From the desk of Nick Ford

A 'No' in Ireland doesn't mean 'No' to Ireland

Wed, 30 May 2012 21:14:43 +1000

A 'No' in Ireland doesn't mean 'No' to Ireland:

As Irish voters cast their ballots this week for or against a referendum to approve the European ‘fiscal compact’, investors’ minds still seem firmly transfixed on events in Greece. In some ways, this seems odd. Greek voters don’t go to the polls until next month: nothing will change in the intervening period. Meanwhile, a ‘no’ vote in Ireland’s referendum would — on paper — mean that the country would be deprived of ongoing financial assistance, running the risk of that country going into default. Given how much Irish debt is still held by institutions elsewhere in Europe, that would be an even greater catastrophe than a possible Greek default.

But as John O’Brennan, an academic at the National University of Ireland Maynooth, suggests, no one seriously believes that Ireland would be left to fend for itself if a ‘no’ vote prevails in the referendum. The Irish government has dutifully followed the measures prescribed under the terms of its bailout. Punishing the democratic will of voters in a country that has been a poster child of good conduct would raise hackles across Europe — and would be counterproductive to boot, given the economic consequences for the region.

This must be seen as something of a gamble though, and one that voters seem unlikely to take — after all, a ‘no’ vote wouldn’t mean an end to austerity. A harsh fiscal environment would necessarily persist given that Ireland would struggle to source funding to run budget deficits. But O’Brennan reckons a ‘no’ vote would be profound across Europe. The region’s appetite for austerity is clearly waning: not just because of protests in Greece, but also due to the shift to ‘growth’ being attempted by new French president François Hollande.

Ireland doesn’t have a veto over the fiscal compact. But an Irish rejection could nevertheless prove a death-knell for the treaty as it stands.

"Even though Ireland has dutifully followed the … textbook approach, the economy has failed to..."

Wed, 30 May 2012 20:40:00 +1000

“Even though Ireland has dutifully followed the … textbook approach, the economy has failed to respond, and Irish bond yields are still high. As Chauchat points out, “something is not working”.”

- Karen Maley, Business Spectator (quoting financial analyst Francois Chauchat)

Greek voters go back to the polls in mid June to try again at electing a government. But a more immediate poll looms, which could have serious implications for Europe’s efforts to tackle its present economic crisis. Ireland is holding a referendum to approve the new European ‘fiscal compact’ — a German-driven commitment to enshrine fiscal discipline within the Eurozone. (Ireland is the only country to hold such a vote due to domestic constitutional requirements.)

As with Greece, Ireland has had to be bailed out by its European neighbours — though for different reasons. Whereas Greece was brought unstuck by government profligacy (exacerbated by attempts by politicians to hide the true, parlous state of its finances), Ireland required aid after its financial sector imploded and its banks’ debts were absorbed by the state. But the effect on voters has been much the same: austerity and underlying economic conditions have slammed the breaks on economic growth and driven up unemployment.

But unlike Greece, Ireland is something of a ‘darling’ within the Eurozone. It enjoys labour market flexibility and a competitive business environment. But that isn’t enough to nurse Ireland back to health — not while banks are still trying to rebuild their balance sheets. And without a stable financial sector, businesses have little scope to grow, hampering efforts at broader economic recovery.

Irish voters have reason to be frustrated at the pain they continue to experience. Nevertheless, they are expected to approve the fiscal compact. Were the referendum to fail, Ireland would be deprived of any additional external assistance. Francois Chauchat, an analyst for GaveKal (an investor research firm), suggests it would also surely turn Greek voters’ minds again towards anti-austerity parties — just at a time that polls there have swung in favour of the pro-austerity centre-right New Democracy party. By the same token, if Ireland does — as expected — endorse the compact (or, to interpret voters’ intentions more precisely, reject the idea of trying to renegotiate the terms of its bailout), Greek voters will probably be more likely to plump for the likes of New Democracy. Even events in Ireland are viewed through the Athenian prism.

Do Greeks have two heads as well?

Tue, 29 May 2012 20:56:08 +1000

Do Greeks have two heads as well?:

Imagine an underperforming economy relative to its neighbours, with unemployment above the regional average. Its government is struggling to raise sufficient revenue to pay its bills — even as it slashes public spending, it still needs to tap credit markets for funds to keep going. Voter frustration — anger, even — is rising. This isn’t a story of any European country, but of Tasmania.

It is wildly unfair to compare Tasmania to the likes of Greece, of course. But Alan Kohler tries his hand at it nonetheless as a parable for what Europe is going through. Australia has a ‘two speed’ economy with mining states such as Western Australia booming, while the likes Tasmania are going backwards. Similarly, Greece can’t raise enough tax revenue while businesses there are burdened with high wage rates. On the other side of the coin, German industry benefits from a relative low cost base and high skills base, in turn providing almost the only engine for whatever economic growth Europe can muster today.

