasury were both working on TARP, so I'm not too concerned about who gets the money.

The details are in the book, yes, and I remember but a portion of them. Essentially, Treasury time and time again was shown to be supporting the banks in ways that SIGTARP Barofsky felt inappropriate. Treasury-especially Geitner-went so far as to interpret the Homeowner Loan Modification program in ways that allowed the banks, not the homeowners, to avoid losses. I did take notes on that section. Holy crap, it's bad