Yesterday I was interviewed for TRT World about the Greek economy and possible Grexit. Have a look here.
All posts tagged Greece
The economic suffering of the Greek people is horrendous and it has to stop – interview on TRT World
Posted by Lars Christensen on February 21, 2017
https://marketmonetarist.com/2017/02/21/the-economic-suffering-of-the-greek-people-is-horrendous-and-it-has-to-stop-interview-on-trt-world/
Greece’s continued suffering
Greece is once again back on the agenda in the European financial markets and we are once again talking about Greek default and even about Grexit. There seems to be no end to the suffering of the Greek economy and the Greek population.
I must say that I have a lot of sympathy with the Greeks – they have terrible policy makers and no matter how many austerity measures are implemented there is no signs of any visible improvement either in public finances or in the overall economic performance.
Hence, the Greek economy has essentially been in decline for nearly nine years and there seems to be no signs of it changing.
To me there is no doubt what the main reason it – it is the monetary strangulation of the Greek economy due to the countries membership of the euro area.
I don’t like to see the euro area fall apart and I believe it can be avoided, but on the other hand I have a very hard time seeing Greece getting out of this crisis without either receiving a more or less complete debt write-off or leaving the euro area (or both).
ECB can’t do much more
Since 2008 there has been two dimensions to the monetary strangulation of the Greek economy.
First of all for much of the period since 2008 the ECB has kept overall euro zone monetary conditions far too tight to achieve its own 2% inflation target as illustrated by our – Markets & Money Advisory’s – composite indicator for monetary conditions in the euro zone, which shows that monetary conditions in the euro zone essentially were too tight from 2008 until early 2015 and only has been broadly neutral (indicator close to zero) over the past 20 months or so.
Second, the euro zone is not an optimal currency area and it is very clear that Greece today needs significantly easier monetary conditions than for example Germany, which might need tighter monetary conditions.
Looking at these to factors it is clear that the ECB indeed has moved in the right direction in the last two years and overall we believe that monetary conditions right now are about right for the euro zone as a whole. However, the problem is that monetary conditions still is far too tight for Greece.
As long as overall euro zone monetary conditions were too tight there was a good argument that the ECB should ease monetary policy to ensure that it would hit its 2% inflation target over the medium-term and that would help Greece. However, that is not really the case now. While there is no reason for the ECB to tighten monetary conditions it is today much harder to argue for new measures to ease euro zone monetary conditions.
That makes Greece’s problem even more acute and makes the argument for Greek euro exit even stronger.
The problem of course is that Greece is damned no matter what. If Greece stays in the euro area then the hardship continues for the Greek people and there is no reason to believe that more austerity fundamentally will improve public finances and while there have been some signs of growth beginning to pick over the past year any minor tightening of monetary policy from the ECB will likely send Greece directly back to recession.
On the other hand if Greece where to leave the euro area it is unlikely it would happen in an orderly fashion. Rather it is likely to happen in a chaotic fashion and lot of things could go badly wrongly – also for the rest of the euro zone. Just think about what speculation it would create regarding possible Italian or even French euro exit. And will euro exit also mean EU exit and what will be the geopolitical ramifications of this?
So it is not an easy choice. However, I continue to believe that it would be both in the interest of Greece and of the rest of euro area as a whole that Greece leaves the euro area.
The suffering will have to end. However, Greece should not be kicked out of the euro. Rather Greece should be helped out of the euro. Unfortunately there is little will within the EU or the ECB to make this happen and populists around Europe are eager to use this debacle to further sabotage European reforms.
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See also my earlier posts on Greece her:
When effort and outcome is not the same thing – the case of Greece
A simple measure of European political instability – yes, Greece tops the ranking
Greece versus Turkey: It’s the exchange rate exchange rate regime stupid!
“You are both gentlemen…or something” – debating Greece with Lorcan Roche Kelly
How the RECOVERY will look like when Greece leaves the euro
The end game or a new beginning for Greece? We have seen all this before
Political unrest is always and everywhere a monetary phenomenon – also in Greece
Greece in the news – 81 years ago…
Greece is not really worse than Germany (if you adjust for lack of growth)
Remember the last time Greece was kicked out of a monetary union?
Marek Belka suggests dual currency solution for Greece
Germany 1931, Argentina 2001 – Greece 2011?
