Euro sentences to ponder

by on January 7, 2017 at 2:58 pm in Economics | Permalink

The point is that a country like Italy or Greece is not trapped by being in the euro. It could increase its competitiveness by raising value-added taxes on consumption and cutting payroll taxes.

That is from Arnold Kling, channeling Gita Gopinath.  The interview with her at the link is worth reading.

1 derek January 7, 2017 at 4:18 pm

So Greece should go from 23% to what? And Italy from 21% to what?

These countries are in economic death spirals that stem from too much debt which as allowed the growth of government overhead.

2 Silas Barta January 7, 2017 at 4:40 pm

Yeah, that was my thought, based on general background knowledge — Greeks complain about the insane taxes on consumption, especially very visible items like pools, where they’ve had to go to satellite imaging to enforce.

They’re probably well past the Laffer point on consumption taxes, especially when you consider the culture of tax evasion (which itself prompted the re-emphasis on taxation of visible stuff rather than income).

3 carlospln January 7, 2017 at 4:50 pm

Ahh, the iconic ‘swimming pool tax’

http://www.ibtimes.com/why-greek-euro-experiment-failed-lynn-253361

Note to Cowen: Debts that can’t be repaid, won’t.

A Debt Holiday looms. Its a-comin’.

4 So Much For Subtlety January 7, 2017 at 6:14 pm

But the debt is not the problem. Everyone know the debt is not going to be paid back. Most of it has been forgiven. Most of the rest has been moved off the private banks’ spreadsheets and onto the state-sector’s. So the taxpayers of Northern Europe will take the hit.

The problem is deficits. Greece, like much of the south from what I can see, continues to run a deficit. They say they have got it under control but if you believe that I can get you a special deal on one slightly used Acropolis. They need to continue to borrow so they can continue to employ all their cousins and sons-in-law in nice, air conditioned offices where they are not expected to do much work.

This is why Greece has not defaulted. It could and everyone would be happy. But they would not be able to borrow. For a while. If the deficit is about 5-10%, which seems reasonable, they will feel that when the money is turned off. They might have to get real jobs! The private sector is hell. They expect results. What they want to do is go on pretending to work while the Germans pay for all their coffee, sweets and porn. It has been working out so well for them so far.

5 carlospln January 7, 2017 at 6:29 pm

“Most of it has been forgiven. Most of the rest has been moved off the private banks’ spreadsheets and onto the state-sector’s. So the taxpayers of Northern Europe will take the hit”

1) Incorrect. None of it has ‘been forgiven’. The GER & FR banks were made whole in 2011 by the ‘bailouts’.

2) ‘Balance sheet’, not spreadsheet, you ninny. As GR is a country that runs a current account deficit, its banks must borrow continually: overnight, every three months, annually, etc.

3) The taxpayers of GER & FR will indeed ‘take the hit’, but from the Target 2 balances that have grotesquely ballooned from slow motion bank runs.

6 So Much For Subtlety January 7, 2017 at 6:49 pm

You know, someone who is both rude and ignorant is not going to end up looking good on the internet. If you want to quibble about my perfectly correct language, please do. As for the actual substantive part of your reply:

None of it has been forgiven? Take it up with Wikipedia: “Despite these efforts, the country required bailout loans in 2010, 2012, and 2015 from the International Monetary Fund, Eurogroup, and European Central Bank, and negotiated a 50% “haircut” on debt owned to private banks in 2011.” So in 2011 alone they forgave half of Greece’s debt.

My whole point is that Greece needs to continue to borrow and hence cannot default. So I have no idea what point you are trying to make.

And, as I said, there has been a wholesale shift of Greek debt from private (or not) European banks to European governments:

Creditors

Initially, European banks had the largest holdings of Greek debt. However, this shifted as the “troika” (ECB, IMF and a European government-sponsored fund) purchased Greek bonds. As of early 2015, the largest individual contributors to the fund were Germany, France and Italy with roughly €130bn total of the €323bn debt.[125] The IMF was owed €32bn and the ECB €20bn. Foreign banks had little Greek debt.[126]
European banks

Excluding Greek banks, European banks had €45.8bn exposure to Greece in June 2011.[127] However, by early 2015 their holdings had declined to roughly €2.4bn.

So all in all that was a remarkably unhelpful reply.

7 So Much For Subtlety January 7, 2017 at 6:54 pm

Actually a small mistake – not half their debt. The half held at that point by private investors.

