The Question of Eurobonds—Posner

Several countries that belong to the Eurozone and thus use the euro as their currency are in peril of defaulting on their sovereign debt. (In fact Greece is certain to default.) If they default it will probably alleviate their economic woes, because their sovereign debt will (in a total default) be wiped out. They may not even have to pay high interest rates to borrow more money, because with their existing debt wiped out their ability to pay interest on new debt will be greater. Nations have defaulted in the past without terrible consequences; and the deeper the economic hole a nation finds itself in, the less costly default is. 

Still, these countries would prefer not to default. They would prefer to borrow at low interest rates. (Who wouldn’t?) They want the European Central Bank to buy their sovereign debt with bonds issued by the bank, bonds that these countries would pay back at their leisure. Naturally the stronger countries of the EU, especially Germany, do not want to throw good money after bad by lending on generous terms to the PIIGS (as they are no longer called in respectable circles—now they are called GIIPS, an acronym that is not be pronounced with a soft g). Instead they want to secure these debts by persuading or coercing the PIIGS to slash their government spending, so that their revenues, diminished by the worldwide depression though they are, will cover their debt service and thus stave off default. 

The PIIGS don’t want to slash their spending, and for good reason; the standard recipe for combating depression is to increase government spending. If consumers are reluctant to consume, and as a result production and employment fall, and with it borrowing and hence interest rates, government can borrow cheaply from the private sector, and it can use the borrowed money to stimulate production and employment. That was Keynes’s recipe for fighting unemployment, and it is a sensible recipe if the stimulus program is timely, well designed, and well executed. That’s a big if, but it’s unclear what alternative the PIIGS have. In the long run they could increase government revenues by a combination of tax reform, more aggressive tax collection, reduction of bureaucratic impediments to the formation and expansion of businesses, deregulation (especially of labor markets) and privatization, reduction of public employment, and shrinkage of entitlements programs. But such reforms would take years to bear fruit, and might be reversed at any time, and their short-term impact on the economies of these countries would probably be negative. The PIIGS, with the exception of Ireland, have very bad political cultures, and bondholders would be unlikely to trust the governments of these countries to make timely and effective reforms. 

At present the European Central Bank and the wealthy northern European EU members are in a game of chicken with the PIIGS. The former want reform and the latter want handouts. Games of chicken can end badly. This one would not, were it not for the fact that all the countries involved share one currency. Indeed, were it not for the single currency there probably wouldn’t be a game of chicken because, as Becker emphasizes, the single currency is preventing the PIIGS from devaluing, and devaluation is the standard solution to depression for a country that has a large external trade. By devaluing it reduces the prices of its exports, increasing demand, which in turn increases domestic employment because exports are domestically produced. At the same time, devaluation increases the price of the country’s imports, which reduces the demand for imports but increases the demand for domestically produced goods and services, as they are substitutes for imported goods and services. (A complication is that imports include inputs into exports, and so an increase in import prices will offset to an extent the reduction in the price of exports brought about by devaluation.) 

A common currency wouldn’t be a problem if it were easy to change currencies, but it is very difficult, especially when the country wanting to change its currency is economically weak. Devaluation by definition reduces the value of a currency, so anticipating that abandoning the euro would result in its replacement (in Greece, say) by a devalued local currency (the drachma), Greek holders of euros would be quick to exchange them for dollars or yen. The rate of exchange would be disadvantageous to them, however, and so there would be a net money flow out of Greece, making the country’s economic state even more desperate than it is. Moreover, the change in currency would affect not only sovereign debt, but all private contracts in euros as well, which would greatly impede the country’s foreign trade. And setting up a new currency takes time and cannot be concealed, so as soon as the setting up began, the run on euros would begin. 

What a mess! Which is why the wealthy eurozone countries are frightened by the prospect of some or all of the PIIGS dropping out of the eurozone and why therefore the PIIGS have some leverage in demanding handouts in exchange for promises (unlikely, in my opinion, to be fulfilled) of austerity and reform.

Comments

[TANSTAAFL]

Posner correctly observes that runaway government spending is at the heart of the PIIGS' current woes. The same is true of America, of course, or soon will be.

[Thomas Rekdal]

Among the numerous unknowns here, it only seems clear that there can be no resolution of the crisis without the cooperation of the Germans, and the Germans face an absolutely perfect dilemma. If they permit the ECB to essentially print money by buying the sovereign debt of the PIIGS, they may create such enormous moral hazards that any temporary relief is outweighed by an even greater crisis later. On the other hand, if the ECB fails to come to the rescue, the European banking system and perhaps the Euro itself may be at risk. And without the Euro, any resulting German currency would appreciate to a degree that would probably kill their export economy.

