If you don’t want to be “subservient to the markets” then try borrowing less from the markets.

Just a thought.

You’re absolutely right until the last four paras.

Yes, Greece should negotiate a partial default. Yes, it is a necessary part of the solution. But the reason it ain’t happening is nothing to do with markets or hedge funds. It’s government.

Those who created the euro for political reasons cannot bear to see the euro either fail or such a debt default for this would reflect badly on the political decision to create the euro.

Out of interest, has any non-3rd world country ever defaulted on its debt? or has the threat that one would do so merely triggered a bailout?

If the markets are the problem, what is the solution? As Greece shows, not government, as they are the ones overspending, and without imposing European fiscal government (how to irritate the Germans, French and British all at once) there is no mechanism for sorting this out above national level. But whilst I can helpfully rule out that solution, I can’t think of a way forward.

If you don’t want to lose money you don’t have, try not lending it favourably to a socialist government during a bubble.

@Tim completely agree, that is a subsidiary issue, sorry if it didn’t come off like that. This bit:

Secondly, in the climate of fear following the exodus of investors and just after the current recession starts to ebb away, German politicians especially are wary of making too big a splash in case the markets react badly to any intervention.

Is the issue.

The choice is between giving up each nation’s right to rule absolutely over its own economy, or allowing governments to massively mess up (Greece’s false accounts on joining the Euro, it’s excess of civil servants, corruption) and then having to bail them out. Tough one…

“The choice is between giving up each nation’s right to rule absolutely over its own economy, or allowing governments to massively mess up (Greece’s false accounts on joining the Euro, it’s excess of civil servants, corruption) and then having to bail them out. Tough one…”

Or allowing them to mess up and not bailing them out……..Greece should have been given the choice of going bust or selling some of its islands. I would have preferred it to go bust as it would probably have taken the euro down with it. The problem is a bit deeper than too many civil servants, it’s also tax exasion as a national past time.

“Out of interest, has any non-3rd world country ever defaulted on its debt?”

On external debt (ie, owed outside the country):

Austria, 1938, 1940. Germany, 1932, 1939, Greece, 1932, Hungary, 1918, 1932, 1941, Poland, 1918, 1936, 1940, 1981, Russia, 1918, 1991, 1998, Turkey, 1915, 1931, 1940, 1978, 1982, Argentina, 1951, 1956, 1982, 1989, 2001, Venezuela, 1983,1990,1995,2004.

Just to give a 20th century list of not Third World countries.

Greece has been in default on its external debt for fully 50% of its time as an independent country (since 1823).

Domestic default (ie, on debts owned by govt to citizens in that country’s own currency), UK, 1749,1822,1834,1888-1889,1932, Canada (Province of Alberta) 1935, US, 1933, plus lots and lots of others.

If you’d like to know more about this fascinating (umm, for a given value of fascinating of course) subject I strongly recommend this book.

http://www.amazon.co.uk/This-Time-Different-Centuries-Financial/dp/0691142165/ref=sr_1_1?ie=UTF8&s=books&qid=1274182242&sr=8-1

It’s actually the book that all the economists are reading now to try and see what has happened in the past.

Jennifer,

You are slightly misusing the finding from the Bank of England Study. That appears to compare a restructuring – agreed with the people the country has borrowed from – with outright default. The former is arguably closer to the austerity approach that you are attacking – and they suggest it leads to better outcomes – and certainly this isn’t evidence that restructuring is better than what they are trying now.

In our book on how to cut spending (http://www.amazon.co.uk/How-Cut-Public-Spending-Election/dp/1849540152/), one of the people involved in Sweden’s successful fiscal consolidation makes the point very well, he titles a section of his chapter “if you are in debt, you are not free”. If I need to borrow £5 from you then that gives you a certain power over me, you can say yes or say no. Borrowing on a huge scale as many countries, including our own, necessarily gives those lending a political power they would not otherwise enjoy.

Some kind of restructuring, and that probably means an exit for Greece from the Euro, might be necessary but I don’t think that is really a complaint about the power of markets. Paul Krugman made the point recently that if Greece were to do without financial markets, and default on its debt, then because that would mean stopping borrowing it would actually need to make bigger cuts, and face tougher austerity measures than it is currently planning to – as the primary balance would have to shrink to zero immediately. So financial markets, with some help from German taxpayers, are saving Greece from a tough austerity package!

Best,
Matt

‘ Furthermore, this missed opportunity has allowed Anglo-Saxon hedge funds to speculate on Greek debt, and could lead eventually to the end of the Euro. ‘

You appear to be buying the line that evil speculators are somehow to blame. Hedge funds did not create the problem nor did they make it worse. Greece was priced out of capital markets when the French, German and Swiss banks stopped buying their debt. Hedge funds buying CDS is anticipating that would happen, they can’t make it happen. Markets did not assert their absolute dominance, fundamentals asserted dominance. Fundamentals said if the Greek economy significantly contracted through cutting their deficit they would be unable to service existing debts from their tax base. Therefore, why roll-over their debts when you are guaranteed to lose money.

The ECB/EU/IMF are not bailing-out the countries in the Eurozone periphery, they are bailing out the European banking sector who hold so much of the Eurozone sovereign debt, they just declined to tell you that is what they are doing. The German and French banks are massively leveraged with Eurozone sov. debt.

