Seeing the erred ways of my thinking… (1)

When I started this blog, the idea was to focus on the glass being half-full instead of half-empty. Instead of hammering in why Greece was in a hopeless situation, I tried to hammer in what would need to happen so that Greece, I almost have to eat my words now, would become “the economic tiger of the Eastern Mediterranean”.

Even though my belief in a better future for Greece has not evaporated entirely, I do have to admit that my basic belief started falling apart some time between the first and second election of this year. About two months ago I wrote that Greece had probably crossed the point of no return.

So has the time come to admit defeat? Probably so! But a society’s admitting defeat, resigning itself to being a failed state, is somehow against my nature. So I thought that I should, one by one, take the themes on which I had rested my case and show where I erred in my thinking. Time will tell whether this will be the first post in a series, or the first and the last post at the same time…

I erred in thinking that political leadership (particularly at the EU-level) would have more knowledge of how an economy works. That within one country, the expenses of one economic agent (be that an individual, a family, a company or the state) are the revenues of other economic agents. That within an economic union, the foreign revenues of one country are the foreign expenses of other countries. Particularly of Germany I would have expected that kind of knowledge because it had a prime example of it within its own borders a couple of decades ago.

I had lived in the US when the Iron Curtain fell, when Germany was unified and when the West gave the East the same hard Deutsche Mark as a currency, more or less on a 1:1 exchange rate basis. I had my own small company at the time and my employees asked me what I thought of that. I told them something like: “Knowing the Germans, they will probably run the dredging machines over that archaic, inefficient and run-down economic structure; then they will build up a new economic nirwana from scratch and within a few years that region will probably be the most attractive, competitive business area of all of Europe. Something like a Silicon Valley not only for IT but for business in general”.

Well, I had overlooked a small detail. Other areas of Europe would have been threatened by that new competition and of all those areas, the one threatened the most would have been the former West Germany. Tough enough for Germany to have reasonably strong competitors in other countries but to have the greatest competitor of all within its own borders — Gor forbid the thought!

As became known later, West German industry certainly did not reach out a helping hand but, instead, actually hindered the few good Eastern businesses to be successful. Even West German unions contributed their own part to making sure that jobs in the West would not be endangered by new jobs in the East.

And to perfect the disaster, the West gave the East an overvalued exchange rate (which, at the time, may have been seen as a “gift” in the English language but turned out to be a “Gift” in the German language). Now, so the thinking went, all the East Germans would have to do was to become, overnight, as efficient as the West Germans had become in 4 decades after WW2. A society which for 4 decades had been told that the state would take care of them was now expected to jubilate that they could take care of themselves.

The West knew that there would have to be transfer payments during a transition time. I believe that transition time was originally capped at 5 years. Today, more than 20 years later, those transfer payments are still in place and I understand that the sum is now approaching 2 TREUR. That makes almost 100 BEUR per year!

So there could not have been better proof of the following fact: if an economic region within a larger union, for whatever reasons, cannot develop its own economic strength, there will have to be transfer payments. Since nobody likes transfer payments, the primary goal in any union must be to have each and every economic region develop its own economic strength. If that were to mean that one’s own economic growth is slowed a bit, then that would be the price to pay. At the end of day, it would be a small and temporary price to pay because, if all goes well, the sum of both will be better than what each individual part could have accomplished on its own (in fact, that was one of the ideas behind the EU structural funds).

Moral of the story?
One can’t have the cake and eat it. There is only one effective way to get one’s loans repaid by a weak borrower — all parties involved have to figure out how to make the borrower strong again. For the Core to sell a lot of goods to the Periphery without paying attention to what the Periphery is doing with those goods and where they get the money from to pay for them is totally short-sighted. If the Periphery is importing consumption goods and paying for them with vendor loans, the exporters will sonner or later not have a Periphery to export to (and they will have to write off their accounts receivable from the Periphery). Thus, it is in the interest of the Core to make sure that the Periphery remains (or becomes again) a strong borrower. Even it that means selling less to them short-term (and possibly contributing to local production with direct investment in the Periphery).

Final question?
Is that really so difficult to understand?

