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Thinking the unthinkable

Stephanie Flanders | 13:32 UK time, Thursday, 11 February 2010

All eyes are on Brussels, as we await more details of the "co-ordinated measures" on offer to help Greece. There's just one problem. Even a bail-out - if that is what it turns out to be - won't solve the basic problem facing Greece, or the eurozone.

Let me explain. Greece has two big problems: a debt problem and a competitiveness one. A "bail-out" won't solve either - at least, not a bail-out that any self-respecting German would be willing to consider.

We may get a bit more clarity today on the support that Germany and others are planning to offer Greece. More likely, as I said yesterday, we will have to wait until the next week's meeting of European finance ministers. That is what today's statement suggests.

But we can be fairly sure that whatever deal is struck, it will not make Greece's debt problems go away.

The best that Greece can expect from its eurozone partners is a promise to underwrite Greek debt, or some form of bilateral loan to tide Greece over. The first would cut the risk premium on Greek debt and make it easier to service. The second would give them cash to get them through the next few months, when nearly 10% of their debt comes up to maturity.

But neither would do much to lower the stock of debt hanging over the economy. Or lessen the need for swingeing cuts in public services and tax rises over the next few years. Indeed, if Berlin has anything to do with it (and we know it will) - Mr Papandreou's government could come out of this with an even tougher schedule for cutting the deficit than it had before.

So, it won't make the debt problem go away. It probably won't make the burdens on the Greek government - or its people - that much easier. It just goes from being 'impossible" to merely "intolerable".

It goes without saying that it won't solve Greece's competitiveness problem either. I promised a post today on the long-term structural problem underlying this eurozone crisis. Happily - or perhaps unhappily - Martin Wolf beat me to it, in a superb column in yesterday's FT. As he says:

"So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output."

As I showed in my piece for yesterday's BBC News at Ten, it's no accident that the countries in the firing line in this crisis are also the ones whose competitiveness has deteriorated the fastest within the eurozone since the single currency began.

This chart tells the story, from Janet Henry at HSBC.

HSBC chart

German unit labour costs have barely budged since 2000, and German inflation has been lower than the eurozone average. As a result their exports have gradually become more and more competitive in world markets. Whereas Greece, Spain, Portugal and the rest have had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness.

This is why there is no comfortable route of this for the Pigs (Portugal, Italy, Ireland, Greece and Spain) - though for some the path is tougher than others.

As I've said many times in the context of the UK, it's tricky to cut borrowing as a share of GDP when your GDP is itself shrinking or stagnant. It is more or less unthinkable that Greece would manage to do this and achieve the real cuts in wages and living standards that would be necessary to seriously improve their competitiveness within the eurozone.

Martin Wolf says that higher German domestic demand is the solution (or a big part of it). That would certainly help. So would a weaker euro - though remember, in the current situation, the biggest beneficiaries of a weaker euro would be German exporters.

But imagine you were coming to the situation for the first time. You knew nothing of the Bundesbank. Or the history of the single currency project. Or even the market impact of the failure of Lehman brothers.

If you were such an unworldly creature, you might come up with two, more ambitious proposals for tackling Greece's fiscal and competitiveness problems head-on: debt restructuring for Greek bondholders; and a higher inflation target for the ECB - say, 4%, instead of 2%.

I touched on the first of these, briefly, on the Today programme this morning.

If you could pull it off, restructuring Greece's debt (with some suitable "haircut" for private bondholders) would actually lower the real burden of its debt, making the path out of this more plausible. Of course, Greece would pay a price for it in the markets. For a long time. But it's not as if it's never been done. And it's not as if the alternative path for Greece is much brighter.

"Unthinkable", you may say. "Remember what happened after Lehmans was allowed to go bust - and everyone in the world holding private bank debt started wondering whether they were next?"

The memory of that is indeed one of the many reasons that a debt-restructuring is not being seriously considered. You could be looking at Lehmans, cubed, if the markets started seriously questioning every developed country sovereign bond.

But the international community has now accepted that we need ways to restructure private debt without all hell breaking loose - ways to make private bondholders bear some of the burden when banks get into trouble, not just taxpayers. A few years from now, I wonder whether we will be saying the same about sovereign debt problems as well.

So much for unthinkable number one. What about unthinkable number two - a higher inflation target for the ECB?

This post is so long already - and this is so unlikely to happen - that I won't belabour the point. But this is something that was discussed, a little, when the euro began, and especially when the membership extended beyond the European "core".

Arguably, a higher inflation target for the eurozone would help the less developed economies on the periphery grow faster in real terms, not just nominal. It could also make it easier for countries at the periphery to cut labour costs in real terms - without actually lowering people's nominal wages or suffering deflation. And it could weaken the euro, which might help growth as well.

A 4% inflation target for the ECB wouldn't solve the problems at the periphery. You would still need more domestic demand in Germany, and some tough structural reforms in Greece and the rest. For all these reasons, the short-term benefits of slightly higher inflation could easily be frittered away. But it might, just might, move things in the right direction.

Pity that the eurozone members cannot even raise the question. Let along make it happen.


Page 1 of 2

  • Comment number 1.


    You stole my thunder! I quoted Wolf from yesterdays FT at #75 on your earlier blog, minutes before this appeared. Let's hope Germany learns to go shopping sometime very soon!

  • Comment number 2.

    If things are so bad I cannot see the German people allowing the Eurozone and all its failings to bring down Germany.

    We all know the German attitude to inflation from their past experience so although it may be a good idea to run with a slightly higher level of inflation as you said it will be an impossible task trying to get this through.

    Inflation is like QE so when it takes hold it becomes difficult to stop.

    Seeing so many EU politicians floundering around in the dark not knowing what to do shows us clearly that the Eurozone was never set up with the possibility of recession in mind.

    I always thought that trying to put a false botton under a recession would only put off the inevitable until another day.

  • Comment number 3.

    Arguably, the ECB are to blame for the 'PIIGS crisis' for not enforcing the debt/defict criteria under the Maastrict treaty?

    If the ECB are as much use a as 'Kraft Chocolate fireguard' what is the point of having a 'union' and a central bank?

    With this kind of 'trough-enomics' and 'troffiteering' the 'little 'gilt edged' pigs' might be avoiding the market altogther?

  • Comment number 4.

    Your section:
    German unit labour costs have barely budged since 2000, and German inflation has been lower than the eurozone average. As a result their exports have gradually become more and more competitive in world markets. Whereas Greece, Spain, Portugal and the rest have had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness.
    A quick question - is this not predicated on the assumption that all things were equal in 2000. I cannot imagine the unit costs for production in Greece or Portugal - especially wages - being the same as in Germany.
    So their relative competitiveness may have declined but not their absolute?
    Just a question.

  • Comment number 5.

    Hi Stephanie

    Your post is interesting but does not seem to address the moral hazard issue raised on today. Both restructuring Greece's debt or a higher inflation target have considerable moral hazards involved in them.
    It looks to me that your thoughts are heading in the direction of Greece needing a currency devaluation. Of course unless the Euro falls in value this would mean Greece leaving the Euro. Is this what you are trying to imply?

  • Comment number 6.

  • Comment number 7.

    The 4% inflation target sounds sensible, but at what target level does inflation become uncontrollable?

  • Comment number 8.

    I guess this is an Economics blog, but some mention of the fundamentals of the social environment in Greece is surely appropriate. From reading some of the comments about the country, they are starting to look on the edge of 3rd world, with a barely functioning tax regime, wide-spread tax evasion, bribery and corruption, government accounting irregularities... You can do all the restructuring and inflating you want, but until the citizens and government get a grip on themselves and collectively realise the mess they've all made together and find some common ground amongst themselves for how they are going to sort their mess out, then I don't think anything the ECB or European Council, IMF or anyone else does will make one jot of difference.

    BTW, how were they accepted into the Eurozone in the first place!?

  • Comment number 9.

    Good article, and I wholeheartedly agree.
    Yes, you did mention Martin Wolf on 10/2.
    But before that:
    56. At 6:26pm on 09 Feb 2010, onward-ho wrote:
    Of course PIGS profligacy is not the only problem in the Eurozone, it is also the "virtuous" exporting BAFLNG countries who are too mean to buy anything from the PIGS or they already own the companies there.
    and there is only so much Mateus Rose, Guinness,Prosecco and Retsina you can sell in Frankfurt.
    There is a growing realisation that the real imbalance is that some countries like Germany,China and USA want trade to be a one-way affair In Europe,for PIGS and for the UK it's not much fun driving the wrong way down a one-way street:



  • Comment number 10.


    The way this is going we will see German tanks on the Parthenon within the next six months. Plus ca change plus ca meme chose! I would not be surprised if the euro and EU had collapsed within the year. The markets will test this to destruction and the licence fee funded BBC will fail to report this. Its the beginning of the end for the EU and this is the defining date. Richly deserved.