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Posted by Lars Christensen on February 10, 2017
https://marketmonetarist.com/2017/02/10/greeces-continued-suffering/
When effort and outcome is not the same thing – the case of Greece
Greece has made yet another other deal with the EU and IMF on its debt situation. Or rather as one EU official described it to the Financial Times “If it looks like we are kicking the can down the road that is because we are”.
Said in another way, this is not really a deal to solve the fundamental problem, but rather a deal to avoid dealing with the fundamental problem.
So what is the fundamental problem? Well, at the core of this is that the Greek government simply is insolvent and can’t pay its debts, but at the same time the EU is refusing to accept this fact.
The IMF seems to understand this and probably so do the eurocrats, but politically it seems impossible to accept because that would mean the EU would have to accept that the strategy to deal with Greece’s problems has been wrong and it would mean accepting a major debt write-down on Greece sovereign debt something with likely would not be popular with voters in for example Germany or the Netherlands.
Some are arguing that Greece haven’t done enough to solve its own problems and that letting Greece off the hook with a major debt write-down would just encourage even more bad habits and that is probably right, but it does change the fact that it is very hard to see how Greece will be able to pay of the debt.
Furthermore, it is wrong when some are arguing that Greece hasn’t done anything. In fact, Greece has done more fiscal austerity than any other nation in Europe. So if we for example look at the accumulative tightening of fiscal policy in Greece since 2009 then we will see that Greece in this period has tightened by 18-20% of GDP (measured as the accumulative change in IMF’s measure of Greece’s structural budget deficit). By any measure, this a massive fiscal tightening.
However, one thing is the effort another thing is the outcome and here the story is quite different. Hence, since 2009 Greek public debt has grown from 108% of GDP in 2008 to more 180% of GDP this year. Hence, despite of massive fiscal austerity public debt has continued to grow every single year since 2008.
The reason for this depressing development is the fact that Greece has seen a massive collapse in economic activity. Hence, since 2008 nominal GDP in Greece has dropped by nearly 30%. A true economic disaster. No matter how fiscally conservative a country is it is impossible to stabilize the debt ratios with such an economic contraction.
Therefore, to fundamentally solve Greece’s debt problem it is needed to solve Greece’s growth problem and that is not easy. Fiscal stimulus could of course be a solution, but Greece don’t have the money for that and the markets will not be willing to finance a fiscal stimulus package.
Another solution is massive structural reforms and that is somewhat more promising that fiscal stimulus, but given the depth of the crisis even the most comprehensive reform package is not likely to be enough and that leaves on one solution – monetary easing.
But since Greece is not in control of its own monetary policy because the country is a member of the euro zone that is not really possible either. Or rather it is – if Greece decides to leave the euro area. That seems like a very risky strategy, but it is blatantly obvious that this is really the only solution that would work.
Therefore, it is not a question whether we will get a ‘Grexit’, but rather when it will happen. The German taxpayers will not forever be willing to pay the price for kicking the can down the road.
PS Marcus Nunes also comments on Greece.
PPS The IMF has a new paper, which once again shows that Greece is insolvent and urgently needs a debt write-down.
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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com
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Posted by Lars Christensen on May 28, 2016
https://marketmonetarist.com/2016/05/28/when-effort-and-outcome-is-not-the-same-thing-the-case-of-greece/
Are we about to get a new ”euro spasm”?
I hate to say it, but I fear that we are in for a new round of euro zone troubles.
My key concern is that monetary conditions in the euro zone remains far to tight, which among other things is reflected in the continued very low level of inflation expectations in the euro zone. Hence, it is clear that the markets do not expect the ECB to deliver 2% inflation any time soon. As a consequence, nominal GDP growth also remains very weak across the euro zone.
And with weak nominal GDP growth public finance concerns are again returning to the euro zone. This is from Reuters:
Spain plans to ask the European Commission for an extra year to meet its public deficit targets, El Pais reported on Sunday, after missing the mark with its 2015 deficit and raising the prospect of further spending cuts to narrow the budget gap.
The country last month reported a 2015 deficit of 5 percent of economic output, one of the largest in Europe and above the EU-agreed target of 4.2 percent. To reduce that to the 2016 target of 2.8 percent of gross domestic product (GDP), the Spanish government will need to find about 23 billion euros ($25 billion) through tax increases or spending cuts.
The economy ministry declined to comment on the newspaper report, which cited government sources as saying that acting Economy Minister Luis de Guindos would include revised economic projections in the stability program to be presented to Parliament on April 19.
