How the BBC is repeating Tory narratives about the Euro crisis


10:40 am - November 14th 2011

by Sunny Hundal    


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The narrative across much of the Westminster media, who know little about economics, is that Greece and Italy are in a downward spiral because they spent too much and now must bear the austerity to come out of the crisis.

Far too many BBC commentators repeat this every day without even questioning basic assumptions.

Not only is the analysis rubbish, but it will lead to more ruin across Europe.

There’s little doubt that, over the long term, an economy must balance its books.

But the Greek and Italian economies both suffered under right-wing governments that turned a blind eye to tax evasion. As a result, the tax base was small and unable to sustain government expenditure.

That problem was exacerbated by the European Central Bank’s policy of focusing on keeping a handle on inflation (especially in Germany) rather than encouraging growth at the smaller, fringe economies. So they kept interest rates high.

The crisis in Greece came to light after it emerged that under the previous (right-wing) government, the spending deficit had been hidden away thanks to an accounting scam invented by Goldman Sachs (who else?).

Italy wasn’t running a budget deficit, and while its debt/GDP ratio is high, it could meet debt obligations before all this started. It started teetering after strong rumours emerged that Italian banks weren’t as solvent as before, most likely thanks to its government’s incompetence.

The solutions
Instead of the lazy stereotypes about ‘lazy Greeks’, which even the BBC has been pushing, the solutions for both countries should have been straightforward.

1) They should have tackled tax evasion to expand their tax base and put finances on a firmer footing.

2) The ECB should have started re-capitalising teetering banks, while governments should have nationalised a few big ones and broken them up to reduce the ‘too big to fail’ risk.

3) They should not cut spending massively, because that would only shrink the economy at a time it needed growing. This is exactly what happened to Ireland and Greece (most sensible people now recognise, even at the Telegraph, that massive cuts backfired).

Similarly, huge public spending cuts in Italy will only shrink the economy when it actually needs to grow to have any hope of paying off its debts.

It would not surprise me one bit that Italy increases its debt/GDP ratio after austerity cuts, thereby making it more impossible for it to pay off debts. The BBC and others should stop perpetuating such terrible, discredited thinking.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


No real surprise. The BBC is punch drunk from constant attack form Murdoch,Mail,Telegraph.

In tory world no dissent will be tolerated.

“As a result, the tax base was small and unable to sustain government expenditure”

Out side of your fantasy land of left VS right reasons do not really count for much – What counts is results -a tax base to small to sustain government spending results in spending too much….

Lunatic politicians and talking heads like your self who don’t have real jobs or balance real books result in messes like this…

One of the things that has depressed me is the way the BBC has failed to challenge any of the basic myths perpetrated by the economic mainstream. This is done routinely by use of such phrases as “bloated publc sector”, which seems to be all one word when discussing Greece.

As you say the picture presented of feckless southern europeans bears no relation to the truth: and indeed the “one size fits all” analysis masks very big differences in how this came about for the countries most badly affected. It also skips over the fact that the UK is in a worse position in terms of deficit than some of the countries attacked by the specultors: and in terms of level of debt as well.

It appears that the UK is not attacked because there is no need to bully the government into applying the toxic nostrums demanded by the orthodoxy: both labour and tory politicians eagerly embrace them without need of stick.

I have been trying to make some sense of what actually happened from a beginner’s level, and for any who are struggling to get to some facts I have a little board where I have been trying to explore some of this. Some information laid out in very simple terms here:

http://thosebigwords.forumcommunity.net/?t=48431479#lastpost

In fairness, the BBC World At One had on John Prideaux of The Economist who explained that Italy’s problems from its large national debt, relative to national GDP, failing competitiveness and labour market rigidities had long preceded Berlusconi’s time as PM of Italy. It is just that Berlusconi had so many personal distractions and business interests that he did little to resolve those problems.
http://www.economist.com/node/18805327

Our coalition government has not been short on spin to explain Britain’s flagging economy – Gordon Brown, extravagant public spending etc – and latterly it’s the Eurozone.

If a client of a private company fails to pay its bills the service is stopped. If a country due to tax evasion is unable to sustain government expenditure ( provide service ) it carries on regardless and other country’s have to bail it out…

“The narrative across much of the Westminster media, who know little about economics”

Says Sunny…pot, kettle?

Whilst you are right to a certain extent about tax evasipn, even if all taxes were collected in Italy and Greece the problem would,kt go away. Greece especially simply massively overspent, and their public sector is massively inefficient.

The problem is that in the real world, rather than Sunny/socialsit/keynesian land debts have to be repaid and running large deficits alongside large nationals debts makes most sensible investors think you won’t.