  • Comment number 11.

    Let me take you all below the surface appearance.

    Why are the Greeks, the Irish, etc being told that they have to face cuts in real wages & work longer?

    Are these ordinary working people consuming more than they produce, living off the labour of the more hard-working Germans, Chinese, etc?

    Off course this is how the ruling class want to play it.
    To divide workers, to make them think they need to 'live within their means'.

    Is the average Greek, Irishman, Briton, etc really having an easy life?
    Did our mothers & fathers, grandparents work harder, work more productively?

    Of course, the average person knows they are being exploited but don't have the economic theory to make sense of whats going on.

    The economic theory is actually quite difficult.
    Part of the reason why the mainstream economists can't adequately explain the workings of the system & the nature of the crisis.

    The first point to remember is the capitalist system only produces for profit.
    The capitalist (those few who invest millions/billions) requires a positive return on his capital.
    Whilst this can be done through ever increasing asset prices, it ultimately rests upon commodities being produced that when sold return a greater sum of money than the initial outlay.

    If a positive return is not expected there is no reason for the capitalist to produce.
    The credit crunch was essentially the hoarding of money, into gold for example, instead of into production, loans to businesses.

    But what determines the rate of profit - why does it sometimes fall?
    Well there are many reasons, but the one that it the essential contradiction of capitalism, is capital accumulation (economic growth) is actually a cause of a fall in the rate of profit.

    To understand this requires equations & a deep understanding of the concept of value.

    This takes us to the second important point to note - today's economists have no objective basis for the concept of value.
    About 150 years ago they gave up Ricardo flawed labour theory of value for the subjective marginalist concept of value.
    Hence when they look at the aggregate they are effectively trying to explain prices with prices.

    A labour theory of value that takes the market determined socially necessary labour time into account restores an objective foundation for value & enables an explanation of crises - falls in profit rates that requires the destruction of capital value to restore the rate of profit & the next upward part of the cycle.

    We are therefore all subject to crises & the consequent loss of jobs, loss of houses, & the unpleasant spin-offs, marriage break-up, drug abuse, etc. all because the system itself creates its own crises.
    Previous systems of production only had crises as a consequence of natural disasters, plagues, war, or the like.

    Already through the government bailouts the workers are paying the price to save the capitalist shirts. Now because the goverments can't borrow enough from the banks (the capitalists) to cover the debts, we all have to earn less & work longer.

    The rich need to pay not the workers.

  • Comment number 12.

    Back in the closing months of the last century, I was working in Bonn. Then we were discussing the soon to come Euro, and it was put to me that all EU countries ought to join. I asked the question, with hindsight very prophetic, "would you like to be held accountable for an economy like Greece?"

    At the time it seemed like a joke.

  • Comment number 13.

    stephanie using the word pigs to describe some countries in the eu i asume u r trying to b funny so pple like me do not find it one little bit funny indeed i find very rude

  • Comment number 14.

    Greece has a large debt and other nations won’t like bailing Greece out.
    So does that mean there is a problem.
    Answer = No not really.

    What other nations do or do not like is largely irrelevant because they are not going to decide what happens. Politicians on the other hand will decide.

    They will ensure that Greece stays afloat, because is she sinks the E.U. may well fall apart as she does so. And if that means spreading some of Greece’s debt around or engaging in a spot of QE, then that’s what they’ll do.

    The politicians will distort the true nature of the bailout so that the average person will either not understand it, or not wish to.

    The people of Greece have done an admirable street protest job, and by doing so have forced the hand of the politicians.

    From a politician’s point of view, it matters not whether people go bankrupt, or suffer hardship, the most important thing is staying in power.

    Because if you’re not in power, you don’t get the rich pickings that come with it.

    And from the point of view of the E.U. politicians, you can’t stay in power if member countries fall apart.

  • Comment number 15.

    # 3. At 2:24pm on 11 Feb 2010, nautonier wrote:

    This comment is awaiting moderation. Explain.


    Perhaps 'you' could explain why the moderation is delaying the post - Are Liberty on strike today?

    'There's just one problem. Even a bail-out - if that is what it turns out to be - won't solve the basic problem facing Greece, or the eurozone.'

    Is this because the ECB are themselves incompetent and are fully responsible for this 'Greek crisis/PIIGS crisis' by not enforcing the debt/GDP limits set out under the Maastrict Treaty?

  • Comment number 16.

    Come on Stephanie, you can do it. Just take a long deep breath and say it... Greece needs to leave the Euro.

  • Comment number 17.

    #13. gino wrote:

    "stephanie using the word pigs to describe some countries in the eu i asume u r trying to b funny so pple like me do not find it one little bit funny indeed i find very rude"

    Gino, does yr mummy no ur using her computer?

  • Comment number 18.

    Surely Greece's problems are just like UK except complicated by membership of the Euro.

    In fact when you consider the size of the stimulus packages across the world and then you look at how deep in trouble so many countries still are it makes you wonder where we are all heading.........

    Greece (appropriately) may just start us all sliding back down the cliff again.

    A lot of people have talked about a double dip recession shaped like a 'W'

    I think it is more likely to look like a lightning bolt shape!

  • Comment number 19.

    ........I am not really sure what Greece has done that is so wrong, after all aren't they just "supporting" the economy until the crisis is over, which once achieved will then lead to the economic growth that will allow repayment to take place? After all, we in the UK make it difficult to make the case for moral hazard bearing in mind our own inability to match spending and income over the last 10 years or was that the former Tory Govt's fault as well?

  • Comment number 20.

    @ duvinrouge #11: theoretical arguments are just words: propping up Greece is reality. What do you know of the Greek social economy, for example. What are the Greek workers' costs, wages and benefits? How do these relate to the current problems in Greece (against, inter alia, numbers of civil servants, "black economy" earnings, tax-dodging, etc)?

    These latter are said to be amongst the problems the Greek Government is facing. The EU has no powers to insist that Greece indeed tackles these proposed problems. Each EU member-state still has fiscal control: and, to me, that is the root of many of the continuing imbalances within the Eurozone.

  • Comment number 21.

    11. At 2:53pm on 11 Feb 2010, duvinrouge wrote:

    I'm not an economist, but I agree the numbers don't add up.

    If I, a manufacturer, live forever, and always make a profit and don't spent it, then eventually I will have all the money in the world. If I grow (i.e make more profit each year) then the time it takes me to have all the money decreases exponentially.

    There is no other possible outcome, unless the world banks print extra free money every year to allow for my growth.

    It's the same for countries: Germany can only get rich if other countries (Greece) get poor. The only middle ground is if nobody makes a profit, but break even instead, or if central banks print money each year equal to the net profit of the world for free.

    The world as a whole has to balance. If China is to make a profit, America must get poorer, and so on.

    Within the EuroZone, the only way to get Greece to be more profitable is for the rest of the Eurozone countries to be less profitable. Or for central banks to print money for free.

    I can't see any way around it, the system relies on a balance of one mans profit= another loss.

  • Comment number 22.

    It is typical of economists to impose on their theories the limits of their understanding of people. How can you square such circles as the loathing of the Irish (I am one myself) and Greeks to pay taxes or the Germans to spend ? These phenomena do not have neat answers. The worlds economy would however be better all round if wealth was more evenly spread, that is something we should be able to fix.

  • Comment number 23.

    I can't help but laugh when economists complain about Germany running a surplus, as though its some sort of unspeakable crime. Germans make things that people in the rest of the world want to buy. To compete with them you have to make things that people want. The Germans are not about to start buying things that they don't want,(apart from greek bonds).

    The Germans have a work ethic and are efficient, they do not overpay themselves and spend beyond their means and they remain competative. Why should they bail out Greeks, or anyone else, who have the opposite ethics.

    Like Lehmans, Germany should let economics take its course, let the PIIGS crash and burn and learn the hard way. They have all lived beyond their means and now its crunch time, they need to work harder for less, their standard of living has to fall, and then they may become competative.

    Like the PIIGS, the UK is in a very similar predicament, we pay ourselves too much for doing little or in a lot of cases nothing, what do we do to justify our standard of living. Our government says we must keep borrowing to sustain a recovery, but its just more of what's got us into this mess. There is no easy way out, so stop looking for it.

  • Comment number 24.

    No matter how much Greece manages to export, the problem will not go away until the Greek Government learns to only spend what it can afford based on actual revenues received, and the Greek population (especially the higher paid professions) are forced to pay their taxes. These are old habits which , before the Euro, were compensated for by a combination of inflation and currency devaluation. The same basic problem is there for all the GIPS (sounds kinder than PIGS as the people in all those countries are really nice), their culture of endorsing a large black economy does not fit with the Germanic rules of the Euro. The jury is out as to which will break first - the culture or the Euro?