8 Brian January 7, 2017 at 7:53 pm

“Everyone know the debt is not going to be paid back. Most of it has been forgiven. Most of the rest has been moved off the private banks’ spreadsheets and onto the state-sector’s.”

The problem here is that the German banks are writing down the cash that their corrupt over-lending to the Greek government lost. But there are other losses caused by their criminal over-lending they are not being required to pay.

The Greek government was forced by the over-lending of German banks to take on not just more current spending, but also long term obligations. Public employees hired during over-lending must be paid for decades now because none of them can be fired. Their lucrative pensions must then be paid for 30-50 years after retirement.

The problem here is that after forcing the Greek government to take on long term obligations, those German banks have been let off the hook scott-free with just the loss of their cash principal paid so far. Instead, the German banks must be made to pay the ongoing and future cost of public employee salary and pensions for the next 60 years.

A Greek government constrained by its own tax collections would have been able to reject demands for more public jobs and giveaways. But when cash is free, a government that rejects it will be turned out of office. So abusive German over-lending is the root of the long-term obligations. Those obligations were forced on the Greek government by the Germans and Germany should pay for as long as they last.

9 So Much For Subtlety January 7, 2017 at 8:15 pm

Brian January 7, 2017 at 7:53 pm

The problem here is that the German banks are writing down the cash that their corrupt over-lending to the Greek government lost.

That is a problem? It is at least half the solution surely? The Greeks are never going to repay. Even if they wanted to, they probably can’t. The Greeks have beaches and what? Thanks to generations of socialism their ships seem to have moved to Panama. Good luck getting their owners to pay anything now they all live in London.

The Greek government was forced by the over-lending of German banks to take on not just more current spending, but also long term obligations. Public employees hired during over-lending must be paid for decades now because none of them can be fired. Their lucrative pensions must then be paid for 30-50 years after retirement.

Sorry but what? The Greeks were forced, just forced I tell you, to go on a wild shopping spree with Grandma Merkel’s credit card? How does that work out? The German and French banks may have lent in a criminally irresponsible way, but there was no need for the Greek government to spend it all on getting their cousins well paid sinecures and giving their mistresses fur coats and Swiss bank accounts. They chose to do that. They can change the laws that will enable them to fire civil servants if they want – it is not the Germans forcing them to hire so many and retire so early.

The problem here is that after forcing the Greek government to take on long term obligations, those German banks have been let off the hook scott-free with just the loss of their cash principal paid so far. Instead, the German banks must be made to pay the ongoing and future cost of public employee salary and pensions for the next 60 years.

On what planet is a word of this true? The Germans did not force the Greeks to do anything. If Macy’s offers me a credit card, I am under no obligation to buy my wife a diamond bracelet. If I do buy her one on Macy’s credit card and then decide not to pay them back I don’t see why they should be in hock for buying her the matching necklace.

Those obligations were forced on the Greek government by the Germans and Germany should pay for as long as they last.

So you are claiming because the Greeks voters wanted free stuff and because German fiscal rectitude meant that interest rates were low, the Greek government was forced to spend a lot of money giving the Greek voters free stuff – and somehow this is not the fault of the voters or the government, but of the German taxpayers who lent in good faith based on lies told to them by the Greeks? This is a pretty impressive position to take. However it is not one I share.

The solution, on the other hand, is obvious – bring back the Colonels.

10 carlospln January 8, 2017 at 12:00 am

I was referring [as I believed you were] to GR sovereign debt.

You were indeed correct that, included in the 2011 cycle of bail outs, was a significant haircut on the face value of GR banks’ debt.

It would be helpful if which type of debt [sovereign, corporate, household] is specified.

Also, GR’s sovereign debt problem isn’t quite as simple as you blithely assume:

GR’s government debt crisis, which erupted in late 2009-early 2010, did so due not only to the rising debt levels caused by the recession of 2008-09 and the intensification of speculation on Greek government bonds, but also due to the fall in the euro’s value and the lack of Greek export income and flow of funds into Greece from northern banks and investors that occurred with the banking crash of 2008.