Plainly, the prospect of Tasmania ditching the Australian dollar is vanishingly small, unlike Greece with respect of the euro. Australia also enjoys a considerably more integrated financial market — in Europe, banks are ‘national’ rather than pan-regional institutions. Kohler argues that shoring up the financial sector is essential for Europe to stabilise, and will require joint solutions across the Eurozone. But the region also needs growth so that governments have some chance of meeting their deficit reduction targets (which, in any event, should be pushed out to the medium term). Further austerity, in Kohler’s eyes, is not the solution — rather, it will only exacerbate Europe’s problems.

"I don’t know why I keep expecting QandA to be intelligent, because most of what I see certainly..."

Tue, 29 May 2012 18:42:24 +1000

“I don’t know why I keep expecting QandA to be intelligent, because most of what I see certainly isn’t.”

- Kim Powell, blogger

Although it is usually dominated by politicians, pundits and other political apparatchiks (past and present), last night’s edition of ABC Television’s Q&A consisted of one of the more unusual panels the programme has seen. This week, viewers were tuned into three actors and performers — Jacki Weaver, Miriam Margolyes and Barry Humphries. Alongside them were journalist David Marr and a Liberal party leader from the 1990s, John Hewson. There was much mirth and merriment as the likes of Margolyes and Humphries cracked jokes, with Marr joining in with his barbs along the way. (Hewson and Weaver might as well have stayed home for the night.)

The lack of informed discussion about major policy issues was hardly unique to this edition of Q&A. But where the show plumbed new depths was with the ‘wit’ — if it can be called that — of Humphries and Marr. As Kim Powell writes, misogyny and hypocrisy seemed to be the order of the day. Successful (and, yes, wealthy) businesswoman Gina Rinehart was the target of much hurtful commentary, with the starting premise provided in one question that she was ‘greedy’. Humphries saw fit to comment on Rinehart’s physical appearance, and referred to her ‘neverending hole’ — not a reference to her mining interests, to clarify. Meanwhile, Marr saw fit to pass judgement on Rinehart’s family life, and also took the opportunity to describe a sex worker who was reportedly involved with embattled MP Craig Thomson as a ‘tart’. Breathtakingly, Marr also decried the ‘vicious’ attacks on Cate Blanchett for daring to stick her head above the parapet by commenting on contentious political matters (chiefly, climate change).

As a defender of free speech, I do not dispute the right of anyone to make jokes at the expense of others (assuming they don’t cross the line into, say, defamation). I might consider the humour in poor taste, but individuals can express themselves however they like. Likewise, critics are free to attack them for the content of what those individuals have said. And both Humphries and Marr put on a deplorable show, made worse by a selection of questions from the audience that seemed only to fan the flames. I don’t believe the ABC can take responsibility for what any guests on its airwaves say — especially on a live programme like Q&A. But it can and should challenge those who cross a line into indecency. The ABC failed to do so. For that, the national broadcaster should apologise.

"There are good reasons to believe this is not the 1930s, redux."

Mon, 28 May 2012 20:59:00 +1000

“There are good reasons to believe this is not the 1930s, redux.”

- Pawel Sweiboda, Demos Europa Center for European Strategy

The anger on Europe’s streets is palpable. Voters have punished governments that have tried to rein in their out-of-control budgets by cutting spending, raising taxes and slashing entitlements. Many commentators have likened this anti-austerity backlash to the conditions in Germany that gave rise to the Nazi movement: a populist leader, Adolf Hitler, was able to rally his nation with a plan to restore an economy that had been crippled by make reparations for the first world war. Populists in Europe today aren’t railing against a bloody conflict, but they are fighting a war of a different kind — against foreigners imposing their economies values and policies.

Certainly, there is much evidence to support this comparison. Politicians on the radical fringes of the political spectrum — both left and right — have gained ground. At the forefront of this economic crisis is Greece, where the neo-Nazi Golden Dawn won seats in parliamentary elections earlier this month. And the radical left Syriza movement emerged from virtually nowhere to become the second-largest party in the chamber in those same elections.

But Pawel Sweiboda sees a different story unfolding. He argues that the election results in Europe simply reflect an evolution in the operation of democracy. Where major parties might once have been able to saturate the media with their message, the inherently decentralising effect of the internet means that parties of all stripes now have new avenues to reach prospective voters. The smallest parties have the most to gain from social media in particular.