And Spain is not the only euro zone country with renewed budget concerns. Hence, on Friday Italy’s government cut it growth forecast for 2017 and increased it deficit forecast. Portugal is facing a similar problem – and things surely do not look well in Greece either.
So soon public finances problem with be back on the agenda for the European markets, but it is important to realize that this to a very large extent is a result of overly tighten monetary conditions. As I have said over and over again – Europe’s “debt” crisis is really a nominal GDP crisis. With no nominal GDP growth there is no public revenue growth and public debt ratios will continue to increase.
So why are we not seeing any NGDP growth in the euro zone?
Overall I see four reasons:
- Global monetary conditions are tightening on the back of tightening of monetary conditions from the Fed and the PBoC.
- Regulatory overkill in the European banking sector – particularly the implementation of the Liquidity Coverage Ratio (LCR), which since mid-2014 has caused a sharp drop in the euro zone money multiplier, which effectively is a major tightening of monetary conditions in the euro zone.
- Continued fiscal austerity measures to meet EU demand is also adding to the negative aggregate demand pressure.
- And finally, the three factor above would not be important had the ECB been credibly committed to its 2% inflation target. However, has increasingly become clear that the ECB is very, very reluctant in implemented the needed massive quantitative easing warranted to offset the three negative factors described above (tighter global monetary conditions, regulatory overkill and fiscal austerity). Instead the ECB continues to fool around with odd credit policies and negative interest rates.
Therefore, urgent action seems needed to avoid a new “euro spasm” in the near-future and I would focus on two factors:
- Suspend the implementation across of the new Liquidity Coverage Ratio until we have seen at least 24 months of consecutive 4% nominal GDP growth in the euro zone. Presently the implementation of the LCR is killing the European money market, which eventually will be draining the overall European economy for liquidity.
- The ECB needs a firm commitment to increasing nominal GDP growth and to bring inflation expectations back to at least 2% on all relevant time horizons. Furthermore, the ECB need to strongly signal that the central bank will increase the euro zone money base to fully offset any negative impact on overall broad money growth from the massive tightening of banking regulation in Europe.
So will we get that? Very likely not and the signs that we are moving toward renewed euro troubles are increasing. A good example is the re-escalation of currency inflows in to the Danish krone. Hence, the krone, which is pegged to the euro, has been under increasing appreciation pressures in recent weeks and Danish bond yields have as a consequence come down significantly.
This at least partly is a reflection of “safe haven” flows and fears regarding the future of the euro zone. These concerns are probably further exacerbated by Brexit concerns.
Finally, there has been signs of renewed banking distress in Europe with particularly concerns over Deutsche Bank increasing.
So be careful out there – soon with my might be in for euro troubles again.
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Posted by Lars Christensen on April 11, 2016
https://marketmonetarist.com/2016/04/11/are-we-about-to-get-a-new-euro-spasm/
My lecture at Columbia University on the euro crisis
As the followers of my blog would know I recently did a 11 day speaking tour in the US. I want to share a bit of that with my readers.
Here you can watch my lecture at Columbia University on the euro crisis.
And this is the Powerpoint presentation from the lecture.
I want to thank my big hero Adam Tooze who is head of the Europe Institute of Columbia University for the invitation to speak at Columbia.
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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.
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Posted by Lars Christensen on November 3, 2015
https://marketmonetarist.com/2015/11/03/my-lecture-at-columbia-university-on-the-euro-crisis/
Horror graph of the week – Greek PMI collapses
If you ever read Friedman and Schwartz’s “A Monetary History of the United States” you know what happens when a central bank fails to act as a lender-of-last resort in the event of a bank run and/or at the same time fails to offset the impact on broad money growth of such bank run.
It of course happened in the US in 1930-31 and again in Europe after the collapse of Credit-Anstalt in Austria also in 1931. In both cases the result was a deep depression. Now it has happened again in Greece, but Greece is already in a deep economic depression.
Just have a look at this shocking graph from Macropolis.gr.
There is no great reason to trust eyeball-econometrics, but judging from the sharp drop in Greek July PMI (released today) then we should expect another 10-15% drop in Greek real GDP in the next couple of quarters. That would mean that we soon will have seen Greek real GDP being halved since the start of this crisis.
I think it will be very hard to find any other example of a (peacetime) collapse of real GDP of this magnitude in any other country in the world in the past 200 years and there is nothing positive to say about this. It is the terrible consequence of massive policy failures in Brussels, Frankfurt, Berlin and Athens.