  • Comment number 25.

    #20 frenchderek

    The theory does attempt to show what is the root cause.
    Black market, tax evasion, etc are not.

  • Comment number 26.

    Comment 4 - Yes, you're right, this is about relative competitiveness. If you think about it, competitiveness is an inherently relative concept - you're either comparing to the situation at some earlier date or that of another country. There is no "absolute" measure, independent of what other countries are doing.

  • Comment number 27.

    #21 Crookwood - exactly - I completely agree - see a post below I made last week. [PS Stephanie has just replied to a post - WOW - is that the frist time that has ever happened on a business post? - I notice she seems to have got past the moderators quickly!]

    7 billion people in world and growing

    Estimate of proper jobs in world 2 billion (maybe less) - most of us are just pushing paper around and the fact we receive money for doing it which we can exchange for things makes it seem like a useful function.

    There are too many people in the world - Asia, India, Africa, South America, USA, Australasia and Europe can not all be busy building and producing things for people to consume because the planet does not have enough resources.

    Conclusion - there are a few options.

    1) Some people in the world need to live in desperate poverty - the Africans, some Indians, some Asians and some South americans fulfil this requirement quite nicely at the moment.
    2) We need to equalise standard of living so that those of us in the West become what we would consider to be extreemely poor by today's standards to enable other areas of the world to raise their standard of living. I think this is happening but by running at a deficit every year USA and Europe are being able to maintain their standard of living at an artificially high level - this won't last much longer.
    3) Everybody gets rich at the same time and then the world collapses spectacularly as we consume the worlds resources far too fast - everybody then gets spectacularly poor - so that we all live in the equivalent of Ethiopia or similar.

    At the moment all three options seem possible but I would aim for somewhere between 2 and 3 as most likely outcome.

    How many generations will this take is probably the question my children would be most concerned with.

  • Comment number 28.

    #21 Crookwood

    Think about what money is.

    Is it not that special commodity that allows us to quantify the value of all other commodities?

    This then brings us back once again to the concept of value.

    Isn't the only think that all these commodities have in common labour?

    So how does value increase?

    Labour is the only commodity that receives less value than it creates.
    That is, the wage paid for labour power is less than the value created in the commodity (the transformation of nature) that is then realised at market.
    This realisation of the greater value is the profit, hence all profit derives from labour - the exploitation of the workers by those who control the means of production.

    Hence the class relation of workers having to sell their labour to those who control the means of production (machines, raw materials, land).

    It is the end of this class relation that is required for liberty.
    We need a classless society.

  • Comment number 29.

    #21 Crookwood

    " I can't see any way around it, the system relies on a balance of one mans profit= another loss."
    This assumes that it is a zero sum game and clearly cannot be true. There is such a thing as "Value add" whereby all our activities (mostly) add value and thereby add wealth to the economy. There is clearly greater wealth in the world now than 100 years ago - The cake is larger now and as long as GDP grows, so does the size of the cake.

  • Comment number 30.

    Woe to the UK.

    The pound is rising as the spin-side to the rapidly falling Euro.

    The UK is in enough trouble as it is, and the only, only, only way out is a weakening pound and a slowly rising export led sector (with a lot of pain for quite a few years). And the pound needs to drop another 20% at least over the next couple of years to allow us to survive economically.

    But if the pound rises, then we can enjoy ourselves for a few months in a temporary sunny economic blip, maybe at most for a year or couple, and then absolute economic devastation and oblivion for this country.

    Woe to the UK if the Euro drops against the pound.

  • Comment number 31.

    Perhaps the best solution would be to allow Greece to leave the euro-zone and use devaluation of their currency to help their difficulties. Or expel them if they don't get their act together?

  • Comment number 32.

    Pretending for a moment that the Germans would ever allow a higher inflation target - it's not quite the solution you propose.

    When inflation is higher the rates charged on borrowing also goes up as otherwise the bank's assets (your debt) erode - and the banks aren't in the business of giving money away.

    Also gilt rates would rise as foreign investors would want a higher yield - so making the servicing of the existing debt harder when it's rolled over.

    So in a higher inflation/interest rate environment there would be pressure on asset prices (housing in Spain/Ireland is already vunerable) and unless wages also rose (and freezes are the order of the day) whilst the debt would be diminished with respect to prices the abilities of people to service those debts would be compromised.

    This is why the UK has such a problem. If you combine personal debt (about the highest in the world) and government debt (not the highest outstanding - but getting there with Greek levels of deficit) we have a mountain to service - and inflation would make it worse for many as interest rates would also be pushed up.

  • Comment number 33.


    can you please stop referring to Portugal, Ireland, Greece and Spain as the Pigs? I found it rude and offensive, specially in a public corporation blog

  • Comment number 34.

    It certainly beats me that countries like China, Germany and Japan can be blamed for making things that other nations want to buy. It is OK to blame China for its low wages structure but neither Germany nor Japan fit the low wages picture. These people are inventive logical and prudent. Blaming them for the imbalances is rather like athletes who finish second or third blaming the competition for training too hard. Are they to be blamed because the Anglo Saxons set up a system which is consumer based and they supplied the goods? As I say it beats me.

  • Comment number 35.

    "Arguably, the ECB are to blame for the 'PIIGS crisis' for not enforcing the debt/defict criteria under the Maastrict treaty?"

    The ECB is not responsible for enforcement of the Maastrict treaty, the Council is.

  • Comment number 36.

    Good article with good points raised. The author does not go to the next level though. Greece in itself might be containable with some support from the stronger and larger EU countries like Germany that could afford to lend some relief to Greece's debt problem. However, simply throwing some money at the problem will not make it go away. Without a sustainable plan which somehow stimulates import demand for Greek products (think olive oil, wool, and tasseled slippers), the Greek economy will continue to pile on debt. It should also be noted that Greece's economy has been a mess since they joined the EU, and there is good reason to believe that the only reason they were allowed to join back then at such a generous currency conversion rate, was because they misled the rest of the EU countries about their financial well being.
    This is all neither here nor there however. Greece's problem is just one of a larger problem that faces multiple countries (PIGS) in the EU. Perhaps Greece gets a nice fat loan with few strings attached (VERY unlikely). What happens then when Spain, Italy and Portugal come to the table in Brussels begging for money???? At some point, the word NO will be used. And when that happens, the EU confederation will be tested. Since a binding treaty was never signed, I would find it hard to believe that a country like Germany or France would not find it politically expedient to separate themselves from the EU crisis and find it better to go it alone.

  • Comment number 37.

    Has the moderator gone to dinner?

  • Comment number 38.

    I am sure you are right, the Greek national debts will be underwritten in some way, probably by the ECB, as this would not cost non Greek taxpayers anything.

    Commentators seem to forget that deficits can be turned into surpluses by increasing taxes as well as by cutting expenditure. Remember that the Greek government is sovereign in Greece, and has the power to tax anything Greek.

    I have the impression that there are some very wealthy people living in Greece, eg shipowners. The national emergency could be used to justify a sudden heavy tax on such people, so sudden that they would not have time to arrange avoidance, or if the tax were on property ownership, then it would be difficult to avoid or evade anyway.

    The political attractions of such a measure are considerable. Provided it only affected a small minority, it would probably very popular. Very rich people only spend a proportion of their wealth on consumption, so taxing at this end of the wealth spectrum would not reduce demand significantly. Indeed if it were part of a package in which some of the extra tax was offset against extra expenditure, its effect om demand could be neutral.

    A desperate situation calls for desperate, perhaps unconventional measures. When Germany was in even greater trouble in the 1930's, the Nazi government created a new currency and declared that it was backed by the land of Germany. The implication being that if necessary they would simply use private property as collateral.

    It worked, they were able to end recession in Germany and their economy became strong enough to survive six years of war, without the financial help that Britain received from the US.

    Mrs Merkel should remember this piece of history before she tries to impose too unpleasant terms on the Greek government.

  • Comment number 39.

    Re: 28. At 5:09pm on 11 Feb 2010, duvinrouge

    I don't disagree with your comments, I'm just pointing out that if I sell a comodity for more than I paid for it(in labour or materials) then that money has to come from somebody else, making them poorer.

    It has to be a zero sum game, as soon as I make a profit, somebody has to make a loss, or money will have been created out of thin air, with no strings attached to it.

  • Comment number 40.

    Re 29. At 5:10pm on 11 Feb 2010, Voter_Graham

    It has to be a zero sum game, the books have to balance. If you buy a gizmo from me, your bank balance goes down, mine goes up. The amount of "money" in existance is the same.