That isn’t to say that there isn’t reason to fear the fracturing of the democratic establishment in Europe. As Sweiboda maintains, the rise of neo-fascist movements is a legitimate cause for concern — and one that mainstream politicians should remain vigilant of. But the advantage of the current media environment is how quickly the tide can turn. The latest opinion polls suggest that Greek voters now recognise the dangers that await them if they give too much power to extremists preaching simplistic ‘solutions’ when they go to the polls again next month: the mainstream parties (who endorse the current terms of Greece’s bailout) appear to be in the ascendancy again.

A crisis long in the making

Thu, 24 May 2012 20:36:41 +1000

A crisis long in the making:

Optimists might once have argued that the formation of the euro represented the demise of national identities in Europe — that instead, a pan-regional ‘European’ identity had emerged. Mired in an economic crisis, it’s plain to see how invalid that notion was. This isn’t just about differences in policy judgements across the continent. The political environment is, in parts, toxic: just look at the Greek newspapers that plaster swastikas over images of German chancellor Angela Merkel.

As Clive Crook writes, Europe’s problems are intrinsic to its structure, which owe to the conflicted objectives of those who pursued the “European project” with such zeal. If only economic benefits were being sought, the European Union would simply have become a souped-up free-trade zone. The Germans, hence, have long been keen on drawing more members into the fold to widen economic ties. But the French, long resistant to the idea of ‘free trade’, have always sought deeper political integration — in large part to circumscribe German power. France saw the single currency as one means of driving this. Germany only came on board for political reasons. In the wake of German reunification in the early 1990s, German leaders felt that they needed to demonstrate a commitment to growing Europe rather than merely growing itself.

It’s something of an irony that the very measure designed to ensure that Germany would not dominate Europe has now enshrined that dominance. In fairness, it’s not that the measure itself — that is, the single currency — is necessarily at fault. Rather, its design sowed the seeds of the present crisis. It’s easy to forget now, but until the debt crisis blew up, Greece could borrow money at much the same rate as Germany. But it’s plain for all to see now that Greece is not Germany — Greek sovereign debt was accumulated at an astonishing rate. Without strong institutions (like a tax office that actually collected taxes from people), Greece was always a much riskier investment environment.

It is easy to dismiss history as largely irrelevant to what Europe must do now. Whatever mistakes were made in the past cannot be undone. But Crook reminds us that today’s decisions will depend on what Europe itself wants, and its history will inform those judgements. The commonly stated solutions — establishing jointly backed Eurobonds, and expanding the remit of the European Central Bank to be lender of last resort to the region’s governments — represent the sort of wholesale fiscal, and to a large extent political, integration that many European states have long resisted. A United States of Europe seems a long way off. But if that is the inevitable and ultimate end-point, then it’s hard to see how doing ‘whatever it takes’ to save the Eurozone is really on the agenda.

"Unlike previous summits where the German and French leaders met in advance to hammer out a common..."

Thu, 24 May 2012 19:42:00 +1000

“Unlike previous summits where the German and French leaders met in advance to hammer out a common stance, there was little sign of unity in Brussels overnight. Investors now worry that the relationship between new French president François Hollande and German Chancellor Angela Merkel … is turning out to be fractious and unproductive.”

- Karen Maley, Business Spectator

It was perhaps to be expected. On the campaign trail, new French president François Hollande pledged to take a different tack on European economic policy from his rival, Nicolas Sarkozy. Whereas Sarkozy was largely content to accept the platform ‘austerity’ championed by his German counterpart, Angela Merkel, Hollande has declared his intent to promote an agenda of ‘growth’. And now, after the first European leaders’ summit since Hollande came to power, the divisions remain as stark as ever. Unfortunately, this is precisely the time when Europe needs its two key leaders to find common ground.

As Karen Maley reports, France wants jointly-backed Eurobonds to backstop national debts. Italy wants a guarantee on all Eurozone bank deposits to short-circuit any bank runs that might follow a Greek withdrawal from the Eurozone. Spain is also worried about financial institutions, having recently nationalised one major lender, and wants Europe’s bailout fund to be able to lend directly to banks. (Currently, it is only able to fund governments — and Spain wants to avoid being the latest economy to go cap in hand to its neighbours for a handout.)

Germany isn’t having a bar of any of it, and is supported by Finland and the Netherlands among others. In other words, Europe is fracturing: those firmly in crisis mode (along with their new champion, France) versus those who are footing the bill for the various bailout measures. The European Central Bank will likely be forced to intervene while the politicians bicker. But any of the options available to it are measures they’ve tried before, and have proven to be little more than stop-gaps. The Franco-German alliance is bust — and the Eurozone will be too, unless Merkel and Hollande can somehow forge a new consensus.

Can the Eurozone survive without political union?