A truly Greek tragedy.
HT Joe Wiesenthal.
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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: roz@specialistspeakers.com.
Also note that I am on a Speaking Tour in the US in October. See more here.
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Posted by Lars Christensen on August 3, 2015
https://marketmonetarist.com/2015/08/03/horror-graph-of-the-week-greek-pmi-collapses/
A simple measure of European political instability – yes, Greece tops the ranking
The escalation of the greek crisis recently has made me think about the connection between the economic development, austerity and political uncertainty. Unfortunately we don’t have a commonly accepted measure of political uncertainty or political instability.
However, I got an idea to make a simple measure of political instability in Europe. My idea is simply to count the total number of Prime Ministers, Finance Ministers and central bank governors a given country have had in a given period. A high number would indicate a high level of political instability.
The graph below shows this measure for 30 European countries since January 2009.
I have not done any deep analysis of the data so I am cautious not to make any strong conclusions based on what I have so far.
However, there is a few things I would note:
1) Greece by has been by far the most politically unstable country among the 30 European countries during the Great Recession.
2) All other countries are essentially within one standard deviation of the mean ranking.
3) There is no major differences between the political stability of countries with floating exchange rates relative to euro countries (and peggers).
4) Spain, Portugal and Ireland alle have been surprisingly politically stable during the Great Recession. Among the PIIGS only Italy comes close to the kind of political instability we have seen in Greece.
5) It isn’t surprising that Great Britain, Luxembourg, Sweden and Germany are among the most politically stable countries in the Europe.
6) However, Poland and Turkey have been remarkably stable in political terms. This will likely be a surprise to most people. Given what is happening in Turkish politics and recently geopolitical and military events the ranking could certainly be questioned.
7) Denmark and Finland have been surprisingly unstable politically during the Great Recession.
Obviously this is a very simple measure of political instability and if one want to use the ranking more work on the index would be needed.
For example, it is obviously that we might be more interested in looking at the change in the index rather than on the level of the index. Furthermore, some countries are likely “structurally” more stable than other countries. Should we account for that in some way?
Finally I have not taken into account differences in electoral systems in different countries. That likely distort the data.
If you want to have a closer look at the data see the Political instability Ranking.
Any feedback is appreciated and I encourage my readers to play around with the data and develop it further.
PS I have left out Switzerland of the ranking due to the fact of the large institutional differences in the way Swiss democracy works compared to other place in Europe.
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Posted by Lars Christensen on July 26, 2015
https://marketmonetarist.com/2015/07/26/a-simple-measure-of-european-political-instability-yes-greece-tops-the-ranking/
The Euro – A Fiscal Strangulation Mechanism (but mostly for monetary reasons)
In my earlier post The Euro – A Fatal Conceit I argued that had the euro not be introduced and had we instead had freely floating exchange rates then “European taxpayers would (not) have had to pour billions of euros into bailing out Southern European and Eastern European government”. Said in another way had we not had the euro then there would not have been a European “debt crisis” or at least it would have been significantly smaller.
A simple way of illustrating this is to have a look at the debt development in the euro countries (and the countries pegged to the euro) and comparing that with the debt development in the European countries with floating exchange rates.
I use the same countries as in my previous post – The Euro – A Monetary Strangulation Mechanism. 21 euro countries (and countries pegged to the euro) and 10 countries with more or less floating exchange rates.
The graph below shows the development in (median) gross public debt (% of GDP) in the two groups of countries. (All countries are hence equally weighted).
The picture is very clear – while both the floaters and the euro countries saw their public debt ratios increase sharply on the back of the 2008 shock (albeit less extremely for the floaters than for the euro countries) – from 2011 there is a very clear difference in the debt development.
Hence, from 2011 the floaters have seen as seen a gradual decline in gross public debt (as share of GDP), while the euro countries (and the peggers) have seen a steep increase in public indebtedness.
So while the floaters have seen their public debt increase by just above 10% of GDP from 2007 to 2014 the euro countries have seen a rise in public debt of more than 25% of GDP!
The graph below shows the individual breakdown of the data.
Again the picture is very clear – the euro countries (and the euro peggers) have had significantly more negative debt dynamics than the European floaters. Even if we disregard the PIIGS countries then the euro countries are on average doing a lot worse than the floaters in terms of public debt dynamics .
