Internal deflation versus external devaluation

Mark Weisbrot/Rebecca Ray have published a most interesting analysis of the Latvian experience with austerity. Even a non-economist can easily understand their conclusion, which is: given the chance, internal deflation is a much more costly strategy than external devaluation when it comes to turning an economy around. In the case of Latvia, the loss of GDP and the length of the adjustment period were greater than in all other compared countries which applied external devaluation (n. b.: Economists have a way of presenting their cases in such a way that a non-economist finds them totally convincing. However, there is always an ‘on-the-other-hand’, also in the case of Latvia, and that other hand of Latvia is presented here).

Does all this have a bearing on Greece? No, it doesn’t if one follows the premise of given the chance. De jure, Greece did not have the chance of an external devaluation, something which is not provided for under the Lisbon Treaty (obviously, in practice no one could have prevented Greece from exiting at its own will).

The interesting thing is that Weisbrot/Ray’s argument is more or less the same as that which Prof. Hans-Werner Sinn has made very forcefully from the very beginning of the crisis. According to Sinn, the length, social cost and unfairness of internal deflation would become socially unbearable, thus Greece should exit the Euro, make its adjustment within a Drachma-environment (because that is easier) and then rejoin the Eurozone. Sinn has been crucified for that view; Weisbrot/Ray are being applauded for it.

Personally, I have always been and still am against the alternative of a Grexit. A Drachma would return the Greek economy to a standard which may very well have been totally acceptable to Greeks 30 years ago (high inflation, continued devaluations, expensive imports, cheap tourism, etc.). However, I simply can’t believe that the Greeks of today, particularly the younger generation, could be kept satisfied with ‘such a Greece’. If they couldn’t get in Greece the kind of modern life and living standards which they desire, they would simply leave the country, making Greece even poorer. Thus, the extreme adjustment pains of today are to me, theoretically speaking, nothing other than the price which one generation pays so that the next generation has a fairer chance in life.

Which brings me to those ‘adjustment pains’ (aka ‘austerity’). Papers have recently been full with articles about the ‘amazing mea-culpa from the IMF’. Had the IMF not made such blunders, austerity measures would have been much less front-loaded and the adjustment pains would have been a lot less severe.

That, of course, is assuming that it was the IMF’s program which determined the Fresh Money needs of Greece and not the other way around. For 2009, Greece had a primary deficit of 25 BEUR and by now that seems to have been brought to break-even. In between, roughly 45 BEUR had to be lent to finance the primary deficit. Had the austerity been less front-loaded, Greece might have required 65 BEUR (or more) to finance the primary deficit.

The resulting program was probably a compromise between what the IMF would have considered as ‘workable’ and the financing constraints imposed by the lending countries. And there is no question that the results of the program are terrible. Unemployment of 25%+ simply cannot be considered as the ‘normal price’ which one has to pay during an adjustment process. On the contrary, it is a threat to social peace.

Paul Krugman argues that it will take Greece many, many years (far too many years!) to again reach the GDP-level of before the crisis. Once again, the Nobel Prize Winner sounds absolutely convincing. But does he make sense?

Greece’s GDP was roughly 232 BEUR in 2008. Was that Greece’s ‘real GDP’ or was it a balloon blown up beyond tolerance and seconds before explosion? Is that really the right base for comparisons? Shortly after the crisis erupted in late 2009, pundits calculated that if Greece returned to the Drachma, at least 40% of GDP expressed in Euros would be wiped out. From that standpoint, Greece’s ‘real GDP’ of 2008 would have been closer to 150 BEUR than to 232 BEUR.

One must bear in mind the depth of the macro-economic mess which Greece was in by 2008. Here are a few facts:

* Exports were only 9% of GDP
* Imports were 27% of GDP
* For every 1.000 Euro of exports, 3.200 Euro were imported
* For every 1.000 Euro earned abroad, 2.900 Euro were spent abroad
* Current account deficit was 35 BEUR, or 15% of GDP
* Budget deficit was 15%

Yes, an IMF-expert analyzing from an office in Washington, DC, under no pressure to produce any ‘desirable results’, might have suggested that such a mess requires at least 10 years of reasonable adjustment to make the social cost bearable. At the same time, when looking at such a mess, lending countries probably felt that such a situation required a sledgehammer in order to justify the new lending to their electorates.