In short, in addition to private debt, there were multiple causes behind rising government debt after 2008: in addition to private debt from money capital inflows there was:

• government debt due to the 2008-09 global economic and banking crash and lack of normal economic recovery in the aftermath;

• there was government debt increase due to hedge funds & financial speculators driving up the cost of Greek bonds in 2009-10;

• there was a government debt rise as a consequence of fiscal austerity measures imposed on Greece by Eurozone ‘Troika’ members as part of the debt restructuring of spring 2010;

& there was additional debt caused by the decline in the euro currency itself at the time.

11 Boonton January 8, 2017 at 9:41 am

Write down debt from ‘corrupt over lending’?

How does this type of corruption work? First you lend someone money, they you write it off since they will never pay you back. And this is ‘corrupt’ meaning that somehow this enriches you unjustly? How exactly?

12 Richard D. Lum January 10, 2017 at 6:04 am

Totally agreed!

13 Thiago Ribeiro January 7, 2017 at 4:22 pm

Italy and Greece are not trapped by the Euro, they are trapped by being Italy and Greece. If we were in charge, the trains would be running on time, Euro or no Euro.

14 Just Another Right Wing Dude January 7, 2017 at 4:37 pm

We, who, the Brazilians ??!!! lool Pass me the joint!

15 Thiago Ribeiro January 7, 2017 at 4:59 pm

The Brazilian people has amazing realizations to its credit. Accordind to Prophet Bandarra, Brazil (“the big lion”) is fated to lead the world after crushing the serpent with its heel and defeating Gog and Magog.

16 Rick Hull January 7, 2017 at 6:46 pm

Well that seals it. I’m convinced!

17 Thiago Ribeiro January 7, 2017 at 7:17 pm

Would you want to know more about the teachings of Prophet Bandarra?

18 msgkings January 7, 2017 at 11:38 pm

Oh my god, yes please! I’ve only heard about the serpent thing so far….

19 Thiago Ribeiro January 8, 2017 at 5:20 am

Prophet Bandarra was a shoemaker. Some sayhe was from Jewish stock, some say he wasn’t. Anyway, he was an expert on the Old Testament and he discovered what the prophecies on the Book of Daniel and Revelation were about. They, according to him, foretold the rise of Brazil (the big “Lion”). According to him, the “big Lion” will roar and it will mark the conquest of Africa.after it, under the leadership of the Hidden One, Brazil will lead Civilization in its war against the Serpent – some say it is Communism,others say it is America, others say it is Japan. After this happens, “every valley shall be exalted, and every mountain and hill shall be made low: and the crooked shall be made straight, and the rough places plain”
and all teh chains will be broken, fulfilling around the world, the prediction of one of our anthems, my favorite Brazilian Anthem: “We cannot believe that in another age
Slaves there were in so noble a country.

Now the rosey glow of dawn

greets brothers, and not hostile tyrants.

We are all equal! In the future, united,

We will know how to take up

Our august banner that, pure,

glows triumphant from the altar of the fatherland!”

By then, a kasting peace will have been reached undr a system, as foretold by Mr Kennedy, where the “strong are just, the weak protect and peace preserved” because, to qiote an old song that could as well have been written about Brazil:
“Her fortress is a faithful heart, her pride is suffering;

And soul by soul and silently her shining bounds increase,

And her ways are ways of gentleness, and all her paths are peace.”

20 dearieme January 8, 2017 at 10:34 am

The Book of Daniel and Revelations are hacks written by Russian time-travellers at Putin’s behest, aimed at bringing down the Dems in 2016. Obviously. Just ask the CIA.

21 Thiago Ribeiro January 8, 2017 at 10:46 am

No, they are not.

22 God January 8, 2017 at 5:40 pm

Sorry, Thiago, dearieme is correct.

23 Lucifer January 8, 2017 at 5:48 pm

Whoa there, they were working for me. Stop trying to mooch the credit, J boy.

24 TallDave January 9, 2017 at 1:24 pm

Badgers!

25 Merijn Knibbe January 7, 2017 at 5:48 pm

Sometime ago I met a women working for Lidl, a European (German based ) supermarket chain. She was one of the people who were in charge of organizing some of the ‘country weeks’ (Italian food week, French food week etc., no British food week as I recollect). One of the problems with the Greek week was the fact that Greek suppliers were not really able to produce the amounts Lidl needed… VAT increases won’t solve such problems. Surely not when many of your neighbouring countries are in tatters (Kosovo, Macedonia, Bulgaria) and do not offer any kind of serious market outlet.