The euro countries are trying harder, but are succeeding less
One could of course argue that the difference in debt development simply reflects that some countries are just less prudent than other. However, the graph below shows that this is not a very good explanation.
The graph shows the annual change in the fiscal stance (measured as the annual change in IMF’s estimate for the structural public balance as share of GDP). Positive (negative) values are a fiscal easing (tightening).
A few interesting conclusions emerge. First of all overall both euro countries and floaters seem to have had rather pro-cyclical fiscal policies – hence, both groups of countries eased fiscal policy in the ‘good years’ (2005-2009), but tightened the fiscal stance in the ‘bad years’ (2010-14.)
Second, it is notable that the fiscal stance of the euro countries and the floaters is highly correlated and is of a similar magnitude.
So even if the fiscal stance has an impact on growth in both groups of countries it seems a bit far-fetched to in general attribute the difference in real GDP growth between the two groups of countries to difference in the fiscal stance. That said, it seems like overall the euro countries and peggers have had a slightly more austere fiscal stance than the floaters after 2010. (Some – like Greece of course have seen a massive tightening of fiscal policy.)
This of course makes it even more paradoxical that the euro countries have had a significantly more negative debt dynamics than the floaters.
It is not a debt crisis – it is an NGDP crisis
So we can conclude that the reason that the euro countries’ debt dynamics are a lot worse than the floaters is not because of less fiscal austerity, but rather the problem seems to be one of lacking growth in the euro countries. The graph below illustrates that.
The graph plots the debt dynamics against the growth of nominal GDP from 2007 to 2014 for all 31 countries (both euro countries and the floaters).
The graph clearly shows that the countries, which have seen a sharp drop in nominal GDP such as Ireland and Greece have also seen the steepest increasing the public debt ratios. In fact Greece is nearly exactly on the estimated regression line, which implies that Greece has done exactly as good or bad as would be expected given the steep drop in Greek NGDP. This leaves basically no room for a ‘fiscal irresponsibility’ explanation for the rise in Greek public debt after 2007.
This of course nearly follows by definition – as we define the debt ratio as nominal public debt divided by nominal GDP. So when the denominator (nominal GDP) drops it follows by definition that the (debt) ratio increases. Furthermore, we also know that public sector expenditure (such as unemployment benefits) and tax revenues tend to be rather sensitive to changes in nominal GDP growth.
As a consequence we can conclude that the so-called ‘Europe debt crisis’ really is not about lack of fiscal austerity, but rather a result of too little nominal GDP growth.
And who controls NGDP growth? Well, overall NGDP growth in the euro zone is essentially under the full control of the ECB (remember MV=PY). This means that too tight monetary policy will lead to too weak NGDP growth, which in turn will cause an increase in public debt ratios.
In that regard it is worth noticing that it is hardly a coincidence that the ECB’s two unfortunate rate hikes in 2011 also caused a sharp slowdown in NGDP growth in certain euro zone countries, which in turn caused a sharp rise in public debt ratios as the first graph of this post clearly shows.
Consequently it would not be totally incorrect to claim that Jean-Claude Trichet as ECB-chief in 2011 played a major role in dramatically escalating the European debt crisis.
Had he not hiked interest rates in 2011 and instead pursued a policy of quantitative easing to get NGDP growth back on track then it seems a lot less likely that we would have seen the sharp increase in public debt ratios we have seen since 2011.
Of course that is not the whole story as the ECB does only control overall euro zone NGDP growth, but not the NGDP growth of individual euro zone countries. Rather the relative NGDP growth performance within the euro is determined by other factors such as particularly the initial external imbalances (the current account situation) when the shocks hit in 2008 (Lehman Brothers’ collapse) and 2011 (Trichet’s hikes.)
Hence, if a country like Greece with a large current account deficit is hit by a “funding shock” as in 2008 and 2011 then the country will have to have an internal devaluation (lower prices and lower wage growth) and the only way to achieve that is essentially through a deep recession.
However, that is not the case for countries with a floating exchange rate as a floating exchange country with a large current account deficit does not have to go through a recession to restore competitiveness – it just has to see a depreciation of its currency as Turkey as seen since 2008-9.
Concluding, the negative debt dynamics in the euro zone since 2008 are essentially the result of two things. 1) The misguided rate hikes in 2011 and 2) the lack of ability for countries with large current account deficits to see a nominal exchange rate depreciation.