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10 Responses to Seeing the erred ways of my thinking… (1)

  1. Anonymous says:

    Ah, Mr. Kastner,It is the same story the italian professor was saying about Calabria. Calabria having the euro and the same legislation with Lombardia, will never reach Lombardia…Is it so difficult to understand? No, but it is in human nature and even more in the capitalistic world to go for the profit without thinking much else.When Italy unified, the richer areas where the ones in the south actually and they paid the heaviest price for the unification, with the promice that the north would repay in investments. Similarly, in WWII the south was more destroyed. What happened though, was, that northerns didn't want to make investments in the south, due to profit. South Italy is cursed by geographic isolation and poor southern neighbours (north africa). For a northern industrialist, it made more sense to have his factory built to Turin, which was closer to the central-northern Europe where his clients would be, than do it in the south and increase his transportation costs. Similarly,the state could try to invest more in tourist facilities to the south. Ah, but that would cost politically in northern regions that also like tourism (like Liguria, Venezia, Emilia Romagna).It is a bit asking to go against human nature. I always say that communism was doomed to fail, because it goes against human nature. A human wants to be unique, to beat his neighbour, to have more money, to excel. Trying to make him live an ant amongst many other, equal ants, is against nature and this is why communism can't live under democracy. If communism was natural, the convents would have had much more monks. And even in convents, they are not all equal. There is a hierarchy inside. As a greek proverb says "being a monk is heavy duty".In similar way, in a society, where each country tries to exploit another, historically arrives to do wars, coups etc, in order to grab resources from someone else and where there is ruthless competition and politicians mainly think about political cost and have many ties with businessmen who finance their campaigns in exchange of the politicians returning the favour, what do you expect? That Venice would like Sicily to absorb a good piece of her tourism or that Lombardia would transfer to Calabria heavy industrial base?Greece, even now, is still paying money for weapons that had been ordered up to 2004. The troika doesn't bother about these expenses, nor did anyone say "let us postpone the payments by 2 years". Because they are money that go also to european companies.This is why i said elsewhere, that Portugal inside the euro, isn't going to compete with the big countries, that's why the big countries took her in.Greece in pre-PASOK,pre-EEC era, with the good old drachma, was making her own kitchen electrical appliances and was even exporting them. Now the 1-2 that remain have been bought by german firms.Was also self-sufficient in food, today it's not.The euro for the small countries is like a golden cage. Nowdays it isn't even golden anymore, more of a rusty cage. Either way, you can't fly when you have to compete with someone else's rules at the same field and exactly wait for his good mood to direct investments. It's is like a boxing match between a heavyweight and a featherweight, with rules set up by the heavyweight.Ah, but the fear to leave the cage!Bandolero.P.S.: I have the impression that in USA, maybe because they have managed to create a common identity of people with different origins, have gone beyond this point and see natural the redirection of investments. In Italy for example, to this day, common identity is still a bit shaky. No wonder you have a party that wants to cut off the north and be a state on its own, for purely economic reasons.

  2. Anonymous says:

    And another note. If you want a borrower to ever repay you, don't do your best to discredit him in the "market". From the beginning of this crisis, the ones who were constantly keeping up "the bankcuptcy and Grexit" were the anglo-saxon press (undertandably, hoping that Greece would make the entire euro collapse) and the german one as well german politicians.I remember a greek economic analyst showing on tv news how the greek spread was going up everytime a new doom scenario was supposedly coming out of the german press or a german politician. To this day, the issue of Grexit and direct threats for it, within the EZ, are kept on by German politicians.Have you seen an Italian, Spanish politician making direct or indirect warning about Greece forced out of the euro? No, even though they pay higher interest rate than Germany. Never mind their press, which was always sympathetic to Greece.A greek proverb says "better loose an eye than your reputation". Greek politicians did their best to self-ruin that, but right after them, it were the german ones. Yesterday a french newspaper Les Echo had article "who will invest in Greece after hearing the german politicians talking all the time about Greece having to leave the euro"? I only read it in greek newspaper, so i don't have the original and can't speak french to find it.It's true. Greek politicians always sworn the opposite. But what do they matter?Or did ever the german press or politicians, which other country in the world, ever made a cut of deficit from 15,4% to 3% in 3 years, together with huge reforms, under de facto bankruptcy (dead banks and state doing halting of payments internally) and without being able to devalute its currency?They didn't, because there has never been such a country in world history. And surprise, all they have to say is "Greece didn't meet the targets agreed". I bet, that if Mrs Merkel is about to fall from a cliff and i approach her and say "hold on partner,i will help you. All you have to do is sign here that you will run 100m in 7 seconds,do a high jump at 2.20m and then rush to skating with one arm tied behind you back", Mrs Merkel will sign, but alas, will fail…Even more, if i stand all the time doing psychological war to her.Now we are at the phase "oh, Greeks don't want to stay in the euro, oh, too bad for them, but if they want to leave, well, what can we do…"But, these are things for future economic historians (outside the EU, since, the victors write the history).One thing is for sure, Mr. Schauble will see his money only in his dreams. Because as a greek proverb says "the one who seeks too much, looses also the little" or "Diogenes' revenge", as i call it.Bandolero.P.S.: The most amazing end in the whole EU adventure, would be for Greece to exit and for some unpredicted events, for the euro to surprisingly collapse. Then it would trully be like an ancient greek play. And Mrs Merkel will shout, like king Croesus: "Oh, Solon, Solon!Solon!" (Since i doubt Bild pubblishes him though, i would be glad to send to Mrs Merkel a copy).Bandolero.