Wed, 23 May 2012 21:35:15 +1000

Can the Eurozone survive without political union?:

Many commentators have argued that the Eurozone can only work if monetary union is matched by fiscal, financial and political union. For countries to share a currency, a full range of policy settings must be harmonised. And this has been sadly lacking in Europe. You need look no further than the stark differences between Germany and Greece — not just today, but well before the current debt crisis exploded.

In contrast to this conventional wisdom, Reuters’ Hugo Dixon — a long-time business journalist — argues that the euro can survive while still preserving a degree of national sovereignty. Indeed, he contends that respecting the interests of different states is a necessary condition for saving the single currency. The euro has, since its establishment, been unpopular in some quarters. The political appeal of such views has only grown in recent years, as the success of the isolationist National Front in France (to take only one example) in the first round of that country’s presidential election in April demonstrates. Forcing through greater integration will only anger large blocks of voters across the region.

As Dixon acknowledges though, there are some steps that must be taken to put the euro on a surer footing. First, insolvent governments and banks need to have their debts restructured. The refusal of European leaders to accept years ago that Greece was bankrupt has directly led to the present calamity — it could have been averted (or at least ameliorated) by acting earlier. Second, Europe require a region-wide ‘liquidity backstop’: that is, ensuring that there is sufficient capital for solvent banks and governments to operate during times of stress. The various ad hoc measures and compromises that Europe has used to date in muddling through the debt crisis have not promoted long-term confidence — quite the opposite. A lasting commitment is needed to keep Europe ticking over.

While items one and two on Dixon’s wish list have been frustrated by Germany (among others, who are worried about having to ultimately foot the bill), the third condition has been championed by Berlin, but opposed by many embattled governments. Dixon argues that domestic economic policies must favour greater flexibility — particularly in the labour market. Onerous regulations, such as those that establish generous employer-paid entitlements and make ‘permanent’ workers virtually unsackable, have been central in driving up youth unemployment and driving down labour productivity. Without greater scope for businesses to manage their labour costs, there is little prospect of them being able to compete within Europe — let alone on the world stage. Limited, piecemeal reforms will only ensure low growth for years to come — certainly not enough to catapult Europe out of its current malaise.

"A Greek exit from the euro area would inflict heavy damage in Greece and throughout Europe. It could..."

Wed, 23 May 2012 20:58:34 +1000

“A Greek exit from the euro area would inflict heavy damage in Greece and throughout Europe. It could also be one of the best things that ever happened to the currency union.”

- Jacob Kirkegaard, Peterson Institute for International Economics

A quick check of share markets around the world would tell you that investors are clearly nervous about events in Greece and the fate of the Eurozone. And it’s true that if next month’s second attempt at parliamentary elections in Greece return a clear majority for anti-austerity parties (presumably led by the radical-left Syriza, which may end up being the largest party), the likely consequences will be the termination of the Greek bailout package, full-scale default, and a return to the drachma. The immediate effects would be catastrophic, plunging Greece into an even more traumatic recession, and raising the spectre across Europe of other countries abandoning the single currency.

But as Jacob Kirkegaard argues in a piece for Bloomberg View, crisis is often necessary to prompt Europe to act. Just as austerity has been forced on governments with no other choices, if a full-scale Eurozone meltdown is in prospect, Europe’s leaders may finally see fit to pursue the needed fiscal and political integration to make the single currency work.

For example, Kirkegaard notes the increased risk of bank runs across Europe if Greece dumps the euro. After all, if Greece can leave what was meant to be an ‘irrevocable’ currency union, citizens in Spain, Italy and elsewhere might well fear the devaluation of their own life savings if — in an instant — their own governments decided on a return to the peseta, the lira, or whatever else they once traded in. Bank runs are toxic to economies, and would rip the Eurozone apart. This fear might prompt Europe’s leaders to agree on supra-national financial protections, such as Europe-wide deposit-guarantee programs. Banking would become a European industry, not a patchwork of national industries.

Perhaps most potent in forging consensus on previous no-go zones is the demonstration effect that Greece would provide as it slides into a post-euro abyss. Whatever miseries austerity might inflict, no one would want to replicate Greece’s experiences. That’s of no comfort to ordinary Greeks, of course. Perhaps that’s something for them to reflect on as they cast their ballot papers in June?

"[Since] it gained its independence from the Ottomans in 1832, Greece has been in default or..."

Tue, 22 May 2012 21:51:00 +1000

“[Since] it gained its independence from the Ottomans in 1832, Greece has been in default or restructuring for half this period. [But] this time, Germany is willing to bail it out.”

