Monday, 28 November 2011

Crunch Time for the Euro?

This time it looks like it is serious.  The recent sharp rise in borrowing costs for all Eurozone countries, even Germany, has finally exposed just how bad the situation has become.  Rising borrowing costs and austerity induced recession is pushing the Euro to breaking point.  There is simply no way that Italy and Spain in particular can survive with these high interest rates.  Sooner, rather than later, both of these countries will need to apply for life support from the EU and the IMF or face immediate default.  
Alas for both Spain and Italy there is no more money in the kitty.  Neither the EU nor the IMF has the kind of money needed to support either Spain or Italy, never mind both at the same time.   At this time of crisis, urgent measures are needed, and fast.  Unfortunately the EU is pretty much institutionally incapable of acting urgently.  The solutions not just for Italy and Spain, but for the whole Eurozone, are by now very clear.  They just need our leaders to recognize the inevitable and act accordingly.  This however will be very difficult as both Angela Merkel and Nicolas Sarkozy have been so outspoken in opposition to almost all the necessary changes.  They will have to be prepared to eat rather large doses of humble pie very quickly if the Eurozone is to have any chance of survival.  
The outline of the solution comprises three inter-related parts, which need to be put in place pretty much simultaneously.  The first and most urgent of all is to give some relief to Spain and Italy.  This can only be done in the short term by the European Central Bank (ECB).  All the ECB has to do is to act like all other central banks and be the lender of last resort for Eurozone governments in difficulties.  The ECB simply announces that it will buy all Spanish and Italian government bonds at a lowish interest rate, say 3.5%  To do so it will print as many Euros as it takes.  This would immediately end the pressure on all Eurozone countries.  If this was to continue for ever then this policy would lead to higher inflation.  But in the current situation with low underlying inflation and recessions on the horizon, rising inflation is the least of our worries.  This action can be taken very quickly and really only needs the agreement of Angela Merkel, who to date has adamantly refused to countenance such action by the ECB.  Perhaps the threat of the collapse of the Euro will concentrate her mind wonderfully.
The second part of the equation relates to the need for some Eurozone countries, read Italy, Spain, Portugal, Ireland and Greece, to get their respective houses in order, so that they do not face such severe difficulties in the future.  For not unreasonably, Germans and others are a bit reluctant to support countries in trouble unless they can be assured that they will take the necessary measures to get their public finances in order and to make their economies more competitive.  What this crisis has brutally exposed is that though the Eurozone has a common currency it does not have a common state.  It is most unlikely that the Eurozone countries will suddenly agree to set up a joint Federal state à la USA.  However all the talk is of the need to create a Fiscal Union.  This is where things begin to get a bit hazy.  In the first place such a development will take a great deal of time.  It will require a new treaty, which may or may not involve all 27 member states in the EU.  In the case of Ireland any new treaty would probably have to be supported by the electorate in a referendum.  
There is also the tricky matter of just would a Fiscal Union involve?  At the moment it seems to mean that each country in the Eurozone will have to send its budget to Brussels to be scrutinized and approved or rejected by some new supranational Eurozone body.  If rejected the member state would have to revise its budget in line with the changes proposed by this new body.  It the member state refused it would be fined.  Nice in theory, but can anyone see this really working?  If Italy, say, refused to change its budget proposals on the grounds that it would cause too much suffering for poorer Italians, and also refused to pay any fine, would the rest of the Eurozone really force Italy out of the Euro?  In which case it could probably do so now.  
For a Fiscal Union to be credible - to the markets that is - then it almost certainly needs some kind of common Treasury, which would be responsible for most taxation and most government spending in all the Eurozone.  Not a very realistic outcome at the moment, if ever.  Something needs to be done though, if only to make it politically feasible for Angela Merkel to agree to the first proposal - allowing the ECB to buy up government bonds.   She needs to be able to convince her fellow Germans that there will be no backsliding by other Eurozone countries.  The paradox here is that while Germany has been historically quite open to this kind of increased federalism, it is France which has opposed such a loss of sovereignty.  A bit of humble pie for M. Sarkozy to eat.
The final piece of the jigsaw is to get some renewed growth in the Eurozone, in particular in Spain, Italy, Portugal, Greece and Ireland.  Quite how this can be done while the powers that be are still in thraw to the mantra that austerity and ever more austerity is the answer, is not at all clear.  However if Germany does not agree to the above changes to the remit of the ECB, then all the rest becomes academic and very quickly too.  Wolfgang Munchau has a very good piece in the FT in which he reckons the Eurozone has at most 10 days to avoid a rather messy and expensive collapse.