  3. kleingut says:

    Let me give you an example where a North/South conflict was successfully resolved. Again, it happens to be Germany.Bavaria is the German South. As the world knows, Bavaria is a region for beer and fun-loving people; a great place to have a good time. Those were the times when a certain Bavarian company by the name of BMW had to be rescued from bankruptcy and most people thought that eventually BMW would disappear.I had an uncle living in the then very productive North-Rhine-Westphalia state of Germany. When I took on a job in Munich in 1974 and told him what a wonderful place Munich was to live, he replied: "No wonder! After all we earn all the money here which they spend there". He was referring to the domestic German transfer union. And he was right!What happened? Bavaria had the luck of getting very good political leadership. A leadership which had a future vision of Bavaria which would be more than beer and fun-loving. Their vision was to turn Bavaria into a high-tec region. Aerospace, of all things (!), was one of the targets. The state privatized everything it could and invested the proceeds into things inducing high-tech acitivites (education, business clusters, etc. etc.). Today, the formerly sleepy Bavaria is the strongest economy of Germany. It is a cluster of "clean" industries; of high-tec; of car manufacturers of word-renown (BMW, Audi); an air-hub second only to Frankfurt; the home of renowed multinationials; a center of finance (insurance, private equity); etc. I should add that Bavaria is now also the largest payer into the domestic German transfer union (about half of the total funds paid in) and North-Rhine-Westphalia is one of the largest recipients. And — Bavaria is still a place where people enjoy having beers and a good time…What's my point? Is is leadership much more than location, natural resources, mentalities or cultures, etc. Bavaria was blessed to have that. Greece is not.Another thing is: societies don't generally try very hard unless they have to. All the countries of the former communist Eastern Europe had no chance but to try very hard after the fall of the Iron Curtain. Some of them are today pure success stories, others are not. But all of them have improved their situation in the last couple of decades because they had no choice but to try hard (and without a Marshall Plan!).One exception — the former East German Republic. They didn't have to try hard because money was thrown at them. And one can see today what was accomplished by that.My point: mankind will generate the most results when it is challenged the most. Back in the eighties, I attended a luncheon hosted by the President of the Central Bank of Argentina for foreign bankers. Argentines, like Greeks, like to lament about their economic misery. An unforgettable dialogue developed.The President lamented about Argentina, looking at the man from the Bank of Tokyo: "Just look at the Japanese. They have a barren country. Nothing. And see how much they made out of it. And we Argentines have everything and see what a mess we made of it. Can you imagine where Argentina would be today if Japanese had lived here and not Argentines?"The man from the Bank of Tokyo shot back: "Yes, I can. The Japanese would today be like the Argentines are because they wouldn't have had to try so hard".Everyone laughed but we all had just heard a monumental truth about mankind!

  4. Anonymous says:

    Klaus, i think West-Germany had no other choice. If they do not throw money to the other part of the state – what will happen? A brain drain to West-Germany. People in Germany can live wherever they want within the country.

  5. kleingut says:

    Once it happened, the West no longer had a choice, but they didn't have to make it happen. They could have allowed the East to develop their own economic strength even though, in all likelihood, that would have – at least initially – come somewhat at the expense of the economic strength of the West. In short: they could have allowed the East to be "cheaper" (in today's terms: "more competitive").The transfer payments were/are funded by a so-called solidarity surtax (I believe it is 8% on your tax liability). That is a figure which everyone saw on his tax return. And every time some people saw that, they might have felt "let's build the Wall again". A somewhat lesser economic growth, particularly if only for a limited period of time, is not something anyone would have seen on an income tax return. It's like deflation vs. devaluation. In one case you see it; in the other case you don't see it directly.Today, the former East Germany has a near-perfect infrastructure. No wonder; it's all new. The infrastructure of the state of North-Rhine-Westphalia is crumbling. No wonder that the people there are now asking for reverse-transfer payments.I don't object to transfer payments per se; they are necessary in a union but they have to make sense. Let me give you domestic Austria as an example.There are about 8 million Austrians and about 4 million are in some kind of a revenue-generating activity so that they are payers into the transfer union. Of those, only about 2 million are net payers; the other 6 million Austrians are net receivers. That relationship will get worse and worse as Austrians get older, more needy of pensions and health services, etc. Do you think that this can go on forever? I don't think so. At some point, the net payers will refuse to respect the social contract(beginning with the younger generation).