- Fareed Zakaria, Time

German chancellor Angela Merkel has become the arch-villain to many voters in debt-ridden European economies. She continues to insist that the countries her government bails out must meet stringent conditions. The resentment — indeed, anger — this has fostered is most evident in Greece. But it can be witnessed even in the likes of more powerful (and relatively more stable) countries like France.

However, as Time magazine’s Fareed Zakaria writes, Europe has much to thank Germany for. Through the European Union’s transfer mechanisms, bucket fulls of money have been channelled from the thrifty Germans to the profligate ‘periphery’. For instance, unit labour costs increased a mere 2 per cent in Germany between 2000 and 2010. By contrast, they surged 35 per cent in Greece.

While politicians and voters decry ‘austerity’, Germany is primarily pushing for unpopular structural reforms that offer a long-term path to growth in otherwise stagnant economies. Liberalisation of labour markets will offer new opportunities for employment. Reducing barriers to entry in different professions will foster competition and spur innovation. And in exchange for this, Germany has shown remarkable willingness to prop up governments whose debts have grown so great that private markets are no longer willing to lend to them — at least not without attracting interest rates those same governments regard as punitive.

The message from all of this is that Germany wants Europe to succeed. But it requires other leaders who are willing to make the tough decisions necessarily to ensure that success can be sustained over the long term.

Don't save the euro: dump it

Tue, 22 May 2012 21:16:49 +1000

Don't save the euro: dump it:

One of the 20th century’s great economic lessons was the power of flexible exchange rates. Allowing currencies to fluctuate in value gave individual economies better scope to adjust to shocks. Rather than having to manipulate a whole range of prices and wages to accommodate changing conditions, much of the heavy lifting could be taken by the relative repricing of currencies. Although the euro is itself a floating currency, it represents a fixed exchange rate regime within the Eurozone. Hence the likes of Greece are under immense pressure to cut wages to boost competitiveness relative to the region’s stronger economies — specifically, Germany.

As Stephen Kirchner writes, the Eurozone’s current problems were entirely foreseeable, and stem from the failure to match monetary union with fiscal and political union. What were always different economies have been allowed to diverge further against the backdrop of a common currency. And now, Europe is being torn apart.

From marathon to sprint

Mon, 21 May 2012 20:15:46 +1000

From marathon to sprint:

With doubts openly swirling about Greece’s future within the Eurozone, it’s hardly surprising that ordinary Greeks are starting to worry about the fate of their country — and their money. There is mounting evidence that Greeks are withdrawing funds from their local banks, and depositing them in other Eurozone member states (Cyprus in particular, given historical ties). The advantage of this approach is that, if (when) Greece is forced to return to a heavily devalued drachma, their savings will still be stored in (relatively more valuable) euros. The downside is that it hastens Greece’s eventual demise: these are the first steps in a bank run that could fatally undermine Greece’s banking system.

Once a bank run takes hold, it is hard to stop. Realistically, the government would be forced to introduce harsh controls that would limit withdrawals — effectively depriving people of access to their money, and forcing them to take a massive haircut on their life savings. At some point, banks would either have to be recapitalised by the government (which Greece can’t afford), or could simply topple — probably taking any government down with it, such would be the public outrage.

From Europe’s perspective, a Greek banking crisis would not of itself be a threat — Greek deposits are a small percentage of Europe’s banking sector, and most other European financial institutions have spent recent months divesting themselves of their exposure to Greek banks. But as we have seen throughout this debt crisis, what starts in Greece can spread like wildfire through the region. There are already concerns about Spanish banks, with one major lender — Bankia — having to be nationalised by Madrid. Italians too can hardly consider their financial sector entirely robust.

As Karen Maley notes at Business Spectator, the wealthy have for several months been shifting their money out of Greece, Spain and Italy into the safer havens of Germany, Switzerland and the United Kingdom. If the average Greek citizen is now joining in the rush, how long before ordinary Spaniards and Italians start pulling their cash out? And how willing will the rest of Europe be to use the European Central Bank to prop up wobbly financial institutions — especially at a time when the ECB’s balance sheet is already overloaded with the government debt of embattled economies.

"The problem, it is Chinese. They cheat on everything. On the currency, on research. The difficulty..."

Thu, 17 May 2012 21:51:39 +1000

“The problem, it is Chinese. They cheat on everything. On the currency, on research. The difficulty is that many large companies have Chinese contracts. That’s what is stopping us taking a stronger stance with respect to that country’s products. But it’s necessary to open the conflict, with the support of a number of other European countries.”

- François Hollande, French president, speaking to a journalist in March this year on his views about dealing with China.