    Our growth over the last N years can only come from extra "money" being introduced into the economy by central or lending banks. The lending banks will want it back over a limited 1 - 25 yr period, so you can only get a temporary growth, while you borrow, the bust we've got now is us (the world) coming to terms with not being able to continue borrowing to repay the repayments.

    Central banks can print money without needing it back.

    I'd love to be wrong about this, but I can't see how it can be otherwise.

  • Comment number 41.

    #33 FEYDA77
    "Can you please stop referring to Portugal, Ireland, Greece and Spain as the Pigs?"

    I agree - in my post #24 I have suggest using GIPS as a more polite alternative. However the term PIGS (or sometimes PIIGS) is being used throughout the internet and it may be too late to get people to change. It is not just Stephanie, who I am sure meant no offence.

  • Comment number 42.

    The problem with 'imposing' anything on anybody is the very obvious one - if you want them to do you had better do it too.

    This is a question of mainly political dimensions. My suggestion is to let any European benefit from the best interpretation of the same law in any member state. Pension age for example would be the lowest age anywhere in Europe. The pension would be the highest payable in any state. The tax rate payable the lowest payable in any state. Simple legislation but dramatic consequences! No European state's citizen could grumble about a level playing field. The other side would of-course force all governments to rapidly become as fair as any other state towards its citizens. Now that would be a very simple piece of legislation that the vast majority of Europeans would support!

    I would also advocate a European Maximum Wage for a period of five years so as the make Europe more equal as it have been shown that the more equal a society is the more prepared they are to suffer - and we will all suffer. (This QE /zero interest rate nonsense is just putting off the evil day and making things worse - it has to stop and we must take the hit so that we can get back to rational economics and a stable monetary system.)

  • Comment number 43.

    39. At 6:13pm on 11 Feb 2010, Crookwood wrote:

    So if a farmer plants a crop, who exactly is now poorer?

  • Comment number 44.

    I'm not convinced regarding the zero sum one mans profit is another mans loss arguement.

    It maybe more of a case of relative values. If I have something in abundance (which means it is not particularly valued in my locality) but is scarce in yours what is the problem?

    Surely this is the real basis of trade.

    Similarily the Marxist theory of profit through labour is not necessarily valid in the world today as most of the really profitable enterprises are not based on this model (think software, music, books etc)

  • Comment number 45.

    This article points to another big challenge in the EU: underlying Germany’s huge trade surplus is what I see as a major structural problem with the Eurozone and the EU as a whole. Before German reunification you had four roughly equally sized and equally developed countries - GB, France, Germany and Italy - and companies in all of them could compete with each other on roughly equal terms. But since German reunification, Germany is now about a third bigger than the rest. Now, the size of a company depends mainly on the size of its home market - cf. Kraft’s takeover of Cadbury. Kraft is not better run or more profitable in terms of return on investment etc. It is simply bigger - how could an American manufacturer of ketchup not be bigger than an English chocolate maker? In the same vein German companies have far better economies of scale than their neighbours and can undercut them to take a greater share of their home markets. Subjective, but I certainly see a lot more Müller Milch products in UK supermarkets than before 1990. And we can look forward to this growth in German pre-eminence going on and on.

  • Comment number 46.

    I would not view the probelems the problem of Greece in such a limited way as you, Stephanie, becuase you speak "only" of a problem of "debt" and "competitiveness". Greece has a fundamental problem, a crisis of the state, with corruption and social inequality, the schools, the social infrastructure is out of order, the citizens don´t trust in the political structures, it goes far beyond your limited economic view, the crisis of Greece is much deeper.

    Let me point out that there has been a parallel case with Hungary with an extreme debt and almost bancrupt, they also got credits from the IMF and the EU and - it has worked! There will certainly be strict controls with that money handed over to the Greek government - if that would not work in a sustainable way, the crisis will most probably extend as a crisis of the EU as the ordinary citizen of the EU will not tolerate everything, especially one sided support that is failing.

  • Comment number 47.

    38. At 6:07pm on 11 Feb 2010, stanblogger wrote:

    You mention taxing hte very wealthy in Greece. This is certainly an option, but it carries long term risks. The rich are no different really to you or I (except they have loads-a-money). If they feel threatened financially they will look at their options. One of which is to seek out a more favourable environment.

    Hence why switzerland negotiates tax rates with it's wealthier denziens.

    Oh and the reason it does so? Because they tend to create jobs wherever they go.

    PS if you'd like to send them over here, we could sure do with the help, but I'm guessing you'd prefer to keep them.

  • Comment number 48.


    a few questions to chew over:

    - how much of the inflation differential in 1999-2009 was due to the samuelson-balassa effect and therefore nothing to do with "competitiveness" (i.e. price of tradable goods is same across the whole eurozone, yet higher productivity gains in piigs tradable sector => higher wage inflation in PIIGS tradable sector => higher wage inflation in piigs non-tradable sector => higher overall inflation in piigs)?

    - how much of the inflation differential was due to convergence of price levels, given that piigs currencies generally traded cheap to the dm up to 1999 due to the "currency risk premium" associated with countries that had illiquid markets and/or weaker track records for fiscal / monetary discipline? there was a lot of talk about germany's "lack of competitiveness" in 1999, if you remember.

    - how much of the piigs current account deficits was actually driven by the capital account (i.e. the euro suddenly gave piigs households access to much lower interest rates and a much bigger source of (german et al) financing, leading to private sector credit bubbles, most notably in spain)? now these bubbles have burst, would this not suggest that the piigs' current account deficits will be addressed by collapsing private sector demand, rather than by improvements in "competitiveness"?

    - if "competitiveness" refers to the relative unit costs of labour, is the solution wage deflation in the piigs, or is it simply for piigs workers to increase productivity by e.g. working longer hours? if i were a spanish employee with a large mortgage, i know which i would prefer.

    - why do german households save more? is it cultural? is it regulatory? or is it because of the low level of home-ownership (and therefore the absence of a housing bubble in recent years like the ones that led to "fake wealth" effects on consumption in the piigs)?

    - if the piigs' experience represents an "asymmetric shock" then won't the retrenchment by the piigs be offset by rising export demand from the rest of the eurozone, given that intra-eu exports comprise a large share of the piigs' gdps? if the piigs' retrenchment is not offset by rising export demand from the rest of the eurozone, then surely ipso facto it cannot be an "asymmetric shock", in which case wouldn't the ecb respond with monetary stimulus?

  • Comment number 49.

    #40. At 6:21pm on 11 Feb 2010, Crookwood

    If I buy a pile of building materials for £50,000 and use them to build a house which I then sell for £100,000 then I will have added value. The BofE can create money to match the growth in net asset values across the country created by the net result of all our activities as represented by the GDP. I agree that just buying and selling on its own will not add value - that will just make someone richer at the expense of others (eg as per investment banks - ha ha) . However if value is added then it is no longer a zero sum game.

  • Comment number 50.

    I, like most people I suspect, don't understand much about economic theory - do the economists?
    It has, however, been clear for a very long time that huge trade imbalances exist with the UK and the USA importing goods in huge excess while the "virtuous" countries like Germany, Japan and China export to us. It would seem obvious that this couldn't continue for ever but just as we are addicted to borrowing and buying so the "virtuous" countries are addicted to making and selling. When we mend our wicked ways then they will have to change too - either they start buying or they stop making excess products.
    I live part of the year in Portugal, there every small town has several Chinese emporia selling cheap and often rubbishy goods - the same phenomenon occurs in Spain. Most of this "stuff" is unnecessary. More than half our homes are filled with goods we do not need and often hardly use. Last year, until the governments across the world stimulated the car industry, people and industry stopped buying new cars and commercial vehicles - it is not a great inconvenience to make a German or Japanese vehicle last 6 years instead of 3. It is certainly better for the world!
    What I'm trying to point out is that it is very much in the best interests of the so-called virtuous countries to consider what they are doing. They cannot continue to depend on the debt junkies to keep their factories running.
    Germany needs Greece as much as Greece needs German help

  • Comment number 51.

    Good blog and some excellent observations.

    The 'bailout' for Greece won't be the warm and fuzzy kind. Tough love is required otherwise, there is no incentive for the rest of SPIG to get their houses in order. Also, equal help should be offered to Ireland who shouldn't be left out of any rescue package just because they are not living in denial.

    On a side note, did anyone see Mervyn King's cheery assessment of the UK economy yesterday? We are still 'bumping along the bottom' and growth this year will be lower than expected. (Not sure why this wasn't mentioned anywhere today on the bbc though). Is anyone worried about a Japanese style lost decade? Unbelievably, I think we will have more QE to look forward to.

  • Comment number 52.

    Let´s ask the UK as Europe´s financial powerhouse with the top banker´s place London to hand over some money to the Greek government...How about that?

  • Comment number 53.

