There has been much speculation over the last several weeks that the eurozone might break apart and that Germany might return to the D-Mark. The news media and many analysts feed this rumor, saying that Germany is tired of paying for Greece (and probably for the rest of Europe) and might decide to stray away from the pack.
These theories, while to some extent have some credence, fail to take into account the fact that the biggest beneficiary of the eurozone is Germany herself.
According to OECD figures, from Q1 2000 – Q32009, unit labor costs in Germany have risen 5 per cent, while the same figure for Greece is 35 per cent. This means that Germany's competitive position has remain intact, while the competitive position for Greece has deteriorated rapidly. This means that Germany has an advantage over other European partners when it comes to trade.
Germany's exports have in no way been deterred ever since the common currency was born. The main reason for this is that 2/3 of Germany's exports are within the eurozone. This basically means that, while the euro has indeed appreciated with most other world currencies, for Germany, due to the fact that it is so competitive, the euro has actually fallen in value. Germany haw the best of both worlds. They are part of a currency block whereby all partners have strong currency, but at the same time Germany has trade surpluses with everyone!
While Germany has always been a competitive economy, chances are that that its competitive position would have been compromised if it were not for the euro. Today the world economy and Germany itself, has China, India and a host of other third world countries to compete with. If it were not for the stable value of the euro, chances are that Germany's exports would be much less. As an example, with the euro, Germany is able to sell to Greece x amount of cars, but if Greece had the drachma, which would be worth at least 40 per cent less than what the euro is worth today, its a sure bet that Greece would buy much less cars from Germany.
So if Greece is not helped to overcome its problems, chances are that Greece will be forced to leave the euro and print drachmas. If this happens, then the euro is in trouble because Spain, Portugal and Italy might follow. If that happens, you can probably say goodbye to German trade surplussed.
As a result, it is in the national interest of Germany to keep the euro intact no matter what the cost. That's the reason why Angela Merkel always portrays the Greek stabilization plan as a euro issue and not a plan to save Greece.
However, the Greek stabilization plan is far from certain that it will work. On the one hand the fiscal adjustments required of Greece are very strict and on the other, even if everything goes according to plan, Greece will have a debt to GDP ratio of 140-150 per cent in 2014. The question is, if Greece has problems today, what makes everyone think that its problems will go away with 40 per cent more debt on its books? Also, if Greece cant get funding via market mechanisms today, why is the EU and IFM convinced that Greece will be able to return to the markets within 12-18 months from now?
One way to solve the problem in Greece is to apply a haircut to current bond holders so Greece will have less debt to service. Several weeks ago, Thomas Meyer, the chief economist of Deutsche Bank, said it very clear. He said that if the banks were to forgive 50 per cent of Greece's debt, then the problem would be solved. He also said that if this were to happen, Greece would be able to return to the markets in several months and would not need any help from Europe. Josef Ackermann, the CEO of Deutsche Bank also reiterated something along those lines several days later.
Many other German officials have also called the Greek bailout a waist of time and money. Greece, they say, can't pay this money anyway. German officials more than anyone else have said repeatedly that the bail out money is dead money. Why not restructure - haircut and stretching out maturities - and solve the problem today?
Karl Otto Pöhl, who was in charge of the German central bank also said the same thing in a recent interview in Spiegel magazine. Quoiting from Spiegel, Pöhl said, “Without a haircut, a partial debt waiver, it cannot and will not ever happen (meaning Greece will never be able to pay back the debt). So why not immediately? That would have been one alternative. The European Union should have declared half a year ago -- or even earlier -- that Greek debt needed restructuring”.
The question therefor is, why is Germany be so generous as to be ready to write off 50 per cent of Greek debt and jeopardize German banks?
The answer is that, it's much cheaper for Germany to write a check for 20-25 billion euros to the German banks to cover their losses and have the Greek problem solved, than to pay that money without any assurances that Greece will not default and undergo additional write-offs later on.
The bottom line is that Germany has a vested interest in keeping the euro intact. It's trade surpluses depend on everyone being in the euro. If the euro were to brake apart, Germany would have a big problem in today's competitive global environment. Subsidizing Greece by writing off a big part of its total debt is a small price to pay.
Δευτέρα 14 Ιουνίου 2010
Πέμπτη 20 Μαΐου 2010
Greece needs a crash course in capitalism 101
The Sicilian Expedition was conducted by Athens from 415 BC to 413 BC during the Peloponnesian War. The two main figures of this story were Alcibiades and Nicias. Alcibiades was the main proponent for the expedition and Nicias was totally against it.
Nicias argued that Athens would be off better served if it conserved troops, money and resources for the war with Sparta that was still ongoing. And even if Athens conquered Syracuse and all of Sicily, holding it was almost next to impossible.
Alcibiades on the other hand, being younger and more arrogant, argued that Athens was in the same situation when it was at war with Persia. The defeat of Persia led to Athenian glory and the foundation of the Delian League and this expedition would bring similar results.