That brings me back to the million-Euro-question: What alternatives would Greece have had? What could Greece have done differently? What could Greece still do differently?

There is at least one thing which could have been done to reduce the social cost of the adjustment; in fact, to accelerate the adjustment in a positive way. Even a non-capitalist country like Cuba opted for that ‘one thing’ after they lost Soviet funding. One can only wonder why Greece as a country or the EU as a union have not been able to come up with the most obvious measure which becomes necessary when a country which needs foreign funding loses access to foreign credit.

That solution is foreign investment. Bear in mind that even Cuba, possibly the last communist stronghold in the word, realized that without foreign investment they would collapse. And Cuba attracted quite a bit of foreign investment, particularly Canadian investment in tourism.

It may well be that, beginning in 2013, Greece will transform into a success story for technocrats. For all we know, the primary balance of the budget might show ever-growing surpluses and so may the current account balance.

Yes, it could transform into a success story from that point of view but all of that could become totally immaterial if unemployment stayed around 25%, or even increased towards 30%. Such levels of unemployment totally thin out the social fabric. It may never come to an explosion or it may. If it does, it happens quickly and irreversibly.

The formula is quite simple: no new employment without new investment and no new investment (particularly foreign investment) unless specific measures of promotion are taken. Foreign investment is not only important in terms of the funding it brings but also, if not even more important, in the context of know-how transfer from abroad which comes along with it.

The more I read about the Cosco-experience in Piraeus, the more excited I get about it as a prototype for successful foreign investments. Cosco is a large foreign investment. There may not be too many in that category. Greece has to go for an industrial ‘Mittelstand’, i. e. many new investments, albeit smaller ones, all over the country.

“One little Cosco a day (or a week…) would keep many problems away!”

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"Boroume!" – Or as Obama would say: "Yes, we can!"

It is amazing what comes up when one begins digging in a certain direction! I had written a post about the EU Task Force which triggered feedback that not only foreigners have the wisdom required to improve Greece. Instead, a lot of wisdom resides within Greek brains and the example of Despina Tomadaki came up. That, in turn, led to reference to “Boroume”, a non-profit organization in Athens which organizes the redistribution of superfluous foodstuffs. And that led to the mentioning of a Greek pharmaceutical company by the name of ‘Pharmaten’ which seems to be a prototype of modern business activities which Greece ought to become engaged in.

To me, “Boroume” is the best example of what personal initiative can accomplish. And, very surprisingly, the video which ARTE made about it references a number of other, similiar non-profit aid initiatives which are being undertaken in Greece. Below are a couple of articles about “Boroume”:

HuffingtonPost, February 15, 2012
HuffingtonPost, December 12, 2012
Ekathimerini, October 27, 2011

I had an interesting experience when I opened the website of ‘Pharmaten’, the pharmaceutical company. I quickly double-checked the location of the company. Was that really a company in Greece? In a country about which one has heard nothing but the worst in the last few years?

Browsing through the website of ‘Pharmaten’, I couldn’t help wondering why there wouldn’t be more publishing about companies like that. I kept wondering how many other companies like ‘Pharmaten’ might exist in Greece. Or, even more importantly, how man new companies like ‘Pharmaten’ could be founded in Greece so that economic growth is generated and employment is facilitated?

The Kennedy’s used the following slogan in their political campaigns: “Many people look at things as they are and they ask ‘why’? I like to dream of things how they could be and I ask ‘why not’?”

Or as Barack Obama continued to exclaim during his first campaign: “Yes, we can!”

Or as Boroume says in their company’s name: “Boroume!”

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A toast to Despina Tomadaki & Co.!

A reader who comments under the name of ‘Canutely King’ wrote to me the following: 

This is the sort of thing that drives me to despair. The waste management ‘idea’ didn’t originate from McKinsey’s or the TGFR in 2011/12. Instead it came from an employee of the Greek Ministry of Finance (nee Economy) around 2008, or even earlier. Of course, similar projects have been done long before that in other countries but for Greece, Ms. Tomadaki’s paper is the earliest I’ve seen.