With every choice frought with peril and uncertainty, my guess is that the Germans will cleve to principle and insist that the ECB focus on price stability alone, the consequences be damned. But who knows? Since the future cannot be predicted, perhaps, as Judge Posner wrote in an earlier post, it is premature to despair. But this is pretty close.

[Cheap UGGS Boots]

There is something more to be of value—something I should find within myself—as peace of mind, patience, grace and being kind.

[Jack]

Absolutely cheap asset prices will work wonders...at some point.

[Cheap Moncler Sale]

The same is true of America, of course, or soon will be.

[Cheap Air Max]

All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it.

[Air Force One]

We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

[Christian Louboutin UK]

The bitter truth is that the employment prospects for a recent college grad are far more grim, especially full-time employment in their field of study.

[Air Max 2011]

The Occupy Movement and everyone else worried about earnings inequality should be emphasizing the need to find ways to encourage more high school dropouts and high school graduates to get the required background and study habits so that they can, and want to, continue on for a college education.

[Monster Beats Dre]

There‘s always going to be people that hurt you so what you have to do is keep on trusting and just be more careful about who you trust next time around.

[Monster Beats Studio]

As compared to the post-World War II era, Americans with high school diplomas today are much less likely to find manufacturing jobs, because there are 2-3 billion people in emerging economies with similar skills who are willing to work more cheaply in order to have a shot at attaining a middle class standard of living.

[Cheap Scarf Online]

Global demographics instruct that manufacturing job growth in nations with emerging economies will continue to outpace manufacturing job growth in America.

[Citizen]

While the "profligate" Greeks, Italians, et al. do have some responsibility, the common denominator is the German and French banks that loaned them all the money. Remember that the "profligate" Greeks are not responsible for the problems in Italy, Spain, Portugal, or Ireland. The same as your "profligate" neighbor who took out way too large a mortgage is not responsible for the collapse of our financial system in 2008.

[SteveA]

If Greece were to leave the Eurozone, the other PIIGS would be totally locked out of the public debt markets, and their wealthier northern neighbors would see their borrowing rates skyrocket (since the full extent of damage to their banks would be unknown).

This is why Sarkozy's and Merkels' "shape up or ship out" threats to Greece rang hollow (great for domestic consumption, but in reality toothless). And it's why all the talk of "fiscal discipline" for the PIIGS comes off as a variation on an old joke: borrow $100, it's your problem; borrow $100k and it's the lender's problem.

It is a complete mess. It's hard to come up with a scenario in which the wealthy north doesn't wind up subsidizing the PIIGS for years and years.

[Ugg boots clearance]

This is why Sarkozy's and Merkels' "shape up or ship out" threats to Greece rang hollow (great for domestic consumption, but in reality toothless). And it's why all the talk of "fiscal discipline" for the PIIGS comes off as a variation on an old joke: borrow $100, it's your problem; borrow $100k and it's the lender's problem.

It is a complete mess. It's hard to come up with a scenario in which the wealthy north doesn't wind up subsidizing the PIIGS for years and years.

[Timberland Boots]

If Greece were to leave the Eurozone, the other PIIGS would be totally locked out of the public debt markets, and their wealthier northern neighbors would see their borrowing rates skyrocket (since the full extent of damage to their banks would be unknown).

[Klaus Kastner]