On the day before the expedition set sail, someone destroyed many hermai in the city. The hermai were placed throughout the city to provide boundary markers at roads and borders.
The Athenians took the matter very seriously, for they considered this a bad omen for the expedition as well as evidence of a revolutionary conspiracy to overthrow the democracy.
Many political enemies of Alcibiades claimed he was responsible. Although there was no proof, Alcibiades volunteered to be put on trial under penalty of death in order to prove his innocence. However, Alcibiades was extremely popular and with the support of the army behind him, was not charged and the fleet set sail the next day.
After his departure however, his opponents continued to levy charges at him. As a result, the Athenians sent the Salaminis (the official Athenian messenger vessel and the fastest ship in the fleet) to bring him back to Athens to face charges.
Just before arriving in Syracuse, the Salaminis caught up with the Athenian fleet and informed Alcibiades that he was under arrest and that he would have to come to Athens to be put on trial. Alcibiades agreed, but on the way back he escaped and along with many of his colleges and found their way to Sparta. Alcibiades died of old age in the service of the Persian king, having always tried to help his countryman the best he could and never having betrayed his country in any way.
To make a long story short, Nicias who was against the war to begin with, didn't fight with his heart. He tried to do everything in his power not to confront the enemy and to avoid conflict. The result was a total devastation of the Athenian contingency and the final fall of Athens many years later.
The lesson to be learned from this story is this. If you don't believe in something, chances are that you will not succeed - even thought the odds might be on your side and even thought you might have the high ground.
What happened to Athens in antiquity is exactly what is happening to modern day Greek finances. The Greek political establishment simply does not believe in an open economic module. They do not believe in free market forces, world trade and above all, do not understand what a competitive economy means.
The IMF, the World Bank, the EU and just about every organization on earth has been telling Greece for many years now that it needs to open its economy to free market forces and get rid of the bureaucratic hurdles and restrictions. The reason however why successive Greek governments have done nothing to entertain such demands is that they don't believe in such reforms. It is simply against their beliefs and inner convictions.
They believe in central planing and centralized control. They believe that that hard core central government officials should make the rules and not the Parliament and certainly not the markets. In Greece the prime minister is the central legislative figure with dictatorial powers similar to that of Julius Caesar.
In Greece (as I like to joke around) even right wing politicians are communists. There is simply no understanding of market forces by Greek politicians anywhere across the spectrum. While there might be a few that have an understanding of market dynamics, they are too few to matter.
As a result, the people of Greece have never been tutored to understand free markets. The level of left wing thinking in Greece is beyond comprehension. The majority of Greeks believe that the country's problems are the product of some international conspiracy to enslave the county to “international capitalist” forces. The fact that the country in on the brink of going broke is simply not comprehended. Take the labor unions for example. They insist that Greece avoids the IMF and at the same time are demanding wage increases!
Whether the IMF and EU funding mechanism can help Greece is a matter of debate. In contrast to the problems of Ireland, which were a byproduct of excessive bank leverage, in Greece the problems are an uncompetitive economy that is the result of backward thinking. And the question is, how do you transform Greece to a competitive economy when the majority of the politicians don't believe in it?
Unless Greece undergoes a crash course in capitalism 101 and unless the IMF and the EU force the implementation of free market reforms, all the funding in the world will not do any good.
Having said this, I have to say that I am quit optimistic, because whenever free market forces were implemented, people embraced them and never looked back.
Nicias argued that Athens would be off better served if it conserved troops, money and resources for the war with Sparta that was still ongoing. And even if Athens conquered Syracuse and all of Sicily, holding it was almost next to impossible.
Alcibiades on the other hand, being younger and more arrogant, argued that Athens was in the same situation when it was at war with Persia. The defeat of Persia led to Athenian glory and the foundation of the Delian League and this expedition would bring similar results.
On the day before the expedition set sail, someone destroyed many hermai in the city. The hermai were placed throughout the city to provide boundary markers at roads and borders.
The Athenians took the matter very seriously, for they considered this a bad omen for the expedition as well as evidence of a revolutionary conspiracy to overthrow the democracy.
Many political enemies of Alcibiades claimed he was responsible. Although there was no proof, Alcibiades volunteered to be put on trial under penalty of death in order to prove his innocence. However, Alcibiades was extremely popular and with the support of the army behind him, was not charged and the fleet set sail the next day.
After his departure however, his opponents continued to levy charges at him. As a result, the Athenians sent the Salaminis (the official Athenian messenger vessel and the fastest ship in the fleet) to bring him back to Athens to face charges.
Just before arriving in Syracuse, the Salaminis caught up with the Athenian fleet and informed Alcibiades that he was under arrest and that he would have to come to Athens to be put on trial. Alcibiades agreed, but on the way back he escaped and along with many of his colleges and found their way to Sparta. Alcibiades died of old age in the service of the Persian king, having always tried to help his countryman the best he could and never having betrayed his country in any way.