Thursday, 24 November 2011

Satyagraha from the Met

This was the latest in the live opera relays to be shown at the DCA in Dundee.  And a most unusual opera it was.  The outline of the opera was not very encouraging, rather intimidating in fact.  How about this - an opera with no dialogue, just adaptations from the Bhagavad Gita, the hindu religious poem.  All sung in Sanskrit and without subtitles!
Yet this was a most enjoyable evening.  The opera is an early work by American composer Philip Glass and covers the experiences of Mahatma Gandhi in South Africa.  It traces his transition from a European style lawyer to the dhoti dressed leader of a non-violent protest movement.  It does this through seven tableaux, each representing an important part of Gandhi’s development. 
Much of the attraction of the opera comes from Glass’s music, which is a powerful mix of vibrant, repetitive rhythms and some tender sequences.  Glass’s repetitive minimalist music is perfect for this opera which features lots of hindu chants.  The main singers were all terrific, with Richard Croft as Gandhi.  At times the music and singing just soared in a pulsating crescendo, with the sopranos dominating.
What makes this production - a joint one with ENO - really impressive is the staging.  The main raw materials for the set were corrugated iron and newsprint.  Well probably not corrugated iron, but something which looks like the stuff.  This was used to form the backdrop and changed to represent different urban scenes.  The newsprint was everywhere - on the floor, held up by actors, hanging down from buildings and even crumpled up into balls.  To augment the singers and chorus we had a puppetry group - the Skills Ensemble - to provide background action which helped to make sense of the different tableaux.  This included giant puppets and a couple of acrobats on stilts.  Everything was very bright and colourful.  
Though there were no subtitles, every so often some text illuminating the situation would appear, sometimes flashed onto newspaper sheets, and other times on the background walls.  So we were not completely in the dark.  However the music, the singing, the set and the puppetry all combined to ensure that the audience was spellbound from first to last.  Not an opera I would normally have gone to, but as part of the season ticket, I went and am very glad I did.

Monday, 21 November 2011

Does the Left have a Future?