    #50 states:"They cannot continue to depend on the debt junkies to keep their factories running." Is this true? I think you may just find that countries like Germany, Japan, and China export more than just gizmos. Especially a country like Germany exports a great deal of tooling machinery and machinery of all sorts to countries who value reliability. The US and UK used to do this very thing until they found it more profitable to export financial time bombs to the unsuspecting.

  • Comment number 54.

    Just a thought - if Greece was going to drop out of the Euro, it will be denied by all politicians until the day it actually happens. I wonder what happened to all the old Drachma notes and coins ? Is there a printer somewhere in Europe with a nice new order from the Greek government?

  • Comment number 55.

    Can we put this into perspective.
    The Greece deficit/bailout is dwarfed by the bailout required by the state of California or the bailout received by Lloyds and RBS.

    The Euro is a young currency and passing every test thrown at it. This crisis will speed full fiscal union.

    Who will bailout sterling when the days comes - as it surely will.

  • Comment number 56.

    #39 Crookwood

    Again, think about what money is.
    If you accept that it allows us to quantify commodities by the amount of labour (socially necessary, i.e. realised in the maket) then the more hours worked the more value.

    Now if money is gold (or all the paper money is convertable into gold) the actual amount of money will only change if more gold is dug out of the ground.
    But with more labour hours, more commodities the nominal price in gold will fall.

    Profits can be realised without any more money being printed as the money can buy more commodities because more hours are worked.

    The actual situation today though is not one where paper money is convertable into gold (or anything else for that matter).
    Hence governments do print money to artifically maintain profit rates, e.g. quantitative easing.

    But this then takes us onto the concept of fictitious capital, i.e. capital put into circulation without any basis in production.

  • Comment number 57.

    #44 StephenBlencowe

    So software, music & books just magically come into existence do they?

  • Comment number 58.


    You mention taxing hte very wealthy in Greece. This is certainly an option, but it carries long term risks. The rich are no different really to you or I (except they have loads-a-money). If they feel threatened financially they will look at their options. One of which is to seek out a more favourable environment.

    Hence why switzerland negotiates tax rates with it's wealthier denziens.

    Oh and the reason it does so? Because they tend to create jobs wherever they go.


    "The rich are no different, except they have loads-a-money".

    By definition this is what makes them rich. You suggest that taxing them, or rather "making them feel threatened" they will go somewhere else.

    Isn't that what a parasite or a virus does ? They kill the host, then flee to new environments where they can feast. I'm intrigued to know where is left for these people to flee to and equally why they cannot face up to the reality they have created.

    Switzerland ? The land of immigration ? Isn't this the country that bans mosques, has no exports other than the vampiric banking sector and is supposedly neutral towards other countries ? If Switzerland continues to become a haven for the financial-terrorists that create decimation wherever they pass then at what point does the rest of the World look upon them in the same unfavourable light that we view any other rogue state ?

    The "rich" have made their bed and now they must lie in it.

    If the "rich" were taxed heavily and had no refuge, aside from such financial-terrorist states as Switzerland, perhaps it would be possible to extract back some of the value that the workers have created.

    I support everything the Greek workers are protesting about. They deserve better and no media lies about people being corrupt, lazy or being accused of a porcine nature will suggest that this is not a ploy by the very "rich" that maintain the status quo.

  • Comment number 59.

    We should not forget that the Southern European countries carry the bulk of the burden for the East European expansion: both structural funds and tourism have been redirected to a large extent.

    On top of that, they have to deal with immigration from Eastern Europe and Africa. Last time I was on Crete, I was surprised by the large amount of foreigners and the dilapidated state of the island.

    In Spain and Portugal the real estate bubble has bursted after years of euphoric over-investment.
    And Ireland is also the victim of the US economic downturn, with less transnationals able to use it as a bridge to Europe.

    Different problems require different solutions. But we do need an overall vision of how to get out of this depression. Eco-technology can give the economy new oxygen: solar energy, wind energy, zero emission cars on electricity and air pressure... The European Commission should steer investments for solar energy in Spain, Portugal and Greece. And there's lots of wind energy potential in Ireland and Portugal.

    Let's waste less money on oil and gas, and invest more in renewables. It may even defuse some geopolitical conflicts that are financed by petro-dollars.

  • Comment number 60.

    35. At 5:48pm on 11 Feb 2010, Hesketh wrote:

    "Arguably, the ECB are to blame for the 'PIIGS crisis' for not enforcing the debt/defict criteria under the Maastrict treaty?"

    The ECB is not responsible for enforcement of the Maastrict treaty, the Council is.


    Really! (?)

    You may be right in terms of constitutional approval but under the original Treaty I understand that the ESCB was given a very strong set of responsibilities:




    In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability,it shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of this Treaty. The ESCB shall act in accordance with the principle of an
    open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a of this Treaty.

    3.1. In accordance with Article 105(2) of this Treaty, the basic tasks to be carried out
    through the ESCB shall be:
    - to define and implement the monetary policy of the Community;
    - to conduct foreign exchange operations consistent with the provisions of Article
    109 of this Treaty;
    - to hold and manage the official foreign reserves of the Member States;
    - to promote the smooth operation of payment systems.
    3.2. In accordance with Article 105(3) of this Treaty, the third indent of Article 3.1
    shall be without prejudice to the holding and management by the governments of Member States of foreign exchange working balances.
    3.3. In accordance with Article 105(5) of this Treaty, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.

    Advisory functions
    In accordance with Article 105(4) of this Treaty:
    (a) the ECB shall be consulted:

    - on any proposed Community act in its fields of competence;
    - by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out by the Council in accordance with the procedure laid down in Article 42;

    (b) the ECB may submit opinions to the appropriate Community institutions or bodies or to national authorities on matters in its fields of competence.


    It looks like the 'ECB' has failed to keep proper regulatory control to me?

    I'm not really interested in the ins and outs of EU bureacracy - just 'cause and effect'

    By the way does anyone know what the ESCB's 'field of competence' is supposed to be?

  • Comment number 61.

    #55 Richard Dingle wrote:

    Can we put this into perspective.
    The Greece deficit/bailout is dwarfed by the bailout required by the state of California or the bailout received by Lloyds and RBS.

    The Euro is a young currency and passing every test thrown at it. This crisis will speed full fiscal union.


    Wanna have a bet on it?

  • Comment number 62.

    61. freemarketanarchy wrote:
    Wanna have a bet on it?

    Keep your money - the UK has a national debt of £800bn, rising to £1trn in 2011. The less-indebted eurozone will live to fight another day and currency traders will move on to sterling as it becomes clear how ill-prepared the UK is for peak oil and the retirement of the baby boomer generation.

  • Comment number 63.

    The main Greek problem is not the bloated public sector: Greek public servant salaries and pensions are the lowest in the Eurozone, with the exception of Portugal. Nor is it the non existant welfare state, which only serves its employees and its contractors. It is the parasitic private sector: enjoying billions in contracts, commissions, tax evasion, price fixing and, finally, EU and state funding, including a 30bn € pumped into the "economy" (ie the banks) by the last government. Where is all the money gone? In private acccounts abroad.

    Now Greece has to face the brunt of its cleptocratic political culture. I know that Greece-bashing has become popular nowadays. Do not get us wrong for protesting, though; everybody knows it easier to tax the salaried classes now than fix a broken system and - heaven forbid - challenge professionals and industrialists to give back, even in the form of investment, some of their bounty.

  • Comment number 64.

    The article seems like an advocacy of or for 'Goldilocks inflation'--- the Germans might be more disposed to try it if they hadn't undergone non-Goldilocks inflation in the 20's and then seen what resulted.

    We have been through a lot of 'thinking the unthinkables' in Economics in the last couple of years...and serious as the effects of miscalculation of effects may be, they won't be as serious as the effects if indulging in Designer inflation is miscalculated.

    But I wouldn't rule it out in an age seemingly addicted to easy options...even when they aren't (easy ) any more.

  • Comment number 65.

    Interesting that people still insist on putting Italy in the same group as the PIGS/GIPS countries. Last time I checked they are one of the few net contributor contries to the EU (to the tune of 7 Billion Euros/yr "lost" to the EU), with a lower deficit than most (1/3 that of the UK for instance). Italy's public debt is quite high, but when you combine it with their private deficit the figures are close to those of the US.

    I suspect pretty soon the UK will ring up their Finance Minister to ask for suggestions on how to handle the rapidly balooning debt the UK is building up. Way to go Gordon!

    I do find it laughable to think the France would help bail out Greece(and with what money I ask?) out of the goodness of their heart. If they do help out greece, it will be for a (sizeable) return I'm sure.

  • Comment number 66.

    At 7:10pm on 11 Feb 2010, the_nutty_dragon

    What I'm trying to get at is that the money used to pay for the goods has to come from somewhere.