The Euro is Fiscal Strangulation Mechanism, but for monetary reasons
We can therefore conclude that the euro indeed has been a Fiscal Strangulation Mechanism as fiscal austerity has not been enough to stabilize the overall debt dynamics in a numbers of euro zone countries.
However, this is only the case because the ECB has first of all failed to offset the fiscal austerity by maintaining nominal stability (hitting its own inflation target) and second because countries, which initially had large current account deficits like Greece and Spain have not – contrary to the floaters – been able to restore competitiveness (and domestic demand) through a depreciation of their currencies as they essentially are “pegged” within the euro zone.
PS I have excluded Croatia from the data set as it is unclear whether to describe the Croatian kuna as a dirty float or a dirty peg. Whether or not Croatia is included in the sample does not change the conclusions.
Update: My friend Nicolas Goetzmann pointed out the Trichet ECB also hiked interest rates in 2008 and hence dramatically misjudged the situation. I fully agree with that, but my point in this post is not necessarily to discuss that episode, but rather to discuss the fiscal implications of the ECB’s failures and the problem of the euro itself.
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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.
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Posted by Lars Christensen on July 19, 2015
https://marketmonetarist.com/2015/07/19/the-euro-a-fiscal-strangulation-mechanism-but-mostly-for-monetary-reasons/
The Euro – A Monetary Strangulation Mechanism
In my previous post I claimed that the ‘Greek crisis’ essentially is not about Greece, but rather that the crisis is a symptom of a bigger problem namely the euro itself.
Furthermore, I claimed that had it not been for the euro we would not have had to have massive bailouts of countries and we would not have been in a seven years of recession in the euro zone and unemployment would have been (much) lower if we had had floating exchange rates in across Europe instead of what we could call the Monetary Strangulation Mechanism (MSM).
It is of course impossible to say how the world would have looked had we had floating exchange rates instead of the MSM. However, luckily not all countries in Europe have joined the euro and the economic performance of these countries might give us a hint about how things could have been if we had never introduced the euro.
So I have looked at the growth performance of the euro countries as well as on the European countries, which have had floating (or quasi-floating) exchange rates to compare ‘peggers’ with ‘floaters’.
My sample is the euro countries and the countries with fixed exchange rates against the euro (Bulgaria and Denmark) and countries with floating exchange rates in the EU – the UK, Sweden, Poland, Hungary, the Czech Republic and Romania. Furthermore, I have included Switzerland as well as the EEA countries – Norway and Iceland (all with floating exchange rates). Finally I have included Greece’s neighbour Turkey, which also has a floating exchange rate.
In all 31 European countries – all very different. Some countries are political dysfunctional and struggling with corruption (for example Romania or Turkey), while others are normally seen as relatively efficient economies with well-functioning labour and product markets and strong external balance and sound public finances like Denmark, Finland and the Netherland.
Overall we can differentiate between two groups of countries – euro countries and euro peggers (the ‘red countries’) and the countries with more or less floating exchange rates (the ‘green countries’).
The graph below shows the growth performance for these two groups of European countries in the period from 2007 (the year prior to the crisis hit) to 2015.
The difference is striking – among the 21 euro countries (including the two euro peggers) nearly half (10) of the countries today have lower real GDP levels than in 2007, while all of the floaters today have higher real GDP levels than in 2007.
Even Iceland, which had a major banking collapse in 2008 and the always politically dysfunctionally and highly indebted Hungary (both with floating exchange rates) have outgrown the majority of euro countries (and euro peggers).
In fact these two countries – the two slowest growing floaters – have outgrown the Netherlands, Denmark and Finland – countries which are always seen as examples of reform-oriented countries with über prudent policies and strong external balances and healthy public finances.
If we look at a simple median of the growth rates of real GDP from 2007 until 2015 the floaters have significantly outgrown the euro countries by a factor of five (7.9% versus 1.5%). Even if we disregard the three fastest floaters (Turkey, Romania and Poland) the floaters still massively outperform the euro countries (6.5% versus 1.5%).
The crisis would have long been over had the euro not been introduced
To me there can be no doubt – the massive growth outperformance for floaters relative to the euro countries is no coincidence. The euro has been a Monetary Strangulation Mechanism and had we not had the euro the crisis in Europe would likely long ago have been over. In fact the crisis is essentially over for most of the ‘floaters’.
We can debate why the euro has been such a growth killing machine – and I will look closer into that in coming posts – but there is no doubt that the crisis in Europe today has been caused by the euro itself rather than the mismanagement of individual economies.