The recent election in Spain has only served to confirm a trend that has been apparent for a number of years now.  The collapse in votes for the the Socialist Workers Party (PSOE) and the left in general mirrors that in other countries.  Something similar happened in the UK at last year’s general election.  According to one of the Spanish newspapers 24 of the 27 countries in the EU now have right of centre governments.   This might appear to be a ringing endorsement of the right, but this is not necessarily so.
In most cases it is more a case of throwing out the incumbents and giving the other lot a chance.  Without it must also be said any great enthusiasm on the part of the electorate.  Certainly in Spain the victorious People’s Party (PP) offered no new thinking about how to combat the crisis.  Indeed by all accounts they offered no ideas at all.  The Socialists were rightly blamed for failing to do anything about the crisis and were kicked out.  But few Spaniards are much enamoured with the PP.
With all these right wing governments in power you would think that there should be some kind of consensus about how to deal with the crisis.   But this is manifestly not the case.  There is little agreement among the various governments and even the much vaunted Franco-German duopoly seems to be further apart than ever on ways forward.
It must also be pointed out that in the elections to come over the next two years or so, in France, Italy and Germany there is every possibility that the left in some form will be returned to power.  However if this does happen it will be more a result of the unpopularity of the incumbents than anything positive the left has to offer.
For this is the key question for all those on the left of the political spectrum.  What does the Left have to offer?  Does the Left have any kind of coherent story to tell about what caused the crisis and how to get out of it?  It appears not.  Certainly in the UK, Labour is still pretty much stuck in the by now widely discredited neo-liberal strait-jacket.  All it offers is a bit less in the size and pace of the cuts.  It remains to be seen whether François Hollande and his team can come up with something more convincing.
A further question is what is the Left now anyway?  Apart from the traditional big parties, who all contributed in one way or another to the crisis, who else is around on the Left?   There are plenty of parties out there, but few ever manage to win representation in Parliament.  In Spain the United Left (IU), a reincarnation of the once powerful Communist Party manage to win just 7% of the votes.  While other left parties, particularly in Catalunya, Galicia and the Basque country also won votes, the overall total cannot have much more than 10% if that.
This it has to be said is pretty pathetic.  Why has the mainstream Left been so willing to side up to bankers and big business in general instead of standing up for working people?  And why have the small, more radical Left parties completely failed to win the trust of more than a handful of voters?  It cannot all be down to the media.  Something very bad has happened to the Left.  The current situation should be a godsend to parties on the Left.  Falling incomes in real terms for most workers, rising unemployment and severe cuts to public services and welfare benefits should be ideal territory for the Left to work out a coherent programme to get us out of this mess.  The trouble with economic crisis is that too often in the past they have been used to further the nasty authoritarian right.  If the Left fails to rise to this challenge this could get ever nastier.
Just why the Left has failed to come up with a coherent story is most perplexing.  The evidence of what has happened over the last five decades is overwhelming and out there in the public domain.  The following example all refer to the USA, but the big picture is unlikely to be that different in the EU.  To get an idea of just how rich the super, super rich really are, Singapore based Wealth-X has usefully identified just who they are and how much wealth they own.  For the world as a whole, some 186,000 individuals hold $25 trillion in combined wealth.  In the USA, around 59,000 individuals hold a combined net worth of $7.6 trillion.  To which the only response is WOW!  Surely the Left can come up with some modest proposals to tax some of this wealth?  One such modest proposal can be found here.
Not only have the super rich become more and more wealthy, they have done so at the expense of the rest of us.  Hence the contrast between the 1% at the top and the 99% of us somewhere around the bottom.  An excellent article in Business Insider charts just how this inequality gap has developed over the previous decades.  The writer sums it all up rather nicely:  “The problem in a nutshell is this: Inequality in this country has hit a level that has been seen only once in the nation's history, and unemployment has reached a level that has been seen only once since the Great Depression. And, at the same time, corporate profits are at a record high.  In other words, in the never-ending tug-of-war between "labor" and "capital," there has rarely—if ever—been a time when "capital" was so clearly winning.”
If that is not a rallying cry for a Left alternative then the game is trully over.    There is a fairly simple story out there, but we need, desperately need a new generation of leaders to articulate this in a way that will win the trust and votes of the majority of the population.  Ed Milliband anyone?

Thursday, 17 November 2011

Recent Reads - November 2011

I have been quite busy reading wise recently and have managed to include some new authors this time around.  I am currently reading El Enigma de París by Pablo de Santis.  This is my second book in the Ficciones Argentina Reading Challenge.  El Enigma is a crime novel, but rather unusual in that it features 12 Detectives.  They form an elite group of detectives from all over the world and meet up in Paris 1898 for the Great Exhibition.  Their founder, from Buenos Aires, cannot attend and sends his young assistant instead.  It is this assistant who narrates the events.  It is beginning to get very interesting as one of the detectives has been found dead at the bottom of the Eiffel Tower.  Who dunnit?
As usual my list includes a good number of crime novels.  One was by a new author for me - Johan Theorin who wrote Echoes from the Dead.  Theorin is from Sweden and this is his first novel which is set in the island of Öland off the east coast of the country.  It is a very sad and dark tale about the re-opening of the case of a young boy who went missing twenty years earlier.
A Death in Calabria by Michele Giuttari is the third crime novel I have now read by this Italian writer.  The first was A Florentine Death, followed by The Death of a Mafia Don.  All in fact heavily feature the mafia, though in A Death in Calabria it is the local variety - the ‘Ndrangheta.  Very matter-of-factly and sparsely written they are all terrific reads.  A common thread is provided by Chief Superintendent Michele Ferrara who leads the investigations in all three books
Death of a Red Heroine is the second book I have read by Qiu Xiaolong, a Chinese writer who now lives in the USA.  This is in fact the first in the series which features Inspector Chan of the Shanghai police.  Here he has to find out who murdered a beautiful national model worker.  This brings him into conflict with the higher echelons of the party.  Set in 1990 this is not just a good crime mystery but a good insight into the recent history of China.  
I have also managed to sneak in a couple of audio versions of crime novels.  The first was About Face by Donna Leon, another in the Comisario Brunetti series.  Though set in Venice, this tale spreads far and wide and has some similarities with A Death in Calabria.  Once again the mafia are involved as is the illegal trafficking of toxic waste.  The other audio novel was Dark Water by Caro Ramsay.  Another very dark tale of murders most foul.  Not to mention a bit of police infighting.  Gripping and atmospheric and very well read by James MacPherson, who does a mean Liverpool accent.
Though crime as usual dominates, I did manage to read a couple of other novels.  All were by new authors to me.  The Coffee Trader by David Luss is set in Amsterdam in the mid 1600s and though the newly developing coffee trade is the background for the tale it is about a lot more.  The greed, gambling and corruption at the heart of the stock exchange reads like a pretty good description of what happens today.  The novel also touches on the complex relationships both within the Jewish community in Amsterdam and elsewhere and their relationships with non Jews.  The heart of the story though is about trust and betrayal.  
Pereira Maintains by Antonio Tabucchi.  This was published in Italy in 1994, though the story is set in Lisbon in 1938.  Portugal is now a dictatorship run by Salazar, while Spain is in the throes of its civil war.  Pereira is an elderly apolitical journalist who edits a literary supplement for a low circulation newspaper.  Not wanting to get involved in anything his life is changed by a chance meeting with a young man and the man’s girl friend.  Gradually Pereira grows in awareness of the ugly and murderous reality of the regime in Portugal.  The novel slowly builds up to an unexpected climax.  Great atmospheric descriptions of Lisbon and life in a dictatorship.
I listened to the audio version of The Eye of Jade by Diane Wei Liang.  Like Qiu Xiaolong, Liang is a Chinese writer who now lives in the USA.  This novel is set mainly in Beijing in the year before the uprising at  Tiananmen Square.  The main character is Mei a private detective.  Though she does work on a case, this is not really a crime novel.  Though there are plenty of crimes.  However the crimes have more to do with recent Chinese history and the cultural revolution than anything else.  The novel is mainly about Mei’s attempts to find out what really happened to her father, who was sent to a labour camp, where he died.  Who sent him there and why?  The book also deals with Mei’s difficult relationship with her mother and younger sister.  Ultimately a rather sad and poignant tale, with no happy ending.

Monday, 14 November 2011

Italy and Greece - Democracy in Danger?

The saying that a week is a long time in politics has never been better illustrated than by the recent momentous events in Greece and Italy.  In both countries we now have new governments in record time.  Or at least new Prime Ministers.  It is too early to comment on whether the new teams will make any difference to the travails of their respective countries.  We will need to wait bit longer than the proverbial one week for this.
However even before the new Prime Ministers were nominated, there has been a chorus of criticism from both the left and the right, condemning the changes as undemocratic.  The argument is that the new Prime Ministers are unelected and that Greece and Italy have been more or less told what to do by the EU.  Germany and France are singled out for particular blame in this respect.  Indeed some of the comments from the right have used this as an opportunity to express their hatred of almost anything to do with Germany.  It seems that the Fourth Reich is upon us.
I find all this most unconvincing.  In the first place it is not the EU which has caused the political crisis in Greece and Italy.  The crisis in Greece started over a year ago when the global financial markets lost trust in Greek government bonds.  In Italy the situation only reached crisis proportions recently.  But again it was the global financial markets which made the judgement that Italy’s debt was unsustainable.  The changes in government in both countries is all about trying to regain trust from these all powerful markets.  It is not the EU that has forced the changes.
The second point to make is that in both countries the formation of the new governments has followed the traditional constitutional norms.  The key point here is that both Papandreou in Greece and Berlusconi in Italy had lost their majority in Parliament.  Thus they had no alternative but to offer their resignations to their President.  In normal circumstances this would probably lead to elections.  But these are hardly normal circumstances.  So it is perfectly proper for the President to open discussions with the leaders of the political parties in Parliament to see if there is the prospect of forming a new government with majority support.
This is the third point I would like to make.  In both countries the new government will only survive if it wins support in Parliament.  There is no subverting the constitution.  It is also worth pointing out that this kind of thing is not that rare.  Especially in Italy where in the 60‘s and 70‘s governments often changed two or three times within the lifetime of a Parliamentary term.
I am most bemused by the claim that the new Prime Ministers are unelected.  This bemusement is partly due to the confusion about what the exact complaint is.  Since neither of the new Prime Ministers is an elected MP then one can say that at one level they are unelected.  However in the context of becoming Prime Minister this seems a very narrow objection.  Firstly because getting elected as a MP is only ever a matter for a very small part of the whole electorate.  It may be as small as a single constituency with only 80 000 electors.  In a PR system the electorate will be larger, but still only a small part of the whole country.  And in most PR systems it is your placement on the list that most determines whether you get elected or not.  Whatever the case it is hard to put forward much of a positive case that election by a tiny percentage of the whole national electorate is somehow a necessary precondition for becoming a Prime Minister.
I suspect that the main criticism is that there has not been a general election.  However this betrays a misunderstanding of how a Parliamentary system works.  Whatever the electoral system in use, an elector can only vote for either one candidate or one party.  In no way whatsoever can the electorate as a whole vote directly for who will be Prime Minister.  Only MPs can vote for who will be Prime Minister.  
This is most clearly seen in the UK.  At the last election no party won a majority of seats and none came remotely close to winning an overall majority of the votes.  So who precisely voted for David Cameron as Prime Minister?  Certainly not the electorate.  The only people who could vote for David Cameron were those who were registered in his constituency.  Not much of a popular mandate there.  Yet no-one, or virtually no-one questions his legitimacy or his democratic credentials.  In the previous Parliament we also had the case where Gordon Brown replaced Tony Blair as Prime Minister without a general election.  As the Labour party had a substantial overall majority in Parliament it could do this.  Parliament is supreme and sovereign.
It thus seems to me that there is no serious objection to the new Prime Ministers of Greece and Italy on grounds of a democratic deficit.  We await with a great deal of interest the actions of the new governments.  For the success or failure of Italy in particular will have repercussions for all of us, not just Italians.

Thursday, 10 November 2011

Is there a Euro Crisis?

One just cannot get away from the Euro and its woes.  Not a day goes by without more talk of gloom and doom.  Greece and Italy face the prospect of severe economic meltdown which could lead to an imminent break up of the Euro.  There has even been talk that Greece might have to leave the EU, not just the Eurozone.  Clearly something pretty bad is going on, but just how bad is it?  In this post I want to try and clarify a couple of questions about this ongoing crisis.  Not sure if I can come up with any answers.
There are two questions I find perplexing and rarely, if ever raised in the media.  The first is why are the undoubted difficulties of Greece and Italy presented as a crisis for the Euro and the Eurozone?  The second and related question is why has a crisis in private banking become a sovereign debt crisis?
As regards the first question, to get an idea of why all this talk of a crisis for the Euro is perplexing it may be useful to compare the situation in the Eurozone with the situation in the USA.  Now the two are not directly comparable, but they do have in common that in each there is a single currency - the Dollar for the USA and the Euro for the Eurozone.  There is also the fact that states in USA as in the Eurozone can get into financial difficulties, quite severe difficulties.  However in the USA there is never any suggestion that financial problems in say, California, will cause anyone to question the survival of the Dollar.  There is also no suggestion that California or any other state would be required to leave the USA.  
Jacques Melitz, professor of economics at Heriot-Watt University in Einburgh has written an article about the lessons for the Euro from the USA.  Talking about the situation in 2010, he writes:  “The crisis brought about dire financing problems for many lower-level government units in the US and some national governments in the Eurozone. According to the spreads on credit default swaps, California and Illinois now have a higher probability of non-performance on public debt than Portugal and Spain. This has been true for months. Consider next the difference in response in the States and Europe. Recently Illinois simply stopped paying $5 billion of bills. In June of last year California issued vouchers for wage payments. In addition, savage cuts in public services have begun and are now threatened in various states in difficulty, not only these two. Nevada has made startling reductions in spending on higher education and welfare. “
So, in the USA when a state engages in irresponsible fiscal conduct it is the creditors and taxpayers who bear the brunt of the consequences.  This is what was supposed to happen in the Eurozone.  At its creation the ECB was explicitly forbidden to act as a lender of last resort and instead it was to be the financial markets that would ensure that member states kept to the true and narrow when it came to national debt.  So why was Greece not just allowed to default way back in 2009?  It could still be in the Eurozone, but it would have had to take very, very harsh measures to bring its public finances into order.  Which it is having to do anyway.  Oh, and there is also the small matter that creditors - the banks and other financial institutions - would have to take a full haircut on their loans.  Not good for the banks.
What about Italy, the current country in the firing line?   There are a couple of points to make here.  One, though Italy’s national debt is pretty high at around 120% of GDP, it is not alone in this.  Japan’s national debt represents 220% of its GDP!  And yet Japan can borrow money at around 1%.  Second point is that Italy is not remotely a basket case.  As the Guardian usefully points out Italy is the eighth largest economy in the world and the fourth largest in Europe. Its gross domestic product (GDP) was over $2tn in 2010. Greece, Europe's other basket case, has a GDP of $305bn – an economy about the same size as Dallas, Fort Worth and Arlington in Texas.  The Italian government clearly needs to implement some serious reforms which will no doubt be painful for lots of Italians.  However the country can afford this.  And it is surely a matter for Italians how they go about sharing the pain.
Daniel Gros, Director of the Centre for European Policy Studies, Brussels, has an interesting article entitled What is holding Italy back.  His conclusion is that it is primarily the lack of good governance which is the biggest hindrance to economic growth.  As he puts it: “This implies that it will be difficult to organise a sustained effort to combat corruption, foster adherence to the rule of law, and improve the efficiency of the administration in general. However, progress on these fronts might in the end be more important for growth than the reforms now being imposed by the EU.”
My second question was How has the crisis become a sovereign debt crisis instead of a banking crisis?  For let us remember that this particular crisis originated way back in 2007 with the exposure of financial malpractice, irresponsibility and corruption by privately owned banks in Iceland, the UK, the USA and Ireland.  Note also that only one of these countries, Ireland is in the Eurozone.  Now one of the key virtues, supposedly, of capitalism and the free market is that there are winners and losers.  Captains of finance get huge, some would say obscene rewards, but this is because they take huge risks.  So, how come when it was time to take a loss, it was the taxpayers who had to step up to the plate?  In most countries the big rise in government debt is primarily due to bailing out private banks.  The ongoing saga of emergency loans to Greece, Ireland and Portugal is to prevent a default and the exposure of banks to meltdown.  Why?
Why are all countries and this includes the so-called virtuous ones like Germany, Austria and Finland, so frightened of bank failures?  After all the failure to tackle the root cause has already led to great suffering in Greece, Ireland, Portugal and Spain as a direct result of the harsh austerity measures.  This will almost certainly spread to Italy very soon.  However all these austerity measure just add to the downward pressure on the whole EU economies.  Growth for the Eurozone in 2012 has been downgraded to 0.5%.  This will have serious repercussions for Germany and the other so-called virtuous countries.  The loss of exports to the rest of the Eurozone can only lead to higher unemployment in these countries.  And all to prevent a collapse of private banks?  
A collapse of the banking and financial sector would be pretty calamitous, but it would provide the basis for governments to nationalize the banks and ensure that they were brought under proper regulation and control.  Finance is far too important to be left to bankers.  It would also ensure that all countries shared in the pain of rebuilding a sound and sustainable economy.

Monday, 7 November 2011

Photo of the Month - October 2011

October was quite an active month.  I managed to get in four walks and a visit to Edinburgh.  We also had some lovely weather during most of the month.  Which meant there was still lots of colour in the garden.  Here is our arrangement of pots outside the front door, followed by a lovely gentian from the Barnhill Rock Garden.

The good weather led to a few walks.  One was to Kinpurney Hill near Newtyle, not far from Dundee.  I did this with Elena and the boys.  It was a lovely, sunny, but windy day, and we had a great time.  The photos below show Elena and Liam going up the hillside, then all three at the summit beside the gothic looking tower.

Another outing took us to a jaunt up to the Hopetown monument just outside Cupar.  We did this with John and Diana on another lovely day.  The monument is a very large tower built in the 1820s which looks like this.
I also managed to get in a couple of hill walks with Frank.  One was to the hills at the Spittal of Glenshee.  Another fine day, though the upper slopes were by then already covered in snow.  Here is a view looking across the glen to the higher peaks.
The visit to Edinburgh was with Elena and the boys where we spent all the time in the re-opened National Museum of Scotland.  This has all kind of exhibits and is very child friendly.  Just about everything is included - from dinosaurs to racing cars.  One part of the museum is dedicated to the history of Scotland and this is particularly interesting.  Below is a specially made saltire which was taken into space by an astronaut with Scottish ancestors, followed by a wonderful example of the feathers from a peacock and then three bicycles from different eras.  The final bike is the one built and used by Graham Obree when he broke the world speed record.