The heart of the problem is the euro is a flawed concept. Unfortunately, in this country too many people thought it was only the right-wingers who thought it flawed. All objections even by the EU own economists were dismissed by arrogant officials and politicians who thought they knew best. The bailout buys the periphery time but does not solve their fundamental problem of being uncompetitive. Their unit labour costs are too high in relation to their productivity and until those are brought down they will be unable to grow out of their debt burden. If they had their own local currency it would depreciate until their unit labour costs improved. Within the euro the only way will be nominal wage cuts, deflation, cuts in public spending and slow growth for many years ahead.

Of course, Goldman Sachs made a pot of money helping Greece to hide its true finances in order to qualify to join the Euro. I wonder whther their prifiting from the consequences?

I’ll proof read better next time.

Whether, profiting.

Ok. The line that is causing problems:

“Furthermore, this missed opportunity has allowed Anglo-Saxon hedge funds to speculate on Greek debt, and could lead eventually to the end of the Euro.”

In the laws of grammar, when a clause separates a main clause from its subclause, you have to read through it. I.e. “this missed opportunity… could lead eventually”. That is the sense of the sentence. The missed opportunity is the fault of the Eurozone governments. The hedge fund issue is not something I explore here.

Jennifer, you’re right to point out Michel Aglietta’s article in “Le Monde”, which is, as often from that brilliant French economist, very insightful. By the way, it reflects the quality of thinking in the community of French economists, whose analyses of the crisis often go much further than what is said and read in Britain (or Germany).

On May 12, just one week ago, I wrote in a comment to “A terrible dilemma” (in http://freethinkingeconomist.com/2010/05/12/a-terrible-dilemma/#comments):
… why embarking on a coalition with the Tories?
I see two reasons, and both are wrong.
The first is, once again, the tyranny of -short-termist- markets. “They” (who are they) want(ed) a majority government, assuming this could guarantee tougher spending cuts and deficit/debt reduction, which were at least partly due to the folly of the past period, lest some forget. Anyway, the markets got it. How long will it last? The market operators don’t care (I wrote short-termist). I find it weird that someone like Vince Cable, who has written and spoken brilliant words about the crisis, swallows that coalition.
The second is…. about sacrificing strategy and the long term to tactics and the short term (short-termism, here we go again).

That said, blaming it all on the markets is necessary but not sufficient. The Greek crisis is also an evidence of the failure of the Eurocratic ambitions (see what I wrote recently on http://www.libdemvoice.org/opinion-another-greek-tragedy-time-for-europhiles-to-admit-the-dream-is-over-18240.html -or on http://www.mikeconomics.net).

The odd mixture now at work of of eurozone ministers and EC bureaucrats pushing for futher integration through austerity measures -just for the sake of the euro and… their image- on the one hand; and the constant short-term pressure of “the” markets on the other hand make many incredulous. As Tim Worstall writes: “Those who created the euro for political reasons cannot bear to see the euro either fail or such a debt default for this would reflect badly on the political decision to create the euro.”

Finally, this one from Brian Gardner, a reader of The Guardian (on May 8):
“Given the control they ‘ll exert over Clegg, Cameron (I skip Brown who’s now over and out), it’s a shame we’re denied the chance to vote for Fitch and Standard & Poor’s”

15. Mike Gauillaume. Countries which lack natural resources need to develop a manufacturing base. Those countries which have a large manufacturing base have the appopriate characteristics : desire to obtain a technical education, self discipline, ability to work as a team, patience , peristance, unremitting pursuit of excellence, a high level of craftsmanship, an unwillingness to accept shoddy,careless workmanship; a willingness to work long hours ( look at the the German and Japanese working week in the 40s and 50s ), a willingness to accept boredom in order to achieve, a minimal level of corruption, a willingness to pay a fair level of taxes, innovative, produce goods on time , etc, etc. In the 1950s , S Korea was poorer than Ghana. Look at Korean companies such as LG. Hedge funds do not cause a country’s economic problems.

No other European country emulates Germany’s manufacturing capability because no other country is prepared to copy all those characteristics which make it possible.

Charlie2 @ 16

The Germans may work hard, but the flipside is that they take their holidays very seriously. Their workforce tends to be very organised and their bosses tend to take responsibility when things go wrong (as is the case in Japan). This isn’t the 40s and 50s, so your implied point that people need to work their genitals off with no respite to achieve success is incorrect.

People are often subservient to those from whom they are begging money.

The German industrial capability is based upon their hard work between 1945 and 1965. It is not just the hours worked, it is the effectiveness in which Germany works which is important.

FWIW try this comparison by ONS of GDP per worker and per hour worked in the UK and other G7 economies in 2008:
http://www.statistics.gov.uk/pdfdir/icp0210.pdf

Germany is manufacturing the high value goods the rest of the World wants to buy. The size of the German manufacturing economy relies on a large number of highly educated and trained craftsmen,technicians, scientists and engineers using the most up to date technology. If one looks at BMW,Audi, Mercedes and Porche, they all occupy the the middle to upper bracket price bracket where profits are greatest and their is least competition from the developing nations. In fact the developing nations increases the size market for German high value manufactured goods.

For those who wouldn’t have noticed, the ‘Euro-Greek’ crisis is a hybrid result of the sins of financial capitalism and the fallacies of European bureaucracy.
Click on the Euro icon on http://www.mikeconomics.net homepage to get comments, analyses and longer-term views going further than day-to-day ups and downs, and blips on traders’ screens.