Cyprus. Been There, Seen That

A small country is on the verge of bankruptcy. It is so small that the amount of money needed to save it (17bn euros) amounts to less than 0.12 per cent of the eurozone GDP (no typos here. It is around 30 euros per European citizen).
Been there, seen that. Just three years ago in another small country, Greece. At the time, procrastination, self interest, ineptitude, unpreparedness, made the small problem become huge. And we are all still paying the bill. The Greek crisis management was so successful that our leaders are happily embarking in the same dynamics: improvised, dangerous, half-baked solutions, supposedly designed to avoid free riding (the protestant syndrome, once again) and in fact destabilizing the whole system.

There is no need for me to repeat what has been understood everywhere except, as usual, in Berlin, Frankfurt and Brussels: the tax on deposits breaks an implicit pact between governments and depositors, and fragilizes the banking systems of the whole periphery of the eurozone.

Bringing Krugman to Europe

Well, not him, actually (I wish I could); I need to content myself with his latest post on austerity. Krugman argues that austerity is happening (it is trivial, but he needs repeating over and over again), showing that in the US expenditure as a share of potential GDP is back to its pre-crisis level (while unemployment remains too high, and growth stagnates).

I replicated his figure including some European countries, and with slightly different data. I took OECD series on cyclically adjusted public expenditure, net of interest payment. This is commonly taken as a rough measure of discretionary government expenditure. I also re-based it to 2008, as most stimulus plans were voted and implemented in 2009. Here is what it gives:

IMF Schyzophrenia

I had already noticed that the IMF at times looks like Jekyll and Hide. But not to this point. Last time I cited a simple working paper. This time we are talking about the most important document produced by the IMF. Here are some excerpts from the October  IMF World Economic Outlook, released on Monday:

Time and Money

Thanks to the Financial Times of a couple of weeks ago, I have read an interesting paper on tax evasion in Greece. Interesting because it quantifies what everybody already knew: the Greek government is structurally incapable to collect taxes. The study estimates a lower bound of 28 billion euros of unreported income for Greece. As a consequence, the foregone government revenues amount to 31 percent of the deficit for 2009. We are talking about lower bounds here, so both figures could be substantially higher.

The excessive weight of the informal economy, and the inefficiency in tax collection had already been pointed out repeatedly, for example in the last OECD Economic Survey of Greece before the crisis hit (2009). A sentence of the accompanying Policy Brief best summarizes what we already knew before the crisis

The Strange Case of Dr IMF and Mr Troika

With Greece desperately trying to obtain more time to carry on its fiscal consolidation plan, it is interesting to read a recent IMF working paper on “Successful Austerity in the United States, Europe and Japan”. The study tries to assess how fiscal consolidation and the growth rate affect each other, in expansions and in contractions. I copied and pasted (from their page 7; I just suppressed a couple of technical points) the main results of the paper:

Explaining the Euro Problems in Six Minutes

Last week I had a short interview with France 24 in which I tried  to squeeze in just a few minutes  the contrast between the global imbalances view and the Berlin view.

Wait and See

In a moment of chaos, in which it is very difficult to even simply make sense of actual events, it becomes almost impossible to formulate forecasts. I would not be able to bet on grexit (or porxit, spaxit, itaxit, for that matter), in one sense or in another. I just wait and see.

A few things seem to be changing the broad picture, with a mix of encouraging elements, and added uncertainty.

Fact number one: The new French president is acting as a catalyst for those who are unhappy about German-imposed austerity. Yesterday’s informal council meeting, disappointing as usual, shows that Hollande has the strength to at least impose the discussion of his themes to reluctant Germans (for example the eurobonds). But it remains to be seen whether him and his newly found supporters will be able to force implementation of the measures they advocate for.

Greek Tragedies

I am preparing a class on the crisis, and for the first time I have put together in a single place the actual numbers that I discussed sparsely in the past. Taken all together, they are even scarier. So scary, that I want to share them.

On Wage Reduction and the Contract Between Workers and the State

My colleague Sezgin Polat, of Galatasaray University, has an interesting idea on wages and the burden of the crisis. All the more interesting, that just yesterday the ECB called for further wage flexibility, at a moment in which aggregate demand is despairingly low in the eurozone. Here is Sezgin’s proposal (I shortened it):

Austerity is not Enough

OFCE le blog has posted the English translation of an article I wrote with André Grjebine a few weeks ago, for the French daily Le Monde. We commented the Standard & Poor’s  downgrades, developing the points I had made here.

I maintain that the motivation of S&P marks a turning point in the debate on EMU governance. It was the first time that a major market participant explicitly challenged the priorities that the German leadership is imposing to Europe.

The current discussion on the Greek austerity plan shows that markets are joining those who preach to the desert.