Tag Archives: Greece

DIY Eurozone Bailouts?

According to a new report by Germany’s Bundesbank, Eurozone countries on the verge of a default should draw on the private wealth of their citizens instead of asking others for help. The central bank has detailed a future template for bailouts which attempts to avoid the previous model used for Greece, Portugal and Ireland and has suggested that a one-off capital levy, in other words, a tax on people’s private wealth should be imposed in the first instance, if a country runs into problems.

The bank stressed that a country should exhaust its own possibilities to regain the trust in the sustainability of its public finances and that rescue programs financed by other member states’ taxpayers should only exceptionally be put into action as a last resort such as when the financial stability of the Eurozone is in real danger.

Complaints from northern European members about having to bail out their southern neighbours are commonplace and billions of euros have been used to prop up struggling countries. Greece, for example, has secured two international bailouts since mid-2010, totaling around $330 billion. The German government has always insisted on harsh austerity measures as a way for stricken countries to get their economies back on track and signaled their unwillingness to let the European Central Bank engage in quantitative easing which would potentially fuel inflation in its own nation.

The Bundesbank report looks to renew a debate as to whether German taxpayers should be on the line with future Eurozone bailouts, illustrating the fact that there is no support in the Eurozone for any large scale mutualisation of debts. This means that future loans could be more of a bail-in than a bailout-in, as seen in Cyprus. Hence, the message for countries wanting Eurozone bailouts in the future is, do it yourself!

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Will Greece Fail to Meet Its Next Bailout Target?

The IMF’s latest Fiscal Monitor Review published on Wednesday predicts that Greece may miss its next bailout target, since the country’s budget surplus has only risen to 1.1% of gross domestic product, failing so far to hit the target of 1.5% of GDP set by the IMF and the Eurozone in the bailout terms. Although Greece was predicted to be on track to meeting its targets in the IMF’s last report in April, problems with tax collection, slow growth, and delays in selling off state assets put Greece’s progress in the bailout programme in jeopardy. Should the country fail to meet its main objective, its emergency creditors (the IMF, the European Commission, and the European Central Bank) won’t proceed to issuing the next round of bailout financing, a factor likely to add pressure to the already tense negotiations over the upcoming tranche to help the troubled economy.
Source: Wall Street Journal

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The Finnish Euro Dance

News reports on Tuesday suggested that Finland, one of the few eurozone countries with a triple-A credit rating, was suspected of having been behind the unprecedentedly severe rescue package conditions for Cyprus. During past bailout negotiations, Finland wanted to establish itself as the responsible adult in the room. Unlike many southern European countries with mismanaged economies, Finland learned the lessons of its banking crisis and the subsequent recession 20 years ago.

Finland’s impatience in the face of sloppy fiscal policies prompted analysts to speculate about the country’s future in the eurozone. For instance, Nouriel Roubini, one of the most respected prognosticators of global economic trends, has argued that Finland will eventually be the first country to leave the single currency.

During the latest negotiations between IMF, EMU and Cyprus, Finland was reported to have been responsible for the levy tax obliging Cypriots to pay up to 10 per cent of their savings to foot the costs of the rescue package. Germany is often erroneously viewed as being uncompromising in its bailout demands, but in the eyes of Europe’s debt-ridden economies, Finland is the bad cop in the room.

Yet, Finland has rarely succeeded in its demands as the Greek and Spanish bailouts showed. Tough posturing is meant for domestic consumption to keep the vociferous opposition at bay. The opposition argues - perhaps rightly so - that Finland is constantly paying for other countries mistakes.

The Finnish euro bailout dance usually starts with the Finance Minister Jutta Urpilainen and Prime Minister Jyrki Katainen rejecting reports that a given Mediterranean country is in need of a massive bailout. When the bailout becomes a reality, both Katainen and Urpilainen attempt to calm the public by proclaiming that Finland will not give a cent unless it receives loan guarantees. After it becomes clear that other eurozone countries do not subscribe to Finland’s demands, the bailout passes without guarantees and Urpilainen and Katainen stand in front of the Finnish media explaining that harmonious cooperation comes with an occasional responsibility to compromise.