Ms. Tomadaki presented another paper regarding the conduct of R&D in Greece to the 8th international Conference on Technology Policy and Innovation at Lodz, Poland in 2005. At that time she was working in the Laboratory of Industrial & Energy Economics, Department of Chemical Engineering, National Technical University of Athens. I found an EIB loan to a Greek Pharma firm a couple of months ago. The purpose of the loan was — R&D of course.

I get the feeling that whilst everyone is talking about what needs to be done, Despina Tomadaki is out there making it happen.

But will Despina Tomadaki get any public credit? Unlikely, unless you feel so inclined”. 

What had happened and who is Despina Tomadaki?

The Ekathimerini recently reported that the first waste management tender is expected to see conclusion next month via a private-public-partnership (PPP) and with financing from the EIB. The casual reader might think that this is one favorable outcome of ‘wise men and women of foreign descent’ who presently advise Greece, be they from consulting firms or from the EU Task Force (TFGR). Greeks on their own could never come up with such a brilliant idea.

Or could they? Canutely King discovered that this ‘brilliant idea’ was first presented by the Public Private Partnerships Unit in the Greek Ministry of Economy over 5 years ago. And the author was — Despina Tomadaki (who now works for the EIB).

One criticism of management consultants is that ‘they look at your watch to tell you what time it is’. There is a lot of objective truth to that. Every consultant that I ever worked with confirmed to me that the bulk of ideas which they bring to customers orginally comes from employees of those customers. The resources and potential for improvement are always there. They just need to be taken advantage of.

So, here is to the many Despina Tomadaki’s in Greek society who could and would contribute a lot to Greece’s turn-around — if they were only asked and recognized. Someone ought to start looking for the Despina Tomadaki’s!

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Make 2013 the ‘Year of the Task Force for Greece’!

From ‘EU Task Force’ to ‘EU-Assistance desired by Greece/Greeks’