A less sophisticated but common-sense-driven entrepreneur, when in trouble, analyzes which processes got him into trouble and tries to reverse them. Regarding Greece, this could work as follows (the suggested reversed processes are in brackets). What got Greece into trouble since the Euro?
1) Cause: an explosion of imports with the consequence of de-industrializing an economy which never had much of an industry to begin with. (Reversal: reduce imports by making them more expensive through special taxes and, parallel to that, substitute them with new domestic production). Strategy: stagger import taxes according to their importance to the domestic economy: 0% on essential goods; up to 100% on luxury goods.
2) Cause: domestic production has ceased to be competitive because of increased costs. (Reversal: establish a few Free Trade Zones, located near cities/areas with large unemployment, and implement there an internationally competitive business framework where new domestic production, at first primarily for import substitution, should be incentivated).
3) Cause: capital flight has drained the economy of financial resources. (Reversal: establish capital controls).
4) Cause: Greece has financed her current account deficit totally with foreign debt. (Reversal: substitute foreign debt with foreign investment).
5) Cause: Greece is a lousy place to do business. (Reversal: implement a new Investment Law offering investors in the Free Trade Zones exactly the kind of business framework which they desire and, since Greeks laws are possibly no longer trusted, have the EU guarantee compliance with the law).
6) Symptom: the budget deficit has exploded. Note that this pe se is not a cause. It is the result of government expenditures exceeding revenues.
7) Cause: the government has overspent? Wrong diagnosis! Greece’s government expenditures are about 50% of GDP which is quite acceptable compared to some other countries (53% in Austria; 56% in France). Wrong diagnosis leads to wrong medicine (such as cutting expenditures, above all during recession!).
8) Correct diagnosis: government expenditures are very unevenly and unfairly distbributed. (Reversal: keep the total level of government expenditures unchanged but restructure their application. To be cute: stop paying pensions to the dead so that you don’t have to take the money from the living).
9) Correct diagnosis: government revenues are out of whack (39% of GDP compared with about 49% in Austria/France). (Reversal: increase government revenues but do not take more money from the “usual suspects” who have been paying their fair share all along (salaried employees; pensioners; etc.). Instead, use all resources of the executive and the state of law to collect taxes brutally from those who never paid any. No holy cows! Their paying taxes will have no impact on economic activity because they can withdraw the money they need from their foreign accounts).
A more detailed suggestion can be found in this link.

http://klauskastner.blogspot.com/2011/09/endgame-for-greece.html

[boyi]

最近英国的威廉王子与准王妃凯特的婚礼将人们的兴趣转向了对皇室婚礼的期待。无论是哪个国家，皇室的婚礼都会成为大家关注的焦点。而准新娘身价不菲的冬装新款也让人惊艳不已。梅特•玛丽特王妃的这款婚纱礼服设计比较简单，由挪威婚纱礼服设计师Ove Harder Finseth进行设计。这款冬装新款采用经典的长袖设计，新娘一个桂冠和一个老式的面纱就搞定。非常具有怀旧意义。

[Universities in USA]

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[Prada Outlet]

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[Observer]

TANSTAAFL adds his meaningless tripe to a very shallow post by Posner

The problem in the South has, contrary to what Tanstaafl wants to say, too much gov't spending. The problem is, as one location economist after another has pointed out, a single currency not accompanied by political union rapidly attracts all economic activity to the most productive region (Germany).

The mere act of joining the Euro is what caused this problem. Everyone, I mean everyone said that what has happened is what was going to happen. The cumulative effective of tens of thousands of micro decisions would bankrupt the South, regardless of what the gov'ts did (and it did).

The same thing would happen in the US except that we have a political union that transfers federal tax dollars to unproductive states, dampening the effect of location theory. If one looked at where economic growth has happened in the US in the last 25 years, it has all be concentrate in a few cities, but we tax them and spend the money everywhere. If we didn't do that, our poor and unproductive states, that free ride on federal taxes, would be in the same shape as Greece, Italy, and Spain.

Europe has a choice. Forget the Euro or political union. The question of the later is always, will Germany's tax payers pay? That is what a political union is. The rich pay taxes that go to their poor neighbors.

This time, they may be able to re-finance, but I believe doing such would be a mistake. They should either go all in or forget about it. GB, watching the events, is not about to go all in, so that pretty much says they should break up the Euro

[NEH]

Observer, There is one phenomena that various regions have been fighting in the U.S. for years. That is the plundering by "poorer" States of the productive capacity of once more productive regions. That is, the granting of massive tax incentives to companies that relocate production and hence work to the poorer South and Southwest and coupling it with a well engrained and intrenched anti-union anti-worker mindset known as "Right to Work". The end result is production, job flight and increasing unemployment and loss of tax base and revenues. Which says something about our current Budgetary problems...

In the E.U. this flight has yet to occur. Due to the more Nationalistic economic structure and the desire to hold production and jobs in place.

[Jack]

NEH........ yes, and as we see here in Alaska, it's ever difficult to ascertain where the wealth comes from.

At the state and Federal level Anchorage, Juneau and Fairbanks (and Seattle) are the "wealthy" cities that pay taxes and for their services while we "subsidize" our far flung rural towns.

But! truth is Anchorage does not produce one drop of oil, a CF of gas, a single salmon crab or bottom fish, nor a nugget of gold, and for the most part tourists sluice through here in one day or so on their way to see Alaska. But we do have tall buildings full of managers along with a bit of 5pm traffic.

[sallya]

The Europe crisis is more and more serious.

[Ralph Lauren Outlet]

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