  6. Anonymous says:

    Mr. Kastner,In substance we agree, that once in the golden cage, you don't fly. Exactly because need, as well as using your own weapons and rules, not set by others, are the driving forces. And exactly, ex communist countries that performed well, should better stay out of the euro if they want to keep going so well.The Japanese are perfect example. They have had long periods of selected isolation from foreign countries.The German example you bring, is a case of "common identity", which makes things more acceptable. Also, in the Bavarian case, Bavaria is perfectly situated in the center between north-south europe for an industrialized region and more important, it had available in the country the technlogical know-how on how to make aerospace or car industry.And like you say, leaders are very important. In Greece, if the King at the beginning of the 20th centure had won the political struggle with Venizelos, Greece would be today half its size or even less. Venizelos was the game changer. Nowdays, Greece is having its worst batch of politicians ever. In other times at least, there was a decent opposition leader that was mending things a bit. Nowdays you have the corpses of the 2 main political parties.My main objection in this whole story is: You know someone is overweight. Why do you claim to help him, by giving him a trainning program that the best gymnast of the world has failed to do? Are you helping him lose weight or have a heart attack?You can accuse him for being overweight all you want, but that's how he is now, that's what you have to work with.It is more intellectually honest to say since the start "take the hard road, it will make you good in the long term". In fact,having lived in the drachma era, i agree, that if Greece had stayed with the drachma and without Andreas Kreiskandreou, Greece wouldn't be here now and would be competing much better in her region. Because one thing is to have all euro members around and anohter all non-euro members. Just like it is different to be surrounded by rich countries that absorb easily your products and another being surrounded for 40 years by 3 enemy states and 1 enemy-friend.If West Germany had left the East on her own, Germany would probably have had social-political crisis. At the time i had read that Easterners were feeling already "strangers" with the Westerns. If the West had let them go their way, who knows if social cohesion was enough to keep them from having secessionist movements.Finally, rightly as you say, the ex communist countries progressed in the last 2 decades and without Marshall plan. Exactly, the bird out of the cage had to fly. On the bright side, they had no debt after the initial hit. They were like clean slates for investments and some had a decent soviet technlogical know-how available. Once they had hit the bottom, they had to go up. Greece today, for whatever reasons you like, is in a death spiral, which is scaring investors away. If some company has been in the bad Greece for the last 30 years and suddenly decided to leave while the "cure" has begun, labour cost drops, reforms are taken, etc, there MUST be a cause! I am not asking why new don't come. But if one could live in Greece in the mad situation for many years and now that things have been made more profitable for them, they leave, then there is something wrong…Before you start running and dreaming of a greek Bavaria, you first have to get out of the operation table. Greece is still on the operation table, in semicomatose condition and getting worse. A comatose patient can't get up and run. First he must able to get out of the table.As things stand now, Greece will keep bleeding for quite a while. I hope the people will be asked sooner or later, whether they want to change doctor or not.Bandolero.

  7. Anonymous says:

    “We knew at the fund from the very beginning that this program was impossible to be implemented because we didn’t have any — any — successful example,” said Panagiotis Roumeliotis, a vice chairman at Piraeus Bank and a former finance minister who until January was Greece’s representative to the International Monetary Fund. Because Greece is in the euro zone, he noted, the nation cannot devalue its currency to help improve its competitiveness as other countries subject to I.M.F. interventions almost always are encouraged to do.At the same time, Mr. Roumeliotis and others note, the troika underestimated the negative effect its medicine would have on the Greek economy.“The argument that is used usually by the troika in order to criticize Greece — and to ignore their mistakes — is that the deep recession is because of the nonimplementation of the structural reforms,” Mr. Roumeliotis said. While Athens has fallen woefully short on that front, he conceded, the bigger problem is that the severe cuts contributed to the downward spiral by decimating economic demand within Greece.“There was the moral hazard idea: ‘We can’t give Greece money too cheaply,’ ” Mr. Papandreou said. “There was a sense: ‘Punish them. We have to be careful that if we make it too easy for a bailout, others will want similar things.’ ” doesn't come as a surprise.Back at the beginning of the program, i had read at least 2 articles saying that the IMF, in particular Strauss Kahn, was in favour of a "standard" IMF full program, which i think was 6 years. Exactly, in order to avoid these huge cuts so quickly that crippled every sector of the economy. But, Mr. Papandreou narrates the rest of the story.This is no complaining, Germany had the right to do whatever she wished, it was Mr. Papandreou's job to say "such a program has never been implemented in world history, not even by Germany, Mrs Merkel, so either you give me another or i cut my losses now and we all pay our damages" and like his father, be prepared to face the political conseguences of his acts.What i can't stand, is having every day 2-3 Germans, complaining about how come Greece missed targets. They NEVER said a single positive thing. 5% reduction of deficit in 1 year, is european record. In OECD Greece is 1st in reform ranking. All this while impossible to devaluate. But reading german press or politicians, it seems that Greeks have been under the sun waiting for the deficit to come down on its own…All i can say as a Greek, is to wish for Germany, to one day come to the situation of Greece and someone save her under the same conditions.For Greece, despite my impulse to default within the euro and stay there only so that we can drain the nervers of Mr. Sinn and Mr. Ressler, i hope the greek politicians have the decency to make referendum (without Mrs. Merkel imposing the question this time), because what is happening now isn't what people voted in May and people have been lied enough to this day, things can become explosive with all the young angry.But, as i said again, i am now doing circles, having exhausted all i had to say.Bandolero.P.S:- PSI: the biggest ever private haircut that didn't deliver the target of any haircut.- Titanic: the biggest ever transatlantic that didn't deliver the purpose of any passenger ship.