A. Introduction
The ExecutiveSummary of the 1st TFGR Report is a very well formulated document which subtly caters to cultural and other idiosyncrasies of Greek society (example: “The Task Force is a resource at the disposal of the Greek authorities as they seek to build a modern and prosperous Greece”). Nevertheless, it is recognizable that it was primarily written by foreigners for Greece and not by Greeks for themselves. 
The entire conduct of Greece since the beginning of the crisis can be characterized as non-ownership. This inevitably translates into a perception on the part of the Greek people that “we have to do what they (the foreigners) force upon us!”
This also applies to the TFGR. As long as Greeks have the perception that the TFGR is something which EU-elites have decided to bring upon Greece, the TFGR’s success will be limited. It will face the risk of being perceived as a type of occupation force; perhaps as enforcers of Troika-measures; and those Greeks who cooperate with it may become seen as collaborators.
To start off, below are 3 suggested mental experiments.
B. Mental experiment 1 – Who is it that needs something from whom?
Suppose, back in 2009, Greek leadership, in an attack of self-recognition, had recognized that Greece was on the fast track towards becoming a failed state, doomed to remain in the status of a developing country unless some corrective action happened in a hurry. Suppose further that Greek leadership had recognized that the only thing which could prevent such a disaster would be a massive know-how transfer (‘development aid’) from the EU. Finally, suppose Greek leadership had decided to invite brainpower and talent from all walks of Greek life to put together a request for know-how transfer from the EU which would be so convincing that the EU could not afford to reject it.
That ‘application for know-how transfer’ would have represented a very strong desire of Greek leadership! Instead of trembling whether or not a next tranche would be disbursed, Greeks might have trembled whether they get the know-how transfer which they so urgently desired.
Interim finding: Something needs to be done so that the TFGR becomes what it is supposed to be (i. e. something which the Greeks desperately desire to have).
C. Mental experiment 2 – Why not Alexis Tsipras?
The TFGR is supposed to help Greek authorities as they ‘seek to build a modern and prosperous Greece: a Greece characterized by economic opportunity and social equity, and served by an efficient administration with a strong public service ethos’ – this comes out of the Executive Summary. The same intention, with some well-meaning interpretation, could come right out of the mouth of AlexisTsipras.
Suppose Alexis Tsipras discovered that the TFGR ultimately has the same thing in mind for Greece as he claims to have. Suppose further that Alexis Tsipras understood that the TFGR is the only way to achieve a ‘modern Greece’. And, finally, suppose that Alexis Tsipras would want to go down into history as the ‘father of modern Greece’. Would it not be logical to assume that Alexis Tsipras would travel Greece up and down to explain to Greeks that the TFGR is his own invention and that it is the only solution for a better Greece? Would it not be logical to assume that a majority of Greeks would become enthusiastic about the TFGR?
Before that would happen, would it not be logical to assume that established Greek politicians/parties would try to jump on the TFGR-bandwagon before Alexis Tsipras owns it altogether?
Interim finding: Something needs to happen so that the TFGR becomes perceived as something which every Greek politician wants to be the owner of (instead of only tolerating it as a ‘necessary evil’).
D. Mental experiment 3 – Success stories
The Executive Summary correctly stated that ‘some early successes are needed to build the momentum for sustainable change’. Suppose the TFGR had been all over Greek media in the last year with success stories. Success stories of how the potential of 9 BEUR in cohesion policy projects was being utilized. Motto: a ‘huge celebration’ every time a new project, however small, gets successfully under way. Suppose it would get so far that Greek media would continually question the TFGR what is holding up more projects and what could be done about it?
INTERIM CONCLUSION: It is possible to imagine, without too great an effort, that things could happen which would stimulate the sense of ownership on the part of Greece and Greeks. Without such Greek ownership, it seems impossible for the TFGR to achieve all the stated goals (that would be like McKinsey starting a consulting job without proper introduction and support from the customer’s management). Thus, a possible solution would be to find external catalysts (people and/or events) which would catapult the TFGR into the limelight which it requires and deserves.
E. Case in point – Cosco and the port of Piraeus
This seems to be a prototype-example of a successful foreign investment and it should urgently be marketed as such! Not only did a foreign investor pay a substantial amount of money to the Greek state for leasing half of the harbor; it also tripled the business volume in the first 2 years and is now investing 300 MEUR into an expansion which will create new jobs and entirely new logistics perspectives for Greece. The NYT described this as follows: “In many ways, the top-to-bottom overhaul that Cosco is imposing on Piraeus is what Greece as a whole must aspire to if it is ever to restore competitiveness to its recession-sapped economy, make a dent in its 24 percent unemployment rate and avoid being dependent on its European neighbors for years to come”.
Interim finding: Why does it take the NYT to make such a commercial for what Greece really needs? The TFGR could/should dress up and market to the public such an investment as the type of foreign investment that can be and will be excellent news for Greece! (and Cosco should be involved in that promotion). And the TFGR should present itself as the facilitator of many more such projects in the future.
F. Allies in the cause – Groups
It will not be enough for the EU to determine that Greece needs help to become a modern country. Unless Greeks themselves determine that, all efforts will be more or less futile. To promote the right kind of awareness, the TFGR should work through ‘allies’.
Let’s just identify 3 potential groups of allies: (a) media, (b) academia and (c) students.
It should not be too difficult to get the media involved. Not via press conferences! Instead, via something like ‘monthly information afternoons’. A more or less structured event where attendants get meaningful information and some food or drinks to loosen the atmosphere. A good keynote speaker would be useful. Above all, they should be involved by being asked to fill out questionnaires, make proposals, etc. If such afternoons go over well, a sense of shared mission might develop over time.
A similarapproach could be applied to the academia (university professors, etc.). And through the academia, one could get through to the students.
It should be easy to get students, particularly students of economics, excited about the activities of the TFGR. And one should offer such students opportunities to involve themselves on a voluntary basis. The typical thing would be to have a list of projects on hand which could be assigned to teams of students who are interested to participate. As an incentive, one could offer that the best projects submitted will be awarded a prize (perhaps personally handed over by some visiting EU-official).
Interim finding: The point of all this is to create momentum and excitement.
G. Allies in the cause – Individuals
The TFGR should attempt to attract the support of key public personalities as champions of its cause. One example which comes to mind would be Peter Economides (I take him as an example because I have read his writings and seen some of his video presentations).