To make a long story short, Nicias who was against the war to begin with, didn't fight with his heart. He tried to do everything in his power not to confront the enemy and to avoid conflict. The result was a total devastation of the Athenian contingency and the final fall of Athens many years later.
The lesson to be learned from this story is this. If you don't believe in something, chances are that you will not succeed - even thought the odds might be on your side and even thought you might have the high ground.
What happened to Athens in antiquity is exactly what is happening to modern day Greek finances. The Greek political establishment simply does not believe in an open economic module. They do not believe in free market forces, world trade and above all, do not understand what a competitive economy means.
The IMF, the World Bank, the EU and just about every organization on earth has been telling Greece for many years now that it needs to open its economy to free market forces and get rid of the bureaucratic hurdles and restrictions. The reason however why successive Greek governments have done nothing to entertain such demands is that they don't believe in such reforms. It is simply against their beliefs and inner convictions.
They believe in central planing and centralized control. They believe that that hard core central government officials should make the rules and not the Parliament and certainly not the markets. In Greece the prime minister is the central legislative figure with dictatorial powers similar to that of Julius Caesar.
In Greece (as I like to joke around) even right wing politicians are communists. There is simply no understanding of market forces by Greek politicians anywhere across the spectrum. While there might be a few that have an understanding of market dynamics, they are too few to matter.
As a result, the people of Greece have never been tutored to understand free markets. The level of left wing thinking in Greece is beyond comprehension. The majority of Greeks believe that the country's problems are the product of some international conspiracy to enslave the county to “international capitalist” forces. The fact that the country in on the brink of going broke is simply not comprehended. Take the labor unions for example. They insist that Greece avoids the IMF and at the same time are demanding wage increases!
Whether the IMF and EU funding mechanism can help Greece is a matter of debate. In contrast to the problems of Ireland, which were a byproduct of excessive bank leverage, in Greece the problems are an uncompetitive economy that is the result of backward thinking. And the question is, how do you transform Greece to a competitive economy when the majority of the politicians don't believe in it?
Unless Greece undergoes a crash course in capitalism 101 and unless the IMF and the EU force the implementation of free market reforms, all the funding in the world will not do any good.
Having said this, I have to say that I am quit optimistic, because whenever free market forces were implemented, people embraced them and never looked back.
Τετάρτη 3 Ιουνίου 2009
Baltic Dry index
Another sign that the real global economy is returning to normal is the rise in transportation rates.
Κυριακή 31 Μαΐου 2009
Change in direction for the dollar
The trend has changed and the dollar is now in a downward slope compared to the euro. For the first time since the dollars upward move, we now have the euro hitting higher highs and higher lows.
Even though we have this confirmation of a change in the trend, I am still of the opinion that the euro will in the future end up at much lower levels against the dollar. The timing of this outcome however is another matter altogether.
Theoretically speaking commodities and gold should do well, however both are so outrageously overpriced that I dare not even consider the notion.
Assuming that the fed does not overdo it with the printing press, stocks, especially manufacturing stocks (most are priced for scrap), should do just fine and should more than increase in value compared to the loss in the value of the dollar.
Τρίτη 26 Μαΐου 2009
Are US consumers changing habits and lifestyles?
You all know that the savings rate in the US is up. What you might not know is that it’s at a 10 year high, as illustrated by the chart below from the BEA via the St. Louise Fed:
TThe funny thing is that Americans are also taking out 15 year mortgaes. The theory is that people will get out of debt faster – NY Times: http://www.nytimes.com/2009/05/24/realestate/24mort.html?_r=2&partner=rss&emc=rss
More recently, there has been increased activity in another loan alternative: a fixed-rate mortgage with a 15-year term.
Brokers and mortgage industry executives say that these loans are becoming especially popular among people who want to shed debt more quickly, and in light of the current economic atmosphere, that goal is perhaps more widely applicable than ever.
The number of 15-year mortgages issued in February jumped to 74,497 from 42,178 in January, according to First American CoreLogic, a real estate consulting company in San Francisco. And according to Bloomberg News, $15.9 billion worth of 15-year mortgages were issued in March, more than twice the $7.5 billion issued in February.
So the American consumer is actually saving more and pay debt down faster! The US consumer is taking it to the bank!
Is this good news for the markets? Probably not. People only save and refuse to spend when they are afraid and worried about the future of economic prospects. However, I do think it’s a negative issue thing for the dollar.
Paying
I am taking bets that by this time next year, economists and market participants will be blaming the US consumer for being frugal and for refusing to take on the excess Chinese and European production.
And if the US consumer refuses to consume like yesteryear, then who will fill the gap? I have no idea, but the logic of many economists is that emerging market consumers will take over.
In any case, the bottom line is that the US consumer is changing habits. He will be more frugal, savings oriented and less debt oriented.
Εγγραφή σε:
Αναρτήσεις (Atom)