In news that should shock very few people, France’s new president has something of a protectionist streak. Not content to simply bash bankers, François Hollande has also taken to criticising trade with China. After all, this is a country that is able to produce things cheaply and sell them to the world. By contrast, French industry is hamstrung by high costs, including regulatory barriers and rigid labour laws. Rather than reform French policy to make domestic production more attractive, many — such as Hollande — would be happier simply to slap trade restrictions on Chinese goods and other cheap imports.

Trade is not a matter of domestic policy, however. The European Union is a single trade zone, with pan-regional rules in place. The safe assumption has typically been that the relatively pro-market (or at least not anti-capitalist) Germans would block any moves to impose trade barriers. But as Karen Maley writes for Business Spectator, there is some speculation that world view might be less principled and more malleable than in the past. Specifically, while German trade with China has been substantial, there are signs that cheap production in eastern Europe is displacing Asian business. And with a need to find some common ground with her new French counterpart, Germany’s Angela Merkel might just find China — and with it, the pursuit of trade liberalisation — too attractive a sacrificial lamb. Here’s hoping not.

Finding Europe

Thu, 17 May 2012 21:27:00 +1000

Finding Europe:

Fears about Greece dropping out of the Eurozone have rattled stock markets worldwide, including in the United States. So, what does the US have to fear from events across the Atlantic. Quite a bit, as it happens. After all, this too is a country with a massive budget deficit that needs taming. Just don’t mention the word austerity.

In fact, as Amity Shlaes argues for Bloomberg View, there is much to commend in austerity — though perhaps not how it is practised in Europe. She sees spending cuts as beinf necessary to build trust with those holding government debt — a credible commitment, if you will, of a government’s willingness (and capacity) to pay back what it owes. Keep in mind that a large part of Greece’s troubles stems from the fact that it lied for so long about the true state of its finances, and since then has demonstrated an alarming propensity to squib on tough reforms.

But Shlaes also suggests a quid pro quo for curtailing spending: ‘austerity’ governments should cut taxes too, or at least outline a plan for doing so within the short to medium term. This may be a harder sell. On the face of it, if you cut both spending and taxes, the two cancel each other out — you still have a deficit. However, Shlaes argues that tax cuts provide greater economic stimulus than government spending, meaning you get better a bang for the buck. This ‘supply-side’ story suggests that tax cuts can in turn yield more, not less, tax revenue — a politically popular notion, even if the empirical evidence to justify this is contentious.

The bigger issue from Europe’s perspective is that, for some troubled economies, tax cuts may have a relatively smaller effect than you might expect. Tax evasion is rife in Greece. Lowering taxes on people who aren’t paying tax in the first place is not going to stimulate anything at all.

Ditch the Euro, ditch the EU?

Wed, 16 May 2012 20:53:00 +1000

Ditch the Euro, ditch the EU?:

As expected, Greek voters will be forced back to the polls next month to try again at electing a parliament. And by all accounts, the main beneficiary of this second-round vote will be a party that came from virtually nowhere to become the second largest party in this month’s election: the radical-left Syriza. Some now predict that Syriza will emerge as the largest party in the new parliament, giving it a strong mandate to pursue its plans to renounce the conditions of its bailout from the European Union and International Monetary Fund.

Syriza’s leader, Alexis Tsipras, reckons that Europe will be prepared to renegotiate — despite the fact that European leaders, particularly Germany’s Angela Merkel and her finance minister Wolfgang Schäuble, have insisted that there is no prospect of a better offer on the table. So, what happens? Well, Greece loses its bailout funds and will be forced to default. But that’s not all.

As Monash University’s Remy Davison (who, incidentally, once lectured yours truly) writes, without external funding sources (not just from foreign governments, but financial institutions as well), it would be untenable for Greece to remain in the Eurozone. But there is no provision for abandoning the single currency. Davison suggests the only ‘out’ clause is for Greece to withdraw from the European Union entirely. Consequently, other transfer payments to Greece — such as subsidies under the Common Agricultural Policy — would cease. Moreover, it would lose the trade benefits it enjoys within the EU, resulting in the remaining EU members slapping tariffs and other trade barriers on Greek exports. The EU’s customs union would no longer cover Greece either.

Of course, it’s also possible that some elegant fudge could be devised that would allow Greece to ditch the euro, but remain an EU member. But Davison’s point is that, as the rules currently stand, there is currently no provision for such a scenario. The only hope Greece might have is that it leaves the EU, and ditch the euro, only to be automatically readmitted to the club (but outside the Eurozone). However, how many would be willing to completely ignore the fact that Greece has become an economic basketcase when it comes to assessing it against the EU’s membership criteria?

"All of the major European economies are spending more now on government than they did before the..."

Wed, 16 May 2012 20:23:00 +1000

“All of the major European economies are spending more now on government than they did before the global financial crisis began.”

- Chris Berg, Institute of Public Affairs

‘Austerity’ has become something of a dirty word in Europe. In countries like Greece, public sector jobs have been slashed, retirement benefits have been curtailed, and entitlement spending has been reduced. Or so goes the conventional wisdom.

Citing data from the European Union’s statistics agency, Eurostat, Chris Berg observes that — as a proportion of economic output (Gross Domestic Product, GDP) — government spending has increased since the onset of the global financial crisis throughout Europe. A key driver of this is rising unemployment, which has meant more people drawing on the public purse. This is what economists refer to as an ‘automatic stabiliser’: without any change in policy settings, a recession will put a balanced budget into deficit as tax receipts dry up and people draw on government handouts. And in Europe’s case, despite cuts in some areas of spending (and some tax rises as well), these have been more than offset by the growth in welfare expenditure. Moreover, even if spending had held perfectly constant in nominal terms, the deterioration in European economies would by definition have seen spending as a proportion of (falling) GDP rise.

Berg concludes that ‘austerity’ is a myth — that what critics are railing against is the lack of additional discretionary spending to jolt Europe out of its malaise. Of course, the data don’t establish either way whether such stimulus would be helpful or warranted. What is does demonstrate though is that Europe’s present woes are not evidence of the perils of ‘small government’, which has become something of a bogeyman in the debate about the future of the European social model. Rather, it is the usual clamour of ‘losers’ from policy changes complaining about the adverse effects imposed on them.

"Europe is far away, and unless you watch the SBS news it has an unfamiliar cast of characters and..."

Tue, 15 May 2012 19:22:59 +1000

“Europe is far away, and unless you watch the SBS news it has an unfamiliar cast of characters and issues. But this year it will become more and more important in our lives, so it’s worth watching - and its scene is changing rapidly.”

- Tim Colebatch, The Age

For the most part, Australia is a spectator to global economic events. In some ways — such as the rapid rise of China — we’re beneficiaries. But in other areas, we can be knocked for six by events out of our control. The calamity presently befalling Europe is one such event. Already, fears about Greek default have seen the Australian dollar ‘slump’ — now hovering around parity with the US dollar, with expectations it could fall further. Just months ago, it was buying 1.10 US dollars.

In a primer for Australian audiences, Tim Colebatch (economics editor for The Age) summarises the current drama in Europe. Readers of this blog would be well aware of the key issues at play. The question is, what does it mean for Australia? For one thing, Treasurer Wayne Swan must be nervously watching how Greece’s politicians act. If Greece defaults on its debts, and leaves the Eurozone, there could be wide reaching ramifications for financial markets — on a par, some say, with the collapse of the US bank Lehman Brothers in 2008 that precipitated a rapid deterioration in economic conditions around the world. (Others, it must be said, believe the Greek situation has been sufficiently managed to limit any fallout.)

In the worst case scenario, a new global financial crisis would — unsurprisingly — unleash a new wave of turmoil on stock markets. Australian banks, reliant on access to overseas funding sources, would be exposed if borrowing costs surged amid investor skittishness. What Colebatch doesn’t mention is that, unlike during the GFC, China’s economy is also easing off. In short, the conditions aren’t as favourable for Australia this time around.

Can't we just get along?

Tue, 15 May 2012 18:28:24 +1000

Can't we just get along?:

The prospect of Greece collapsing out of the common currency is not the only pressing challenge for Europe today. The election of François Hollande as the new French president marks a seismic shift in Europe’s power politics. His predecessor, Nicolas Sarkozy, was part of the ‘Merkozy’ duo with Germany’s Angela Merkel — nothing happened in Europe without their agreement. Merkel hitched herself firmly to the Sarkozy bandwagon in France’s recent campaign — now she’ll have to find a way to work with the candidate she opposed.

As the BBC’s Gavin Hewitt writes, the starkest contrast between the Merkel and Hollande world views is over austerity. Merkel is firmly linked with the current strategy of compelling European governments to embrace budget discipline. Hollande has pledged ‘growth’ over ‘austerity’ — as if the two are binary choices — and wants to renegotiate the recently agreed fiscal compact that would bind Europe’s leaders to German economic values. This comes as embattled economies, most obviously Greece, are crying out for an easing of the tight austerity conditions being imposed on them in exchange for bailout funds.

Hewitt foresees a compromise that doesn’t substantively deviate from current plan, but gives some rhetorical ground to Hollande. For example, Merkel will likely agree to greater European Union investment in infrastructure. But there are still some major uncertainties, including about where Hollande stands on dealing with Greece. Circumstances will force Merkel and Hollande to find common ground fast: Europe will be truly dysfunctional without an effective alliance between the French and German leaders.