I conclude with an unusual momento from our visit to Zermatt.  There I bought a bottle of white wine from the highest vineyard in Europe.  This is found in Heidadorf Visperterminen and is 1150 metres high.  I bought a bottle of Heida Visperterminen from the St. Jodern Kellerei.  I took it all the way back to Scotland and very pleasant drinking it was too.  Cheers everyone!

Thursday, 3 November 2011

Greece and the Euro - What Next?

The drama of recent days continues unabated.  As of this Thursday afternoon it looks like there will be no Greek referendum on the EU deal, but instead the main opposition party has agreed to support the deal in Parliament.  Much relief all round, at least in Eurozone countries and in the UK government.  It is far too early to know what will in fact happen and how this will develop over the coming days and weeks.  But it is useful to step back a bit and try and figure out what is really behind all this turmoil.
In particular it would be helpful to get away from simplistic blame games.   It is all the fault of Greece shout some, while others equally loudly yell that it is the nasty EU which is punishing the poor Greeks.  It would also be good to disentangle the situation in Greece from the wider problems faced by the Euro.
In the case of Greece it is important to remember that the crisis facing that country is primarily due to the mismanagement of its public finances.  The country faces deep seated problems which previous governments have avoided.  It is to the credit of Papandreou and his current government that it is the first Greek government to face up to this reality and to begin to take measures to modernise the economy.  This is something that Greece needs to do and there is no doubt that this will involve great suffering for many Greeks.  However there is no real alternative.  In passing it is worth pointing out that devaluation (leaving the Euro and going back to the Drachma) would make no difference to this.  Unless a country takes the necessary steps to modernise its economy, devaluation makes no long term difference to a country.
The big problem for the country is that this particular challenge comes at the same time as the rest of the EU and most of the world is in the midst of a massive financial and economic crisis.  The country has also been handicapped by the neo-liberal nonsense that currently passes for economic wisdom in most of the world.  More and more austerity measures simply prolong the suffering of Greek people and postpone any recovery.
The EU and the European Central Bank (ECB) have however done nothing to help Greece.  All this talk of Greek bailouts is just nonsense.  The so-called bailouts are designed to bail out EU banks, in particular those in France, Germany and Belgium, which are most exposed to a Greek default.  The EU lends money, at exorbitant interest rates, to the Greek government, to avoid a default.  The money does not go to helping Greek people, who are suffering from cuts in wages and pensions and high unemployment.  At the same time the EU and the IMF are forcing the Greek government to introduce even more drastic austerity measures, which can only lead to less growth in the economy and thus increase the likelihood of a Greek default.
This whole approach has of course clearly failed.  The latest deal included a 50% loss for the banks.  And most observers reckon that sooner or later Greece will have to default on the remaining 50%.  It is all so depressing.  The solution to the crisis, both in Greece and in the Eurozone as a whole is pretty clear.  Greece needs to have its debt written off and have access to new funds at affordable interest rates.  The country also needs to carry out fundamental reforms to its economy and public finances.  But if this is to work this needs to happen in the context of a growing economy.  Not just in Greece, but in the whole of the EU.  Something similar needs to happen in other Eurozone countries.  Not necessarily a write-off of debt, (Greece is the worst in this respect) but in access to funds at affordable interest rates.
This is not difficult to do.  If the ECB were to act as a normal central bank, like the Bank of England or the Fed in the USA, that is to be a lender of last resort, then the core of the crisis would disappear.  The ECB has the money, it can print as many Euros as it wants.  If it announced that the ECB would buy Greek, Italian, Spanish, Portuguese and Irish government bonds at an announced interest rate, (a low one) then the markets would cease to speculate against these countries.  Not only that, the ECB would probably not need to buy that many bonds.  Once the market realised that the ECB was serious the various bondholders would return to the market.  Where else are they going to put their money - under their pillows?
At the moment some EU countries are opposed to this, especially Germany, which because of its own history is still frightened of the dangers of inflation.  However in the present economic climate inflation is not on the horizon and the real worry is the risk of a deep seated recession.  There is also the problem of creating some kind of supranational governing body for the Eurozone.  It seems the governments concerned have agreed to move towards this, but probably need to to do so quicker.
In many ways all this suffering in Greece and elsewhere is so unnecessary.  The means are there to lessen the impact of reforms and to get the economy moving again.  The lessons are there for all to see going back not just to the great depression in the twenties and thirties, but all the way back to the 1820s as Brad DeLong explains here.  For more on the need for the ECB to act as a lender of last resort see here.