Henry Clay once said that a good compromise leaves both sides unhappy. In Finland’s case, only the Finnish taxpayer is left unhappy.

If past bailouts are any indication, Cyprus will get its bailout, irrespective of Finland’s posturing. The northern European country can leave the euro and incur the wrath of the eurocrats or stay and continue its increasingly superfluous dance. Either of these choices will have serious consequences for Finland and the eurozone.

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The Cyprus Debacle

Eurozone politicians, together with the International Monetary Fund, reached an agreement to grant Cyprus a much needed bailout package. The ailing southern European state has been grappling with a stumbling economy and an overstretched banking sector.

The bailout entails an unparalleled and possibly crippling clause. It includes levying 6.75 per cent of all Cypriot bank accounts up to $129,000 and 9.9 per cent for balances higher. Unsurprisingly, the planned levy left many Cypriots wondering whether it would be better to simply withdraw the money and stuff it in mattresses.

The bailout terms sent shock-waves around Europe and the US. The forced confiscation of funds is an unprecedented move which might even push the small island state into chaos. If Athenians can riot, so can the people of Limassol.

But how is the levy any different from a normal tax or a precipitous tax increase? In a way, isn’t all taxation a form of confiscation?

For the wide-eyed euro optimist, the deal that was struck is better for the individual Cypriot because now the burden is shared with foreign companies based in Cyprus, whereas under normal bailout conditions, only the government and tax payers would foot the bill.

Regardless, it’s morally questionable to ask depositors to suffer the consequences of a badly managed economy and it seems that the new levy is simply yet another tax to support a union that can no longer breathe on its own.

The biggest fear of the enablers of the continued survival of the single currency is that a member state will leave the euro. However, the decision makers in Brussels will likely keep the zone together even if it means punishing the citizen.

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A Greek Tragedy

Unemployment in debt-ridden Greece jumped to a record of 26 per cent in the final quarter of 2012. The number is alarming in a country struggling to get back on its feet after a tragic second half of the past decade. The harsh austerity measures coupled with a difficult recession have had a massive impact on the Greek workforce.

The numbers were poorer than the previous quarter’s 24.8 per cent, and 20.7 per cent in the corresponding time a year earlier. The Greek statistics authority announced Thursday that 1.29 million people were unemployed in October-December 2012.

Greece’s economy has been falling to pieces over the last three years, brutalized by its on-going financial woes. The country is living on international loans and hand-outs, given only on the condition that Greece continues its policies of fiscal responsibility.

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The Big Mac Variable

McDonald’s, the company whose symbol is more popular the cross of Christianity, has a product which is probably the most well-known burger in the world, namely the Big Mac. The company’s flagship burger has also become a measurement tool for economists who use the price changes of the Big Mac to determine various economic aspects of a country’s financial health.

Source: Bruegel computation based on data compiled by the Economist.

Now one European think-tank and its innovative researchers have taken the Big Mac Index and morphed it into a variable which seems to suggest that countries undergoing severe austerity measures outperform on average countries with slacker economic policies. However, according to the researchers, Italy is the sole exception to the rule.

The Big Mac index was developed by The Economist in 1986 as a happy-go-lucky manual to whether currencies are at their “accurate” level. The index is centered around the idea of purchasing-power parity (PPP) determining that in the long run exchange rates should move towards the rate that would equalise the prices of an indistinguishable basket of goods and services (Big Mac) in any two countries. For instance, the average price of a Big Mac in America at the start of 2013 was $4.37. In China it was only $2.57 at market exchange rates which meant that the “raw” Big Mac index claimed that the Yuan was unappreciated by 41 percent at that time.

According to the kids at Bruegel and their Big Mac Standard, austerity-embracing Austria and Germany grow above average, while the spend-to-recover countries such as Greece, Ireland, Portugal and Spain are below average. Austerity-driven policies seem to be working not just for unit labour costs but even real prices are adjusting: