Shifting horizons

Much has happened since I last posted some of my thoughts on the ongoing Eurozone crisis three years ago. Although I do not follow the debate with the same level of vigour now than I once did, a few uncollated notes after the jump nonetheless. I notice that my political views have changed rather considerably over the past couple of years.

It is already more than four years since I left the world of fund management. Back then I had a front row seat in the evolving drama that began with Greece, but was soon to engulf most parts of the European periphery. I went on one of the first emerging market style investor trips to Athens in January 2010 — during which a bunch of portfolio managers would grill our counterparts, often rudely, over details of the new PASOK government’s plans to sort out the fiscal mess that was beginning to become very apparent. It is quite astounding to think that back then, Greek sovereign yields were just about 2% above Germany. Today, with the third “bailout” package under negotiation and a sovereign default and restructuring under the belt, this seems like a tale from a parallel universe.

Further trips to Portugal, Spain and Brussels followed, but with my move onto other pastures, I naturally lost some of my professional interest in following events. Occasionally, I would pick up the paper and read about the latest developments, only to feel that in fact not much had changed. European bureaucrats and national politicians continued to muddle through, fearful of admitting the truth, i.e. that much of Greece’s (and quite possibly other European countries’) debts were clearly unsustainable. By doling out ever more concessionary finance, they were kicking the can down the road, it was said. At the same time, they imposed their antiquated economic policies of austerity on the debtors. It didn’t require prophecy to predict that this would produce more radical political movements in both creditor and debtor countries.

In order to keep this post succinct, I would like to refer the interested reader to some of the writing I have enjoyed over the last couple of months. The best piece remains Michael Pettis’s blog post about the French indemnity in 1871-73 and its frightening parallels to today’s situation. If there is just one point to take away from the article, it is that we should be very careful to hold nations accountable for their constituent households’ economic decisions. Rational decisions may cumulate to “irresponsible” behaviour; e.g. if Greek households decide to borrow excessively amid low interest rates, especially while German households and corporates save excessively amid stagnant real wages and lacklustre productivity growth, we cannot rationally go out and scream about lazy Greeks and stingy Germans. That being said, Greece’s public administration remains a mess. But can we judge progress on this in quarterly increments or do we need a more forgiving, realistic long-term view that accounts for both sides of the economic relationship?

There is much more in Pettis’s piece that is worth highlighting. Another important, more technical aspect relates to the nominal debt stock of a country. Pettis argues that it remains of crucial importance, regardless of what financiers may want to tell you. Yes, debt service as a proportion of GDP may be the more important cash flow relevant item, but still, economic agents base their choices very much on headline numbers. If Greek debt service were so important, clearly we wouldn’t subject the country to such odious primary balance targets amid a faltering economy? In this regard, Paul Kazarian’s analysis on Greece’s effective debt stock paints a confusing picture. If we apply normal accounting rules to Greek debt, the European creditors have already effected a major debt relief by extending the maturities, offering grace periods, and lowering the interest due on these instruments.

And yet we are not allowed to call it debt relief — because it would be a violation of the “no bailout” principles so aggressively guarded by Germany’s ruling coalition. So something perverse is happening instead: we offset the concessionary financing by ever more draconian economic measures. It is clear that this makes Greek GDP, e.g. the denominator of debt/GDP ratios ever smaller, Greek debt ever less sustainable.

Schäuble et al have behaved unbelievably irresponsibly over the past weeks, but they obviously cater to an electorate that is becoming worryingly nationalist, reaching into the political centre in northern European countries. And yet, on the other hand, it is easy for the united left (or what’s left of it, indeed) to cry foul amid how Greeks are being treated by their evil northern paymasters. Hasn’t Syriza played its cards exceptionally badly since coming to power in early 2015? Yes it has, but it too is playing to a domestic audience susceptible to blaming external forces for a largely self-created mess.

In a climate like this, positions become hardened and the middle ground gets lost. Public intellectuals abroad urged Greeks to vote “no” in the referendum, to try and go it alone, liberated from the shackles of a fixed exchange rate. But they do not live in Athens, and cannot see how difficult this may be for Greece. Perhaps Greeks are better advised to accept the pain they know than subject themselves to an experiment with unknown outcome? At the same time, loud voices from Eastern Europe suggest that Greece is only now feeling the same pinch that all these countries had to feel following the financial crisis, with the undertone being that “they deserve this”. Really? Who says that? Latvian pensioners? Do these people really think that there is no solidarity between those suffering from austerity? I would suggest that the ones making these statements represent the better-off and righteous parts of the populations in Eastern Europe. I wouldn’t pay much attention to them.

Growth will save the day, we are told. This has allegedly happened in Ireland, where, thanks to austerity and the right economic policies, a recovery is now happening to the fanfare of the economic orthodoxy. Nominal GDP growth is also, arithmetically at least, the most important determinant of Greece’s debt sustainability. (A shame that the recent shenanigans pushed Greece back into recession, after 2015 had actually kicked off on a promising note.)

Alas, anti-austerity and pro-investment are not per se going to solve our problems in Europe. This would require us to think about distribution. Coming out of a recession, paying down concessionary loans (e.g. by fire-selling national property), no one dares ask probing questions about income inequalities, although they are really at the heart of the recent economic crisis and continue to shape it as we go along. Social cutbacks, pension, competitiveness and taxation reforms — unfortunately these have become shorthand for a further erosion of equity and solidarity in the European Union and its member states. Europe’s future doesn’t look too bright.

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