"[Syriza leader Alexis] Tsipras is merely expressing views that are already widespread within large..."

Tue, 15 May 2012 18:11:00 +1000

“[Syriza leader Alexis] Tsipras is merely expressing views that are already widespread within large segments of the Athens establishment, namely that the Europeans will ultimately give in and pay up, because they fear a Greek bankruptcy as much as people in the Middle Ages feared the Black Death.”

- Der Spiegel, German newsmagazine

Greece is almost certain to go back to the polls next month, after parliamentary elections this month proved inconclusive. What seems clear is that radical-left party Syriza looks set to play a dominant role in Greek politics in the near-term. Its young leader, Alexis Tsipras, rails against the austerity measures inflicted on Greece, and is vowing that any government his party supports will reject the conditions and call on Europe’s leaders to return to the negotiating table. Europe is unimpressed with that idea: Germany, in particular, insists that Greece must stick to its bailout agreement, or lose its only financial lifeline.

If Tsipras does find himself, eventually, in a position to call Europe’s bluff — and Germany holds its ground — Greece would likely withdraw from the European monetary union. The writers at German newsmagazine Der Spiegel recognise the pain this would inflict, but also consider it the best option for Europe, and for Greece itself.

From Europe’s perspective, the dangers associated with renegotiating the bailout term are simply too great. If Greece gets a better deal, other recipient states would surely demand greater leeway as well. As it is, Der Spiegel considers that Greece has failed in its current reform program. Meanwhile, public anger in those countries footing the bill — chiefly Germany — would increase. Instead of weaker countries potentially leaving the Eurozone, instead the pressure on stronger countries to depart would grow.

If Greece were to return to the drachma, it could instantly devalue its currency — helping to restore the international competitiveness it has lost within the Eurozone. This isn’t just about consumer purchasing power (that is, raising the relative price of imports into Greece and lowering the relative price of Greek exports abroad). Foreigners could buy up Greek companies for a song, and transform their operations — a chance for the sort of private sector growth that Greece has been sorely lacking in.

Of course, devaluation on its own will not be sufficient. Greece still needs to restructure its welfare system, reduce barriers to industry, and reform its labour laws. These are the measures that will provide the long-term incentives for economic prosperity — and precisely the sorts of things that Greece has struggled with even under the current pressure from investors and foreign governments. And the rest of Europe will have challenges of its own. As Der Spiegel concludes, ‘if Greece returns to the drachma, that will be the point when Europe’s work really begins’.

"From the perspective of how the presidency should work, a vice president should never force the hand..."

Mon, 14 May 2012 20:27:58 +1000

“From the perspective of how the presidency should work, a vice president should never force the hand of a president on a sensitive, first-order issue by getting out ahead publicly. … Biden committed a governmental sin of the first order.”

- Ben Heineman, lawyer

Last week brought an unexpected, albeit unsurprising, declaration by US President Barack Obama. Obama confided in a hastily scheduled television interview that he had reached a personal view that gays and lesbians should be allowed to marry. In policy terms, Obama’s announcement has little impact: states have legislative authority over marriage, not the federal government. Indeed, Obama revealed his position just days after North Carolina passed a constitutional amendment to ban gay marriage. Nevertheless, the admission was historic. Obama became the first US president to publicly support gay marriage, and a darling to the gay rights movement.

It was a curious time to make such an announcement — at the start of what will be a gruelling campaign for Obama to secure a second term in the White House. But some believe Obama’s hand was forced by his vice-president, Joe Biden, who declared his own pro-gay-marriage position a week earlier. Ben Heineman is one pundit of that view. In a piece for The Atlantic, he slams Biden for jumping out of line with his boss. Heineman concludes that Obama should dump Biden, and pick a new running mate — suggesting the outgoing Secretary of State, and former sparring partner before the last election, Hillary Clinton.

Clinton would, in many regards, be a compelling choice for VP. But before getting carried away with the idea, it’s worth considering Heineman’s reason for making such a switch. He contends that Biden has effectively betrayed his boss. But it is also plausible that Biden was given the green light to air his views as a way to test the public mood in advance of Obama opening his mouth. True, Biden is known for shooting his mouth off. But its also worth noting that education secretary Arne Duncan also endorsed gay marriage before Obama did. (Indeed, Duncan opened up on his views the day after Biden.) If this alternative explanation is true, then the case for dumping Biden is fatally weakened.

That said, if Heineman is right — that Biden’s comments were not coordinated with the Oval Office, and compelled Obama to speak out prematurely — then Biden is certainly a liability for the campaign ahead. If Biden does part with Obama before November, it’ll be a good sign of what really happened this month.