  8. kleingut says:

    I liked "Kreiskandreou"! They, indeed, must have been similarly charismatic leaders. As a young person, I was captured by "Kreisky and his team" who were going to bring Austria into an entirely new age of enlightenment. Running the national debt from near-zero to now over 70% of GDP helped, of course, to paint a picture of an unbelievably good tomorrow. Whether the generation of our sons will see it the same way remains to be seen. The debt capacity is the "free lunch". Once it is used up, one has to start paying for one's lunch.

  9. Anonymous says:

    In Greece it was similar. Greece had just recently been out of the junta and the KKE was legalized, so there was a feeling in the people for something new. Papandreou exactly came at the right moment and won with the motto "Change!" (exactly what people wanted). But it was the wrong change… Although he was very smart and he tremendous at political plays. Even when he was very ill, having done heart surgery, he managed to kill a "coup" of his potential successors, in the open, during a PASOK's meeting. While they were regarding him as "dead and burried", he managed to turn the tables on them and remained undisputed leader till his death. A wasted talent.It's not just the economic damage, it's also the mentality damage he did. For example, the golden wages for pubblic enterprise workers, where a high school educated electricity worker was getting double the money a high school professor would get, started in his period. Also, the notion of welfare state, which nobody dares touch today. He started putting small health centers in every 2000 people town. Even after his death, this was now "the normality", everyone was asking one.The problem is exactly, not the debt itself, but WHAT you do with that debt. Papandreou didn't do anything productive for the economy with it. On the contrary, by letting trade unionists go wild, as opposed to the previous period, he managed to make investors away. For example, greek ship magnates used to repair their ships in Greece. After a million strikes that lasted months, they left. This tollerance started in Papadreou's period, where if you were trade unionist you were often more powerful than a minister.Papandreou was better in foreign policy affairs. He had anticipated even the legalization of the PLO in Palestine (there is an Andreas Papandreou square somewhere, named by Arafat himself) and the restoration of western ties with Ghaddafi (for the time it lasted). For example, thanks to his good relations with the "villains" of the time, he mediated the deal between France and Ghadaffi about Chad, in Elounda, Crete,1984 Arafat, he was the only western leader to be receiving him officially, with honours of state leader. Arafat has sometimes flew to Athens to attend PASOK's summits. although he didn't shut off all US bases, he did shut some and restrictred others. If i am not mistaken, today, the US has no basis of her own in Greece. They are concessions of use, on property of greek army bases(for example Souda Bay which is the main US base, is technically under greek law and property) or NATO bases. Of course all this didn't make him popular in the US, there are many declassified documents that prove it, but he managed to deal with that too. He didn't cut all ties, but he used to counterbalance with other ties too. For example, in his first big purchase of fighter aircrafts, he split the deal 50-50 between USA and France, in order to have a 2nd source of procurement, in case the Americans decided to "punish" him by embargo or else.Bandolero.

  10. Anonymous says:

    Τhis is another Kreiskandreou's invention in 1984. The "K.A.P.I.". Places for entertainment and socializing for people over 60 years old. These in Greece were legendary for "tavli" tournaments everyday between elders, drinking coffee. time they were improved with visiting doctors, physiotherapists, etc.Even today, if you walk in a KAPI, you have good chances to find somewhere a Papandreou's portrait.This alone had given him loads of votes from the elder, the KAPI were hugely popular.Bandolero.

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