    In your example, if the farmer charges and gets more money than the cost of growing their crops (seed cost, land rent, labour, fuel, his labour charges etc), that money has to come from someone else, making them financially poorer. Wealth is added, yes, but that wealth comes from somebody else.

    Take this globally, and for Germany to get wealthier, another set of countries have to get equally poorer. You can exchange asset for cash (I've got a BMW, BMW have got 30K), but the asset usually depreciates.

    If we keep buying the farmers crop, he will amass wealth, and we will lower our wealth. As a country, Germany spends less than they generate in wealth, and this excess is paid for by everyone who buys a German product. The have less cash, Germany has more. Can you see what I'm getting at?

  • Comment number 67.

    All that goes to show that countries like Greece should not have been accepted in the Euro zone. Most of the Mediterranean countries have a history of high inflation, budget deficits often exceeding the 3% threshold and debt/GDP ratios significantly higher than 60%. Yet at the same time, some Eastern European countries who are fiscally prudent, such as Bulgaria and Estonia have been told that they should expect membership anytime soon.

  • Comment number 68.

    #10 mrdtv

    "Plus ca change, plus c'est la meme chose.

    Your optimism knows no bounds. How did you forget to mention that, "the end of the world is nigh?" and "nuclear war is about to break out?" A Plague of locusts anybody?

  • Comment number 69.

    It is often said that Greeks live beyond their means. But if we look at the figures showing total indebtedness which includes both public and private debt, Greece's debt is 179% of the GDP whereas the EU average is 175% of the GDP. The Netherlands have a total indebtedness of 234%, Belgium 219% and Spain 207% of the GDP.

    Private debt is a serious problem in the UK too, where the external debt, that is, the sum of public and private debt owed to nonresidents repayable in foreign currency, goods, or services amounts to 365.44% of the GDP.

    Now, let's not forget that Greece spends huge amounts of money on defence. Greece has a serious security problem with Turkey, since Turkey invaded Cyprus in 1974 occupying the North part of the island.

    Greece is the only EU country with an official threat of war declared against it by the Turkish Parliament in 1995. The so-called "casus belli" (reason for war)decree declared that if Greece extended its territorial waters to 12 miles - as it is entitled to do under international law - the Turkish government would regard it as a cause for war.

    Since the 1970s, Turkish military aeroplanes fly over Greek islands in demonstration of the military might of Turkey. Since the 1990s, Turkish politicians talked of "grey zones" in the Aegean Sea, by saying that those rocky islands that were not cited in the Treaty giving Greece sovereign control over the Aegean islands remained under the Sultan's jurisdiction, and are therefore claimed by Turkey.

    Now, despite the terrible mistakes by its politicians, Greece is a dynamic country and managed to become one of the 30 most advanced economies in the world, despite being located in a troublesome neighbourhood. Until 1990 it was cut off from its communist neighbours in the north, then the Yugoslav wars began and lasted for a decade.

    So, stop blaming the Greeks who were hit by the worst economic crisis in living memory for which they were not responsible. All of us who feel the pain in our pockets should be reminded that the crisis did not start in Greece but it was caused by mistakes by US Federal Reserve and the Banks which our governments eagerly bailed out with our money.

  • Comment number 70.

    I Don't understand much of all the economic terminology but can anyone explain

    1. What would the situation in Greece be if they were never part of the eurozone? i.e. if they still operated using the Drachma?
    2. The Greek Government insists that speculators are attacking Greece, because they see it as the weaker link in the Eurozone, in order to attack the Euro. Who are the speculators? is it possible that e.g. institutions who were recently bailed out by tax payer money in various other countries be gambling these amounts against the Euro?

  • Comment number 71.

    Basically Stephanie is saying 70's style stagflation is the 'cure' for Europe (including the UK) and the US. Meanwhile, economic power will continue to shift eastwards towards China.

    That is the inevitable consequence of any sovereign debt bailout.

  • Comment number 72.

    44. At 7:15pm on 11 Feb 2010, StephenBlencowe

    I agree, it doesn't seem obvious, but if we all moved pennyless to another planet and gave everybody a pound, no person could ever be richer than 5 billion pounds. Banks could generate false money, but the books still have to balance, and eventually that false money will be taken out of the system again.

    Of course you could increase the rate of false money generation until we couldn't afford the repayments, and then the growth would dissapear until the system rebalanced. Sort of sounds like where we are now.

    From this I conclude that central banks have injected money for free into the system for many many years to account for the growth we think we've had for the last few centuries.

    I'm not an economist, and I could be wrong, but going back to the thread, the wealthier Euro countries are going to have to share their Euro wealth with Greece, one way or another.

  • Comment number 73.

    An interesting article Stephanie. However, I think a visitor from Mars who had analysed the social/political/economic and cultural dimensions of Greece without knowledge of Lehmans, etc. would probably say that you are never going to solve the Greece problem by economic measures alone. Rather one must recognise that Greece has been dogged by political and economic corruption in most areas of its commerce for a long time. These are cultural issues. No doubt there are those in Greece who yearn for a better way (as in Italy) of running the country and managing commerce. However, the reality is that (as mentioned by another commentator on this site), Greece should never have been allowed into the EU in the first place until full due diligence had been observed by the EU on their accounts. Now that they are there, the richer nations will simply have to pay the costs. Another victory for irresponsible government and management of economic affairs!

  • Comment number 74.

    #55 Richard Dingle wrote:

    Can we put this into perspective.
    The Greece deficit/bailout is dwarfed by the bailout required by the state of California or the bailout received by Lloyds and RBS.

    The Euro is a young currency and passing every test thrown at it. This crisis will speed full fiscal union.

    Amen Richard - along German lines. Within a generation we will have sixteen Germanys, stretching from the Atlantic to the Russian borders.

    A word of warning. We in Europe, not just the Eurozone, need to force hedge funds out into the cold clear light of day. It is not acceptable that the masters of these morons are bailed out with tax payers money, whereon they then turn and mercilessly savage the hands that propped them up in their hour of need, and probably with the same cash!!

    They may target Greece today for relatively small sums of money as Richard indicates. Who next? Countries are not abstract notions, they are societies, they are expressions of their people and their cultures. In Europe they are the successors of great civilizations. We will not permit their extirpation, financially or otherwise.

    Hedge funds are financial Talebani - seek out and destroy!

  • Comment number 75.

    #62 Ravenseft wrote:

    61. freemarketanarchy wrote:

    Wanna have a bet on it?

    Keep your money - the UK has a national debt of £800bn, rising to £1trn in 2011. The less-indebted eurozone will live to fight another day and currency traders will move on to sterling as it becomes clear how ill-prepared the UK is for peak oil and the retirement of the baby boomer generation.


    I've got an even bigger bet on that one already!

    Trust bet will come in.

    I can't lose! ;o)

  • Comment number 76.

    The Greek solution is simply another government sponsored Ponzi scheme. So long as the governments in the US and Europe can keep printing money and increasing their debt burdens, they can try and imagine they can keep the tide at bay. However, like all Ponzi schemes, sooner or later things are going to go pear shaped and then the financial crisis of 2008 will look like a walk in the park.
    The Greek problem is simply another phase of the ongoing game of 'pass the debt'. So long as governements continue to be pathetic in their fear of facing up to this fact, the inefficient companies (banks and car companies, etc.) plus inefficient countries will continue to be bailed out.

  • Comment number 77.

    42. At 7:05pm on 11 Feb 2010, John_from_Hendon wrote:
    So are we approaching a decisive moment? Does the Eurozone crisis precipitate the creation of the United States of Europe or the break up of the Euro zone? It seems to me that you can't all share the same currency and spend it by different rules.

    I do like the idea that we can all pick the best of breed, so to speak throughout the EU, that is a particularly empowering idea, for the people, which I can imagine really upsetting the EU bureaucracy, heck they didn't even want referenda! Implement that and I may even change my opinion of the EU.

  • Comment number 78.

    Everyone is discussing this as if it is an economic issue. It isn't. It is entirely political. Firstly, go back to the Euro's creation. Plenty of non-economists knew that Greece had not met the Euro conversion requirements. I think we can assume those advising the EC knew this too, and advised their political masters accordingly. Yet Greece was allowed to join the Euro: an entirely political decision.