Peter Economides is a man who has a way with words and who is a charismatic communicator. If he would talk about the TFGR in similar fashion as I have heard him talk about new branding for Greece, there would be enthusiastic followers all over. But first he himself would have to be made enthusiastic for the TFGR.
The same would really apply to other personalities who enjoy public recognition and respect, be they artists or whatever. One could even imagine that a testimonial campaign in favor of the TFGR might bring some benefit.
INTERIM CONCLUSION: Without external catalysts (people and/or events), it will be difficult, if not impossible, for the TFGR to catapult itself into the positive limelight which it needs to accomplish the desired impact on Greece. The common premise should be that prominent individuals support the TFGR on a voluntary basis, i. e. out of conviction and not out of material interest.
H. Working with public administration (WWPA)
I argue vehemently that it is not possible to change, in a sustainable way, a large social system like a public administration solely by implementing new processes, training the people and by perhaps appointing a few new managers. If there are no accompanying measures, there will be significant passive resistance to change which will offset many of the reform benefits.
I differentiate between Hard Facts and Soft Facts. By Hard Facts, I mean things like processes, flow charts, job descriptions, interfaces, etc. By Soft Facts, I mean tools which affect cultures and attitudes (TQM, change management and perceptive communication techniques, etc.).
My argument is that the Soft Facts have to prepare fertile ground so that the Hard Facts can be put to successful use!
I. WWPA – Third-party (neutral) evaluation
The process of transmitting know-how from the ‘expert’ to the ‘student’ must be continually checked and evalued by a neutral third party (an ‘observer’) to make sure that the process is indeed working. An elite French civil servant might think that he has just passed on the greatest wisdom to a Greek civil servant without realizing that he has perhaps reached the ears, but not the mind and heart of the ‘student’. A Greek ‘student’ may, without noticing it, turn off the teacher’s motivation by continually acting like he knows everything already, anyway. Above all, they may not be dealing at eye-level and without that, the relationship will not work well.
The ‘observer’ would act as a coach who makes sure that both sides are on the same wavelength; who recognizes any need for improvement; who organizes on a monthly basis feedback sessions between ‘teacher’ and ‘student’; etc.
J. WWPA – Selection of counterparties
It is imperative to have a strong representation of ‘practitioners’ both among the ‘teachers’ as well as the ‘students’. It is much easier to establish shared wavelengths among ‘practitioners’ than among ‘elitist technicians’ (who may focus on outsmarting one another).
‘Teachers’ should not only be selected on the grounds of their technical qualifications but, even more importantly, based on their ability to communicate well and collegially.
Among the ‘students’, it is important to open this process also to people on the lower end in the hierarchy, particularly to motivated, impressionable and enthusiastic young people (‘little heroes’).
In any group there are likely to be one or more ‘leading steers’, that is people who can sway group opinion in one direction or another. Particularly ‘observers’ should look out for those ‘leading steers’. If they are positively-minded, they should be moved into the limelight. If not, they should be neutralized.
It may be necessary from time to time to set an example of harsh measures so that the group can get back to order. If so, that measure has to be really harsh and symbolic (disciplinary action) to get everybody’s attention back into the right mindset.
K. WWPA – Verification
A perfect example would be where a ‘teacher’ explains a new process, where the ‘student’ understands it but turns around and suggests even an improvement to that process. That would be a ‘home-run’. With some creativity, one can actually ‘manufacture’ such home-runs a bit so as to provide for more frequent experiences like the above.
In any event, there must always be verification that things have not only been ‘learned’ but also ‘understood and absorbed’. To think back of my Latin classes in Gymnasium: my teacher should not only have checked that I translated the Gallic Wars perfectly into German but he should also have checked whether I had learned what happened during those wars.
L. TFGR – Internet presence
I could not find any internet presence of the TFGR. In general, it is not good enough to do good things; one also has to talk about them in order to create momentum and to involve people.
There are sites like Branding Greece, Greece-is-changing, repower Greece or Invest-in-Greece whose common denominator is to create awareness. The TFGR should consider a similar presence. In fact, it might consider assuming the lead among all such internet presences promoting a ‘new Greece’.
Blogs, twitters: there are roughly two dozen serious and competent bloggers/twitters who focus on Greece in English and who have influence. They cover the political spectrum from The Left to the center-liberal. Over 90% of their postings relate to Troika-measures and debt issues. In other words, they focus on the ‘derivative’ of the problem. Hardly anyone focuses on how the Greek economy could be gotten into shape, which is the ‘underlying’. My point is that playing around with the ‘derivative’ will not solve anything unless the ‘underlying’ is fixed.
The TFGR should capture the attention of these bloggers/twitters. If the latter became as involved with TFGR-issues as they presently are with Troika/debt-issues, life would be perfect for the TFGR.
The effort required to accomplish the above would not be very significant. And, of course, one should also work on something to reach Greek-speaking bloggers/twitters.
M. TFGR – Organizational positioning
It would be interesting to make a survey among Greek parliamentarians and members of government checking who knows what about the TFGR. It would be particularly interesting to learn who knows which minister is responsible for the TFGR.
An outsider gets the impression that the TFGR is a Brussels-based effort which has an outlet in Athens and which interfaces with the Greek government. One would definitely not get the impression that the TFGR is a priority project of the Greek government itself.
Until the Greek government (I think it should be the Prime Minister) comes out and assumes loudly and clearly ownership of the TFGR, its effectiveness (and even its success) will be much lower than it could be otherwise. If the Greek Prime Minister does not take the initiative for that on his own, he should be ‘prompted’ to do so by EU-authorities.
In mid-2011, McKinsey came out with a very interesting Greece Ten Years Ahead report (which, not surprisingly, was more or less ignored in Greece). Beginning on page 27 of the Executive Summary, there is a section titled “A new National Growth Model”. In it, the establishment of an independent Economic Development and Reform Unit (EDRU) is recommended as an institution directly reporting to the Prime Minister. This EDRU would be critical to support the Greek state in coordinating, facilitating and monitoring the implementation of growth reforms.
I argue that the establishment of some type of this structure is imperative and I argue that the TFGR should assume an eminent role in that structure. I further argue that the personal responsibility for this project must be with the CEO of the government, i. e. the Prime Minister.
If the Prime Minister has trouble with that, one should prompt him by warning that Alexis Tsipras, should he become Prime Minister, would make it one of his first decisions to establish such a structure and he would be applauded for it!

Finally, to quote the OECD from its latest Public Governance Review of Greece: At the core of its administration, Greece desperately needs a high-level structure which has the authority, responsibility and capacity to lead the development of a strategic vision and direction for public policies, and the effective implementation of this vision in practice and over time.

N. TFGR – A ‘facilitator of foreign investment’
As important as shipping was to the Greek economy (and, to a lesser degree, tourism), remittances from Greeks working abroad (such as guest-workers in Northern countries) were by far the largest source of foreign funding from 1950-74. Since most of that money was spent on material and immaterial investments (such as education for children), it is fair to say that those guest-workers laid the foundation for Greece’s recovery after the Civil War.
Remittances are similar in nature to foreign investment. As remittances withered away in the 1970s, other sources of foreign funding replaced them. They came in the form of EU-grants/subsidies (about 200 BEUR until 2010) and foreign loans (a net increase of 283 BEUR from 2001-10). Very little came in the form of direct foreign investment.
Thus, it is clear that the driver behind the Greek economy has been funds flow from abroad. Since the Euro, satisfactory employment (more or less) could only be maintained because, on average, at least 30 BEUR flowed into the economy annually. Now that this funds flow has forcefully been reduced, the internal and external accounts are approaching a balanced situation but it has become clear that, when balancing internal and external accounts, the Greek economy cannot employ its people.
Thus, it is also clear that if Greece is to have a better future, the funds flow from abroad has to start up again and instead of taking the form of debt, it needs to take the form of equity. Without significant foreign investment, the Greek economy lacks a perspective. Foreign investment not only as a source of funding but, equally important, as a source of know-how transfer in all areas.
The TFGR should bring that message across to Greeks at every stop along the way.
O. TFGR – A ‘pillar of non-corruption’
It is clear that Greeks have lost confidence in their political leaders. The latest index by Transparency International shows that, since the crisis, Greeks perceive their elites to have become even more corrupt.
What would have been wrong if the journalist who had received a list with 2.000 foreign bank account holders, instead of publishing the list, had handed it over to the TFGR with the request to handle it in such a way as a ‘civilized’ country would do?
What would be wrong if the TFGR were to begin to show more ‘curiosity’ in some of the more obvious abuses which are characterizing Greek public administration all the time?
The TFGR would not be doing that as a ‘spy’ for the EU. Instead, it would be doing that as a great service to the Greek government and Greek people. And any Greek politician who sees that differently should speak out and explain to the Greek public why he thinks so. Not to mention the fact that making life harder for corrupt elites would make the TFGR quite popular on Main Street.
P. TFGR – What if nothing works?
What if those Greeks who are saying that ‘nothing will ever change in the Greek public administration and public sector!’ turn out to be correct? Well, that may happen but if it does happen, then even the TFGR won’t be able to do anything about it.

