The latest Eurostat release on inflation shows that the Eurozone, and the EU at large, keep flirting with deflation. This happens mostly because peripheral countries have near-zero inflation rates. Strikingly, no EU country had, in January, annual inflation rates above the 2% ECB target (Finland and the UK stood at 1.9%). Deflation is a problem for debtors, who see the real value of their debt increase. It is a problem for macroeconomic policy (in particular monetary policy). But it is also a problem for rebalancing. The imbalances that built over the period 1999-2007 show up in diverging inflation rates and labour costs. Take the former, from Eurostat data: Read More
Last week’s publication of a Lancet article1 on the effect of austerity on Greek public health made a lot of noise (for those who know Italian, I suggest reading the excellent Barbara Spinelli, in La Repubblica).
The Lancet article sets the tone since the abstract, talking of “mounting evidence of a Greek public health tragedy”. It is indeed a tragedy, that highlights how fast social advances may be reversed, even in an advanced economy.
Some time ago (March 2012) I had titled a post “Greek Tragedies“. Mostly for my students, I had collected data on Greek macroeconomic variables. I concluded that austerity was self-defeating, and that at the same time it was imposing extreme hardship on Greek citizens. Of course one needed not be a good economist to know what was going on. It was enough not to work at the Commission or in Germany… But the Lancet article also allows to substantiate another claim I made at the time, i.e. that austerity would also have enormous impact in the long run. It is weird to quote myself, but here is my conclusion at the time:
Even more important, investment (pink line) was cut in half since 2007. This means that Greece is not only going through depressed growth today. But it is doing it in such a way that growth will not resume for years, as its productive capacity is being seriously dented.
What makes it sad, besides scary, is that behind these curves there are people’s lives. And that all this needed not to happen.
I think it is time for an update of the figure on the Greek tragedy. And here it is:
I said in 2012 that investment cut in half spelled future tragedy. Two years later it is down 14 more points, to 36% of 2007 levels. I am unsure the meaning of this is clear to everybody in Brussels and Berlin: when sooner or later growth will resume, the Greek will look at their productive capacity, to discover it melted. They will be unable to produce, even at the modest pre-crisis levels,without running into supply constraints and bottlenecks. I am ready to bet that at that time some very prestigious economist from Brussels will call for structural reforms to “free the Greek economy”. By the way, seven years into the crisis, the OECD keeps forecasting negative growth together with unsustainable (and growing) debt.
I also added unemployment to my personal “Greek Tragedy Watch”: Terrifying absolute numbers (almost 30% unemployment overall, youth unemployment around 60%, more than that for women!). And absolutely no trend reversal in sight. A final consideration, related to the melting of the capital stock. How much of this enormously high unemployment, is evolving into structural? How many of the unemployed will the economy be able to reabsorb, once it starts growing again? Not many, I am afraid, as there is no capital left.
Not bad as an assessment of austerity… And yet, just this morning the German government complained for a very limited softening of austerity demands. Errare umanum est, perseverare autem diabolicum…
1. Kentikelenis, Alexander, Marina Karanikolos, Aaron Reeves, Martin McKee, and David Stuckler. 2014. “Greece’s Health Crisis: From Austerity to Denialism.” The Lancet 383 (9918) (February): 748–753. Back
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. Read More
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: Read more
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:
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
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:
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.
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.
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.