PS I am not claiming the structural factors are not important and I do not claim that all of the floaters have had great monetary policies. The only thing I claim is the the main factor for the underperformance of the euro countries is the euro itself.
PPS one could argue that the German ‘D-mark’ is freely floating and all other euro countries essentially are pegged to the ‘D-mark’ and that this is the reason for Germany’s significant growth outperformance relative to most of the other euro countries.
Update: With this post I have tried to demonstrate that the euro does not allow nominal adjustments for individual euro countries and asymmetrical shocks therefore will have negative effects. I am not making an argument about the long-term growth outlook for individual euro countries and I am not arguing that the euro zone forever will be doomed to low growth. The focus is on how the euro area has coped with the 2008 shock and the the aftermath. However, some have asked how my graph would look if you go back to 2000. Tim Lee has done the work for me – and you will see it doesn’t make much of a difference to the overall results. See here.
Update II: The euro is not only a Monetary Strangulation Mechanism, but also a Fiscal Strangulation Mechanism.
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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.
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Posted by Lars Christensen on July 14, 2015
https://marketmonetarist.com/2015/07/14/the-euro-a-monetary-strangulation-mechanism/
The Euro – A Fatal Conceit
Imagine that the euro had never been introduced and we instead had had freely floating European currencies and each country would have been free to choose their own monetary policy and fiscal policy.
Some countries would have been doing well; others would have been doing bad, but do you seriously think that we would had a crisis as deep as what we have seen over the past seven years in Europe?
Do you think Greek GDP would have dropped 30%?
Do you think Finland would have seen a bigger accumulated drop in GDP than during the Great Depression and during the banking crisis of 1990s?
Do you think that European taxpayers would have had to pour billions of euros into bailing out Southern European and Eastern European governments? And German and French banks! (I elaborate on this here.)
Do you think that Europe would have been as disunited as we are seeing it now?
Do you think we would have seen the kind of hostilities among European nations as we are seeing now?
Do you think we would have seen the rise of political parties like Golden Dawn and Syriza in Greece or Podemos in Spain?
Do you think anti-immigrant sentiment and protectionist ideas would have been rising across Europe to the extent it has?
Do you think that the European banking sector would have been quasi paralyzed for seven years?
And most importantly do you think we would have had 23 million unemployed Europeans?
The answer to all of these questions is NO!
We would have been much better off without the euro. The euro is a major economic, financial, political and social fiasco.
It is disgusting and I blame the politicians of Europe and the Eurocrats for this and I blame the economists who failed to speak out against the dangers of introducing the euro and instead gave their support to a project so economically insane that it only could have been envisioned by the type of people the British historian Paul Johnson called “Intellectuals”.
And don’t say you where not warned. Milton Friedman had warned you that forced monetary integration would cause political disunity and would be an economic disaster. He was of course right.
Bernard Connolly who wrote the book “The Rotten Heart of Europe” warned against exactly what is going on right now. Nobody wanted to listen. In fact Bernard Connolly was sacked from the European Commission in 1995 for speaking his mind.
The sacking of Bernard Connolly unfortunate is telling of lack of debate about monetary policy matters in Europe. Any opposition to the “project” is silenced. The greater “good” always comes first.
There have only been referendums about euro adoption in a few countries. In Denmark and Sweden the electorate have been wise enough to go against the “orders” of the euro establishment. As a consequence both countries today are better off than if the electorate had followed the orders of the elite and voted ‘yes’ to euro adoption.
It is easy to understand the frustration of the European voters. They have been lied to. Unfortunately the outcome is that voters across Europe now are happy to vote for parties like Front Nation, UKIP, Podemos and Syriza. I ask you the cheerleaders of the euro project – is this what you wanted?
I can only say that I can understand the Greek population’s anger over seven years of economic and social hardship and I likewise can understand that the taxpayers of Finland don’t want to pay for yet another meaningless bailout of Greece. But you should not blame each other. You should blame the European politicians who brought you into the euro.
Blame the eurocrats who never understood Hayek’s dictum from his great book “The Fatal Conceit”:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
The euro is a fatal conceit.
UPDATE: I now have some empirical evidence that the euro is indeed a Monetary Strangulation Mechanism.
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Posted by Lars Christensen on July 12, 2015
https://marketmonetarist.com/2015/07/12/the-euro-a-fatal-conceit/