Happy New Year to the ‘Greek Task Force with EU assistance’!

Klaus R. Kastner 
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"The stench of dirty money"

This article from the Ekathimerini (by Nikos Xydakis) is just as much interesting for the many comments made to it as for its content. I recommend reading those comments. There is only one word to interprete the comments: rage. Presumably, justified rage.

Back at university 40 years ago, I remember taking a course in Political Science about the size of political elites. The course was taught by Professor Karl Deutsch, a Czechoslovak emigré; highly sophisticated; highly empirical in his research; in love with models explaining how politics worked.

If I recall correctly, one of his themes was that the number of people influencing the political fate of a society was actually a very minute percentage of society. Perhaps a few hundred people in a country of small to medium size.

Suppose that the number of people required to change the political fate of Greece would be around 1.000 (Deutsch would probably have argued that it is smaller). Is it possible to think that, in the entire Greek society, there are not around 1.000 people of competence, exceptional character and high moral decency?

I can’t imagine that there aren’t!

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Watch out for January 11, 2013 at 22 hrs!

I have a friend who is a Brit aged around 70 and who has worked in banking in about 16 countries. He is married to a Greek and has been residing in Greece off and on for the last 40 years and permanently for the last 10 years. He is one of those old-boy-guys who displays seemingly unlimited wisdoms on practically everything. I love to listen to his opinions.

Over the last few years, I have been incredibly impressed by his good judgement on Greek issues. I won’t say that he has never been wrong but it seems to me that he has almost always been right.

In June of this year, he told me that I should look out for Friday, January 11, 2013. Why? Because, he said, on that day Greece would announce its exit from the Eurozone. I downplayed his judgement by saying that anybody could predict a day but what I would want to know is the exact hour. That’s when he committed to 22 hrs on that day.

So here we go. The world did not come to an end on December 21. We’ll now see whether Greece exits the Eurozone on January 11, 2013 at 22 hrs.

My friend’s reasoning was interesting. Remember that in June of this year, everyone was predicting a Grexit within months; certainly before the end of the year. My friend argued that a Grexit would have to happen when nobody expected it.

He said that, by year-end, most of the tough decisions would have been taken. The negotiations with the Troika would be over; the overdue tranche would be disbursed; the fears of a Grexit would have died down; the Eurozone would have calmed down. Only, the Greek government would meanwhile have become convinced that Greece could not make it within the Eurozone.

Thus, the Grexit would be announced on the first possible date in 2013. It would have to be a Friday evening. Friday the 4th would still be in the holiday season, so that wouldn’t be a good fit. Friday the 11th would be the first ‘regular’ Friday in 2013.

So, as New Years’ Eve approaches, many people feel like making bets. If you believe what my friend is saying, bet on a Grexit on Friday, January 11, 2013 at 22 hrs. And even if you don’t believe it, place the bet anyway. If you win, everyone will consider you a genius and if you lose, no one will find out.

Except, don’t place that bet with me!

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Did they really know what they were doing?

This article from the Swiss paper TagesAnzeiger summarizes very nicely (mostly in German) the accusations which have been made against EU-leaderships many times, namely: they knew exactly what they were doing when they formed and shaped the monetary union; they knew exactly what the dangers were and — they ignored their own findings. The most shocking realization is that the authors of the Delors-report did not think that a monetary union would come into existence in the foreseeable future: The economic prerequisites for a monetary union that is characterized by immutably fixed exchange rates between the participating countries will probably not exist for the foreseeable future”.

The article quotes the Delors-report from 1989 as well as comments made to it from Karl Otto Pöhl (then the President of the Bundesbank) and Francois Mitterand. Let me just cite the most important quotes below. 

“If sufficient consideration were not given to regional imbalances, the economic union would be faced with grave economic and political risks”.

“This is especially important because the adoption of permanently fixed exchange rates would eliminate an important indicator of policy inconsistencies among Community countries and remove the exchange rate as an instrument of adjustment from the member countries’ set of economic tools”.