    Monetary and fiscal policies are inextricably linked. Consider the USA, and imagine a Greece-type problem there. A mid-size state is in danger of default. We all know what would happen. The President would simply tell the Chair of the Fed to honour the debt in order to preserve the USA's creditworthiness. To minimise this risk, individual states are limited as to the deficits they can run. If they breach these rules, the federal government just steps in and takes over their administration. Now put this in an EU context. Sure, their is the laughably named "Growth and Stability Pact" (who says the Germans have no sense of humour?). But there is no body that can provide temporary liquidity to an individual Euro-member state in the way the Fed can in the USA. The ECB is specifically precluded in its charter from doing this. So who does Rumpole of the Belgians (aka the EU President) call on to help the Greeks? He can't call on the Commission or Council of Ministers, as non-Euro states have said, quite rightly, this isn't their problem. So there is nobody with either the fiscal or monetary power in the EU/Eurozone to resolve this problem. The EU/Eurozone cannot provide monetary or fiscal support, and the Greeks cannot devalue.

    SF has provided us with the solution to Greece's problem: debt restructuring and higher inflation. However, the former implies quasi-default at the Eurozone level, and the latter is anathema to the Euro's chief user, Germany, for understandable reasons. Therefore for either or both parts of SF's solution to work, there is a precursor, namely Greece's withdrawal from the Euro. Given that it should never have been allowed in to begin with, this is not as big a deal as it may sound.

  • Comment number 79.

    When I visit Greece I am always amazed at the lack of public services rather than the excess of them .....the lack of quangoes and public organisations and palaver about some things....though there is a lot more red tape in other areas.They do not have the social workers, the equality and carbon obsessionality, the diversity bodies,the legal aid and the overseas functions, the governance bodies, the environmental agencies, the four million cctv cameras and disclosure obsessions etc that UK has.
    They are being lectured by Northerners about waste when actually we should be learning from tham about lean government.
    Local government services, which do not I think, come under the public spending percentages of GDP we use for comparison , are much leaner affairs in Greece than here.The Greeks do not really pay much in their equivalent of council tax for instance.
    They have not built the horrid council estates, they have not the infrastructure of comparable Western Governments.
    The other interesting thing about Greece is that given their annual deficit is similar to UKs, they are spending 52% of their public spending on pensions and benefits .....I am not sure what the comparable figure is in UK but I suspect it is about half of this.So the Greek pensioners are paid a lot more than their UK counterparts despite a GDP which is 1/3 less, and at a much younger age ....which strikes me as being a fantastic use of public money rather than a waste.
    I also suspect that Greece has a lot of workers classed as public servants who are doing jobs which we used to class in the same way ,but whom we have hived off to the Sercos of the world in the private sector with lower pay and poor pension provision but arguably higher costs to the public sector and less value for money . the Greeks are only spending 48% of their government spending on non-pensions and non-benefits ....... which makes the provision of these services look like a pretty mean and keenly budgeted affair.
    I also suspect that the Greeks have not gone down the privatisation road as much as we have but have a lot of sellable things in the public sector which we now lack, and the sale of which assets massaged UK public spending figures the way that burning furniture saves heating bills.
    The other factor is that I expect the Greeks have indulged less in sleight-of hand PFI and other accounting measures, splitting off government functions to Quangoes and other bodies capable of raising finance not directly attributable to government debt, whose budgets do not show up in public sector estimates . ....... rather like we have done here.
    We need to send our boffins over there to show them how to airbrush their figures to make things look a lot better. Perception is as they say reality.
    Nonetheless it is still the case that their deficit is high and, given the above factors, it must largely due to the non-levying of and non-payment of tax. We could send over our tax inspectors,VAT men and compliance/money laundering detectives , or better still the Germans whose snitchy culture must guarantee higher tax compliance.If you get reported for crossing the road when there isn't a green man I wouldn't like to be doing a homer extension build in Bonn.....but is that not why we like Greeks and going there rather than to Bonn for our hols?
    And I doubt the Greeks would thank us for sending over our tv license enforcers,parking wardens and bin inspectors, thoughI would dearly love to do so.
    It maybe that if Greece were to insist on plastic rather than cash for transactions the tax take would increase to the point of wiping out the annual deficit.
    One solution for Greece is for its debt to be rolled over into new loans at ECB rates c 3% rather than expensive credit-scored Greek rates @ c 7%. That way there is no actual cash being given , but a Euro wide sovereign loan rate, which could be under-written by the Germans and the French which would decrease the burden of the interest payments due on these loans down to affordable levels.
    So the biggest thing we can help them with is in the presentation of spending and making the big figures,the ones that determine how much interest you get charged for public borrowing,look better.
    Perception is reality.

  • Comment number 80.

    "You could be looking at Lehmans, cubed, if the markets started seriously questioning every developed country sovereign bond."

    If this is Lehmans reloaded, then...

    Germany = Lloyds TSB
    Greece = HBOS

    I think Germany are too smart to put their money behind Greece, hence the deliberately vague but ostentatiously stern announcement today: apparent support without any substance. Besides, it would be as politically unacceptable in Germany as 10% spending cuts over two years and without deflation will be in Greece.

  • Comment number 81.

    Ask a Faliraki Taverna owner who he prefers when it comes to counting the cash at the end of the night.... Wayne n Stacey or Hansel und Gretel?
    It is also true that the Greek woes have been brought on partlY by the collapse and/or emasculation /takeover of British package tour companies like First Choice , and budget UK Airlines like Globespan,EXCEL etc whose cheap flights brought millions of Brits to Greece; and the drying up of UK remortgage funds which was the major source of UK expat property investment and turnover in Greece as NORTHERN ROCK,RBS, DIRECT LINE, INTELLIGENT FINANCE,HALIFAX, BRADFORD AND BINGLEY,C+G,BANK OF IRELAND etc etc ALL HIT THE FLOOR AND THAT LITTLE BEACHSIDE DREAM ESCAPE DIDN'T GET BUILT, BOUGHT OR SOLD, THE SUZUKI JEEP DID NOT GET RENTED,THE OUZO WAS NOT POURED, THE KEBABS SHRIVELLED AND BURNED,EVEN THE HILLSIDES BURNED .
    The fancy new apartments and restaurants were empty.
    The Brits were THE big spenders and housebuyers in Greece and with a cup of tea costing five Euros in Rhodes we stayed at home and caressed our carbon emission profiles.
    No wonder their economy crashed.

  • Comment number 82.

    81 Onward-ho

    Blimey - optimism never sleeps ;O)

  • Comment number 83.

    83 Stephanie, give that Penguin a job!

  • Comment number 84.

    Penguins do it standing up!

  • Comment number 85.

    EDGE540 hit the bulls eye and Stephanie is being surprisingly un-insightful. Greece's problems are totally cultural. We could bail out their debt tomorrow and this time next year they would be in exactly the same fix. Greece is an endemically corrupt society. They gained entry to the EU with a set of national economic statistics that they now admit were completely fraudulent. They are a nation of tax cheats, people who only take short cuts in life and whose young people want to do nothing more than work in a life time guaranteed job for the Gov't. (1/3rd of the work force is civil servants!). Until there is a substantial re-work of the Greek national character and culture (the work of at least a century, I suspect) they will continue to career from one self made crisis to another while selfishly and self indulgently looking to the rest of Europe to bail them out.

    Stephanie, this has nothing to do with debt levels or economic competitiveness.

  • Comment number 86.

    CROOKWOOD - in the teeth of all the evidence you obviously believe that economic development is a zero sum game. If this were so we would be no more prosperous today than we were 500 yrs ago. Clearly, let me point out to you, Crookwood, we are. Intel makes huge profits designing and manufacturing incredibly advanced computer CPU's. Other companies make huge profits using these same computers to guide and control their manufacturing and service processes. Everyone comes out ahead. How could you possibly be communicating with us on this web site if this was not so? Whose pocket did you pick in order to access the internet?

    Adam Smith spotted this 260 years ago. Where have you been since then?

  • Comment number 87.

    Were you a speech-writer for the politburo? Still haven't gotten over the defeat of communism? As a citizen I can assure you that Switzerland is very interested in immigrating that world-class heart surgeon or successfull entrepreneur from Greece. So while we have a shot at getting the next Bill Gates into the country, you will get to... ??? Oh right, ramble on about evil rich people! Besides if Switzerland doesn't take them, there is a 100 countries besides us that will (including, of course, the UK).

  • Comment number 88.

    Your comparison between a legal financial occupation and the trainers of the murderers of almost 3'500 New Yorkers is not nearly as funny as you think.
    In the run-up to the US mortgage crisis several hedge-funds in fact exposed your beloved government employees and their Wall-Street paymasters as the liars that they are.

  • Comment number 89.

    I am a manufacturing businessman in the UK. We do the R&D and then we make things and then sell them in the UK and overseas. If a company in the same or a similar business to me got into trouble for what ever reason I would have big problem reconsiling myself to using my companies money to assisting them through their problems. If I went to my workforce and said " look guys that wage increase I promised you has to go on hold because we are helping out another company" I think I can hear ,quite loudly ,the response. No matter how much ducking and diving the euro politicians do to save the Euro mantra there is no escaping the fact that its the workforce Europewide who will suffer for the egos of the politicians and the systemic waste in the Euro zone.
    It does make one wonder if Nigel Farrage is actually onto something!