Anyway, I’ve never seen confincing arguments that VAT increases productivity, the argument was Always that consumption had to get down to make way room investment and exports. With 25% unemployment and problems like the one mentioned above that makes little sense. And mind that nominal wage cuts in Greece have been epic.

Greece has been increasing value added taxes all the time. At this moment, total revenu is in line with the EU average: http://ec.europa.eu/eurostat/statistics-explained/images/e/e0/Breakdown_of_tax_revenue_by_country_and_by_detailed_tax_categories_in_2015_%28%25_of_GDP%29.png
Also, total taxes had to increase, for well known reasons. And they did (look here, Greece is ELhttp://ec.europa.eu/eurostat/statistics-explained/index.php/File:Total_tax_revenue_by_country,_1995-2015_(%25_of_GDP).png

26 Merijn Knibbe January 7, 2017 at 5:50 pm

Sometime ago I met a women working for Lidl, a European (German based ) supermarket chain. She was one of the people who were in charge of organizing some of the ‘country weeks’ (Italian food week, French food week etc., no British food week as I recollect). One of the problems with the Greek week was the fact that Greek suppliers were not really able to produce the amounts Lidl needed… VAT increases won’t solve such problems. Surely not when many of your neighbouring countries are in tatters (Kosovo, Macedonia, Bulgaria) and do not offer any kind of serious market outlet.

Anyway, I’ve never seen confincing arguments that VAT increases productivity, the argument was Always that consumption had to get down to make way room investment and exports. With 25% unemployment and problems like the one mentioned above that makes little sense. And mind that nominal wage cuts in Greece have been epic.

Also, Greece has been increasing value added taxes all the time, further increases will erode price comeptitivity of the all important tourist sector. At this moment, total revenue is in line with the EU average: http://ec.europa.eu/eurostat/statistics-explained/images/e/e0/Breakdown_of_tax_revenue_by_country_and_by_detailed_tax_categories_in_2015_%28%25_of_GDP%29.png
Also, total taxes had to increase, for well known reasons. And they did (look here, Greece is ELhttp://ec.europa.eu/eurostat/statistics-explained/index.php/File:Total_tax_revenue_by_country,_1995-2015_(%25_of_GDP).png

27 ladderff January 7, 2017 at 6:38 pm

Indeed, the USA is not trapped by its addiction to debasing the currency. It could solve its problems by being well-governed!

28 Jan January 7, 2017 at 7:24 pm

Yeah, it’s looking like “well-governed” is right around the corner! Good thing, too, because our economy is in the shitter.

29 Liberal, Fact Based Journalist January 7, 2017 at 9:43 pm

“Good thing, too, because our economy is in the shitter.”

Jan, please don’t say that as Trump hasn’t taken office yet. Ideally, we should wait until a few months after Trump takes office before we start with that.

30 Brian Donohue January 8, 2017 at 11:20 am

Average CPI increase over the past 10 years is 1.8%. The last 10-year period in the US with lower CPI increases was 1957-1967.

31 Private Obvious January 7, 2017 at 6:38 pm

Yeah… I suspect telling the Greek people that what they pay for everything will go up while taxes paid by companies go down may not be a popular move, politically speaking. That’s just my take on the situation.

32 So Much For Subtlety January 7, 2017 at 6:52 pm

It might just be me but I suspect that returning to 1950s poverty won’t be very popular either.

The Greeks have been living large with Germany’s credit card. The Germans won’t pay any more. What can the Greeks do? They have been searching for that magic money tree that will continue to shower them with German money but it is not working. No matter how many times they call Merkel a Nazi she doesn’t want to keep paying their bills.

So they can get a job and earn a living or do what exactly? They can earn a living the hard way or the much harder way. They seem to prefer the latter.

33 Viking January 7, 2017 at 8:37 pm

The western liberal governments screws its citizens innumerable ways:

One tiny example:

By first lending money to Greece, it causes inflation, so the bargain prices we were used to in the 70s are no longer available on a vacation to Greece. Secondly, the taxpayers are stuck with the bailout. Long term, the Greeks will be poor, and equilibrium will return, but this intermediate term sucks!

34 Floccina January 7, 2017 at 9:14 pm

Of course many of the taxpayers will say “I did not borrow the money nor did I get any of the money.”

35 So Much For Subtlety January 8, 2017 at 4:39 am

And the politically correct liberal argument is, presumably, they did borrow that.