“A particular role would have to be assigned to common policies aimed at developing a more balanced economic structure throughout the Community. This would help to prevent the emergence or aggravation of regional and sectoral imbalances which could threaten the viability of an economic and monetary union”.

“Wage flexibility and labour mobility are necessary to eliminate differences in competitiveness in different regions and countries of the Community. Otherwise there could be relatively large declines in output and employment in areas with lower productivity. In order to reduce adjustment burdens temporarily, it might be necessary in certain circumstances to provide financing flows through official channels. Such financial support would be additional to what might come from spontaneous capital flows or external borrowing and should be granted on terms and conditions that would prompt the recipient to intensify its adjustment efforts”.

“Moreover, the fact that the centrally managed Community budget is likely to remain a very small part of total public sector spending and that much of this budget will not be available for cyclical adjustments will mean that the task of setting a Community-wide fiscal policy stance will have to be performed through the coordination of national budgetary policies. Without such coordination it would be impossible for the Community as a whole to establish a fiscal/monetary policy mix appropriate for the preservation of internal balance, or for the Community to play its part in the international adjustment process. Monetary policy alone cannot be expected to perform these functions. Moreover, strong divergences in wage levels and developments, not justified by different trends in productivity, would produce economic tensions and pressures for monetary expansion”.

“Rather than leading to a gradual adaptation of borrowing costs, market views about the creditworthiness of official borrowers tend to change abruptly and result in the closure of access to market financing. The constraints imposed by market forces might either be too slow and weak or too sudden and disruptive. Hence countries would have to accept that sharing a common market and a single currency area imposed policy constraints”.

The economic prerequisites for a monetary union that is characterized by immutably fixed exchange rates between the participating countries will probably not exist for the foreseeable future. Even among the members who form the nucleus of the exchange rate system, tensions must repeatedly be expected for the foreseeable future owing to differing economic policy preference and constraints as well as the resultant divergences in their economic development, which will make realignments in the central rates of their currencies necessary. Even within a common single market these problems will not simply disappear, especially seeing that this market will trigger additional structural adjustment constraints, the extent of which cannot as yet be fully assessed. For this reason, too, it will not be possible to do fully without occasional realignments in central rates for the foreseeable future. This indicates the necessity for further progress in the direction of greater convergence in a large number of macroeconomic as well as structural fields”.

“Apart from this, it should be made clear that monetary integration cannot move ahead of general economic integration, since otherwise the whole process of integration would be burdened with considerable economic and social tensions. Moreover, examples from history demonstrate that new nations did not confer a uniform monetary order on themselves until after the process of unification was concluded. Any durable attempt to fix exchange rates within the Community and finally to replace national currencies by a European currency would be doomed to failure so long as a minimum of policy-shaping and decision-making in the field of economic and fiscal policy does not take place at Community level. Without this prerequisite being met, a common European monetary policy cannot ensure monetary stability on its own. Above all, it cannot paper over the problems in the Community arising from differing economic and fiscal policies”.

“Isolated steps in the monetary field would overburden monetary policy in political terms and jeopardize the credibility of the process of unification in the longer run”. 

Karl Otto Pöhl commented as follows: “From the German point of view it is essential to ensure, in the discussions about the future design of a European monetary order, that monetary and credit policy is not geared to stability to a lesser extent in an economically united Europe than is the case at present in the Federal Republic of Germany”. And later in retrospect: “When the report was formulated, I did not think that a monetary union would become reality in the foreseeable future. I thought perhaps sometime in the next hundred years. I thought it was improbable that other European countries would simply accept the model of the Bundesbank”. 

Francois Mitterrand: “I consider it dangerous that the Central Bank, for lack of an appropriate political institution, assumes sovereign power. The common currency area is already a ‘German Zone’ but Germany has no authority over our national economies. With the new Central Bank, Germany would have that power” (Mitterrand later became a supporter of the common currency union). 

Final comment 
My previous understanding had been that only people from the outside, like Milton Friedman, had criticized the monetary union (sort of as a defender of American hegemony). As is apparent, EU-leadership itself voiced the very same concerns which Friedman had voiced. I previously thought that European elites had simply been too arrogant to listen to an American. Now I know that European elites were too dumb to listen to themselves.

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