  • Comment number 90.

    86. At 02:03am on 12 Feb 2010, racoleoptonlinenet

    Err, I don't remember saying we don't make a profit, I run a business and I make a profit every year: I was trying to figure where this continuous, amazing profit comes from.

    Presumably before currency, we bartered. The base product must have been food, becuase everybody needs it. But food is grown, and is created every year. You can grow more food and create more currency. It needed to be grown every year.

    At some point currency was invented. It was made, if there wasn't enough, more was made. Probably like the barter food before it, more was made every year.

    Now in the 21st century, all the western world makes profit, great profit, year on year growth. We save the money, we don't spend it all: where is it coming from? Are we printing it to order, are we in fact spending all of it in one way of another? This is what I'm trying to figure.

    I'm not disputing reality, just trying to explain it without magic.

  • Comment number 91.

    Why is it that the PIIGS countries in the Eurozone must make public sector spending cuts yet the Gravy Train in Brussels is racing along at full speed ahead?

    Corruption in the EU is the problem.

  • Comment number 92.

    46. At 09:37am on 11 Feb 2010, you wrote:
    Once again we have our heads down in the weeds rather than looking at the whole picture. Yes, Greece is in difficulties and Yes, it will need propping up. However it is not just Greece we need to be looking at, it is all the so called other PIIGS. As Stephanie correctly pointed out last night on the the 10 o'clock news and was reiterated by her colleague on newsnight, it is not the 3% of Greece that is of concern, it is the 20+% of the group as a whole that is cause for concern.

    Can the ECB / EU support all of these countries, the answer is no. So there is grave concern of a run starting. If Greece is shored up, who will be the next? There are also other countries outside the group of PIIGS who could soon be following suit.

    Can Germany and France stand behind all of these countries, once again I fear not. For both have a number of issues that need attention and along with their commitment to maintain a significant stimulus package. There is just not enough to go around. Also you would have to question the support they will have from home, "robing Peter to support Paul".

    Then we need to look further afield, those in the EU but outside the Eurozone. How many of these club members are on the edge, does the EU turn it's back on these in favour of the Euro member states. Question; Does that mean there is now a two tear membership of the EU. Answer; If yes does it mean the end of the club for a number of members as they will breach the membership rules. If No then who will stand up for these?

    Finally you may all be questioning why do they all not want the IMF to step in. Well the answer is simple, the IMF will expect action to be taken. Action that would not be accepted by those receiving the aid. There are already, I was going to say undertones but that would be the understatement of the decade, resentment from the public in Greece. They are questioning what has been proposed by their own Government, does anyone expect them to agree to guidelines set out by Germany and France or the IMF. They have been sold a dream by their Government and the EU that the Euros would keep on rolling in, but the tap has been shut. This is the same as Ireland who, while the grants Etc were pouring in from the EU had a Tiger gold rush. One built on an economy with no foundations. The people living off a housing boom that was doomed to crash. The Euros stopped flowing in and the property market became unsustainable. There were issues with all of these countries prior to the banking crisis. It is just that the larger countries were enjoying the good times so much they chose to ignore the signs.

    The question has to be asked, where to now? I fear that is back to the drawing board as there have been too many cracks shown up during this debacle.

    The Euro if it is to survive has to have a strong single government supporting it. There are conflicts as not all EU members are in so would have little appetite as has been show to take action to support the Euro at any to themselves. The only other option is for Europe to become a federal group, hence member states would relinquish control of fiscal matters to the central Government. How many countries are ready to sign up to this?

    I still stand by this as there is little if any appetite for any of the major players to actually put their money where their mouth is. In fact I will go a little further we could be seeing the end of the Euro experiment in it's current form unless we have a revolution and a Federal States of Europe is declared. And with Germany's recovery now being reported as faltering what chance of that?

  • Comment number 93.

    You say: "Whereas Greece .... had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness."
    What a nice piece of ideological thinking unburdened by the shackles of empirical evidence!
    What makes you think that there has been a rising trend in Greek wages?
    How about failure of the Greek businessmen to invest in new technology in line with the rest of Europe? If that is the case, the classic neoliberal prescription of wage cuts is not much smarter than prescribing bleeding to those suffering from anemia, much like the medieval doctors.
    I don’t know about the rest of the herd, but this pig has been on diet for almost a decade now.

  • Comment number 94.

    88. At 03:46am on 12 Feb 2010, andreasr wrote:

    Your comparison between a legal financial occupation and the trainers of the murderers of almost 3'500 New Yorkers is not nearly as funny as you think.
    In the run-up to the US mortgage crisis several hedge-funds in fact exposed your beloved government employees and their Wall-Street paymasters as the liars that they are.

    Andreasr -

    I don't use the term Talebani lightly. You rightly point out the intolerable loss of life the Taleban caused in New York. Let us not forget also attacks and loss of life in Madrid and London - Europe suffered too. I resent the implication that I am frivolous about the loss of life.

    If hedge funds are the sources of munificence your post seems to suggest, then let them come forward and operate plainly and visibly where societies can scrutiny their actions. No? Then I strongly assert my belief that these 'legal' entities are financial terrorists, andreasr.

    Like New York their actions have struck deep and hard in the cores of societies they have targeted, causing fear and misery in their wake - London and Rome after the collapse of ERM1, and in this incarnation andreasr, Budapest, Riga, Kiev, Athens, Dublin, Madrid, Lisbon, Rome, all other Eurozone capitals - and where else, where next?

    Do these attacks on citizenries not also merit defensive action?

    I recall no society being asked to accept hedge funds as their financial police, juries, judges and jailers or executioners. Perhaps you can refresh my memory?

    I repeat - extirpate them, and sanction centres that give them succour.

  • Comment number 95.

    Some interesting thoughts. But your (and Wolf’s) emphasis on the loss of competitiveness by the PIGS versus Germany in the Eurozone is a little misleading. It just looks at the rate of change in ULCs. But the level also matters and Spain etc started at a much lower level than Germany in 1999. You would expect faster wage growth etc in the poorer EMU countries as they catch up – they may well still have lower costs than Germany even if the gap has narrowed.

    Also the idea that Greece should default to clear the decks or the Eurozone should inflate its way out of the problem are just ways of profligate countries avoiding the consequences of their failures and putting the cost onto bondholders or others.

    Such solutions mean lower productivity down the road and weaker Eurozone growth. There is no way round deleveraging if Europe wants better growth.

  • Comment number 96.

    92 Chris.

    We all mistype, but was your idea of a ''two tear EU'' an
    intentional or Freudian slip?

  • Comment number 97.

    87. andreas

    It's still the case that if individual countries, such as
    Switzerland,continue to court the world's wealthy with minimal tax
    rates, plus financial anonymity - most handy when your gains are ill- or dubiously-gotten - there's going to be fiscal deficiencies
    elsewhere. Such fiscal gaps will be filled by Joe Public, one way or
    another, since most of us are not courted by Zug, Liechtenstein,
    or Guernsey.

    Or, are you suggesting we could all be multi millionaires, and our
    countries in healthy surplus if only we'd leave the politburo and
    ask our governments to cut / abolish taxes on Formula 1 drivers,
    shipping magnates, hedge fund gurus, dictators etc?

  • Comment number 98.

    #13. gino wrote:

    [PIIGS is rude and not funny]

    I agree, PIIGS is a bit rude, and suggests a totally different group (of people) to me anyway.

    Perhaps GIPSI's would be a little more appropriate ;-)

  • Comment number 99.

    93. At 08:51am on 12 Feb 2010, Philip

    I have for a number of years had the pleasure of holidaying in Greece and on a number of its Islands. I would point out that things changed greatly when they joined the Euro. It was if they had no longer had to worry about economics as that would be taken care of from Brussels. In fact I was in Create the summer of 2008 and had an interesting conversation with a business person who I have known for some time. She on the one hand complained that business was not as good as it once was and blamed it on the Brits for not coming in their numbers as it was now seen as too expensive. The Germans she stated came on the all inclusive packages and did not spend a cent outside their complex. She did state on any number of occasions that Greece was well placed and prosperous also citing a grant she had just got to extend her business property. A property that was only half full at that time. When I asked her what would she have done prior to the Euro to drum up business, she replied cut prices. What had she done that summer, raise prices. Greece signed up for a dream that was just not there as did Ireland and Portugal. The other two are just down to pure greed and mismanagement.

    Unfortunately all must pay for the sins of the ruling class as we here in the UK will see in the coming months and years.

  • Comment number 100.

    96. At 10:14am on 12 Feb 2010, U14313657

    A bit of both.....


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