All Greeks benefited from that theft of German money. They can deny it but they did.

36 Private Obvious January 7, 2017 at 9:28 pm

So higher VAT and lower payroll taxes will prevent Greece from falling from around $72 per capita per day to around the $1.30 a day they had in 1950?

Well, when you put it like that, who wouldn’t take higher VAT and lower payroll taxes over becoming poorer than the Democratic Republic of the Congo? They’d be fools not to.

And if I remember my history correctly, I think that’s what happened with the Democratic Republic of the Congo. King Leopold the second lowered the VAT soon after raising Payroll taxes. (Payroll Taxes, hands cut off for failing to meet rubber quota, same thing really.)

37 So Much For Subtlety January 8, 2017 at 4:35 am

Well no. Nothing much will stop Greece’s collapse. A higher VAT is not a particularly good way to go. Lower payroll taxes would help.

However in the end the reality is that the Greeks are not particularly productive. The government does all it can to make that even worse by penalizing the people who are productive, but in the end, the Greeks don’t do much useful work. That means they cannot have a particularly high standard of living.

38 Private Obvious January 9, 2017 at 7:12 am

From 1950 to 1973 Greece had an economic growth rate that averaged 7.7% which was the second highest in the world at the time after Japan.

But you say now the Greeks don’t do much useful work and cannot have a particularly high standard of living?

I’m not convinced of that statement. Feel free to try me convince me of the truth of that statement, but I think it would have to be a very good explanation indeed to convince me that could they could go from absolute poverty to well over the world average in terms of standard of living and then suddenly become incapable of being able to do much useful work and having a particularly high standard of living.

39 Ray Lopez January 7, 2017 at 9:52 pm

So much ignorance in this post. First off, money is largely neutral within a country but there seems to be stickiness between countries, as Gopinath says. Read this for background: https://en.wikipedia.org/wiki/Feldstein%E2%80%93Horioka_puzzle and https://en.wikipedia.org/wiki/Home_bias_in_trade_puzzle

As for Kling’s comment, he’s quite right (and I like him better after reading his autobiographical book “Confessions of a Would-be Macro Economist”) but Greece, before the 2008 crash, was one of the most indebted per capita countries in the world as percent of GDP (tied with the USA if I recall), so it’s unlikely they’ll have the political willpower to put a VAT on consumption, nor to cut payroll taxes (anyway they need to fire state bureaucrats, and let them emigrate to another country as is done in the Philippines, but I digress).

40 Ricardo January 8, 2017 at 5:16 am

Whatever advantages this strategy may have would be partly offset by making the tourism sectors even less competitive. I suppose one could find ways to refund or excuse VAT when customers are tourists (some countries have systems for VAT refunds for expensive or luxury goods) but it would be difficult to design a system that couldn’t be used for tax evasion purposes.

41 Boonton January 8, 2017 at 9:58 am

I suspect debt forgiveness will end up becoming a sort of stealth EU fiscal policy if it holds together.

42 JWatts January 8, 2017 at 5:53 pm

“I suspect debt forgiveness will end up becoming a sort of stealth EU fiscal policy if it holds together.”

I can’t imagine being able to keep that kind of policy stealthy.

43 JWatts January 8, 2017 at 5:54 pm

It could well be a policy that never gets official recognition, that everybody’s aware of but that it’s not written policy. But I wouldn’t call that stealthy.

44 TallDave January 9, 2017 at 1:28 pm

Well, they could wrap a layer of gauze over debt forgiveness by having the ECB buy Greek debt directly and pretend to care whether they pay it back. It wouldn’t fool too many people, but maybe enough.

45 Cyrus January 8, 2017 at 3:30 pm

To the extent a VAT attempts to differentiate consumption from non-consumption sales, it loses the “everyone reports on their transaction partners to secure their own rebate” enforcement feature of the VAT and becomes a US-style local sales tax, with similar enforcement problems if the tax rate is high enough to be worth evading.

46 Mark B January 9, 2017 at 11:57 am

So the argument is that a top-down engineered mechanism will work as well as a natural market mechanism (currency depreciation)?

Aside from perhaps theoretical concerns… isn’t currency depreciation great in that it brings enhanced tourism and enhanced foreign direct investment, at least in the case of countries like Greece? If Greece vacations went “on sale” for a while due to currency depreciation, I’d sure be looking at a vacation there…

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