It’s all well and good saying that austerity is bad and governments should just borrow and spend more, but you miss the important point – who is going to lend them that money at reasonable rates.

You also forget that austerity can help an economy in the long term by making it more efficient and productive. Ireland for example took a lot of pain quickly but looks to be on its way up again.

Jon Sopel on the Politics Show actually suggested that the peoples of Greece and Italy had succeeded in toppling their leaders! Economic illiteracy? Has he read anything about the EU financial crisis? Even Paul Waugh as the right wing journalist guest looked embarrassed.

Apart from the usual, expected, factual inaccuracies in this Sunny (Italy is running a budget deficit for example) there’s a big problem with your analysis of the crisis. (I’ll leave aside your pathological need to assign all the evils in the world to ‘the right wing’).

Your position is that troubled Eurozone members should not cut public spending at all at present, because the best way to create growth is an expansionary fiscal program. Fine. But where is the money supposed to come from for this? Neither Italy or Greece can resort to the printing press, so the only ways for them to increase public spending would be either to sell assets (privatisation, basically) or to borrow more money. (You state above that they ought to be raising taxes on ‘the rich’, but raising taxes is fiscally contractionary and would therefore, on your own analysis, be counter-productive).

So borrowing is the only weapon left in the locker. And here is the main problem: borrowing money is now effectively impossible for Greece, and much more expensive for Italy. The more money Italy has to spend on servicing its debt, the less there is left over for everything else. It’s trite, but it’s true – you can’t borrow your way out of a debt crisis.

Oh, and a few more points:

[Italy] started teetering after strong rumours emerged that Italian banks weren’t as solvent as before, most likely thanks to its government’s incompetence.

This is arsy-versy. The Italian banks are in strife because of their exposure to sovereign debt – principally Italian sovereign debt. Italy is teetering because of its high levels of absolute debt (itself the legacy of the over-spending governments of the 70s and 80s) and the short-term nature of that debt.

The crisis in Greece came to light after it emerged that under the previous (right-wing) government, the spending deficit had been hidden away thanks to an accounting scam invented by Goldman Sachs (who else?).

The Goldmans ploy (not that dissimilar to PFI really) is pretty small potatoes compared to the real accounting problem in Greece – the total unreliability of official statistics.

The BBC has been peddling the austerity policy since the crisis began. No debate, no suggestion of alternatives, certainly not social democratic ones. Just deficit reduction down the line. It has been a primary mover in selling these policies, which now threaten the NHS as well as our pensions and other public services, as inevitable and right. It just shows how important a role a state broadcaster must play in maintaining state power. As to which state – obviously not the 99 per cent of licence fee payers who have been told to pay the price so the 1 per cent (who probably dodge this too) can stay in charge. So the BBC makes no note of the outrageous coups which have unseated democratically elected governments and treats as natural forces the bond marketeers who engineered the coups in favour of the corporate elites. But they make sure that everyone wears the poppy.

“… and while its debt/GDP ratio is high, it could meet debt obligations before all this started. It started teetering after strong rumours emerged that Italian banks weren’t as solvent as before, most likely thanks to its government’s incompetence. ”

You reckon maybe question marks over bank solvency may have a smidgen to do with holding so many government bonds. At a wild speculative guess specifically Italian government bonds. Actually the Italian banks are too boring to be completely insolvent. There are more worries over the French banks than Italian banks. Monti will placate things in Italy for a while. Meantime the crisis will move on to France.

” The ECB should have started re-capitalising teetering banks, while governments should have nationalised a few big ones and broken them up to reduce the ‘too big to fail’ risk. ”

The ECB can’t recapitalise banks. National treasuries are the recapitalisers.

3. Fiona

” It also skips over the fact that the UK is in a worse position in terms of deficit than some of the countries attacked by the specultors: and in terms of level of debt as well. ”

They are not being ‘ attacked by speculators ‘. Investors are dumping their bonds because they no longer want to bear the risk of holding them. I wonder why. Maybe something to do with a ‘ voluntary ‘ 50% haircut in Greece. More sellers than buyers and yields will rise. Yields rise and that triggers more selling causing yields to rise further. Nothing to do with speculators and everything to do with ordinary savers, pension funds and banks de-risking.

Last week Channel 4 had a one hour programme highlighting all the tricks the Greeks get up to to avoid or evade tax.

From rich doctors to minimum wage hairdressers it appeared the whole country was complicit in dodgy their taxes.

And the retirement at 50, and the pensions for unmarried daughters of Army officers and the fact that there are five times as many pharmacists in Greece as other EU countries because of the generous subsidies on offer and back handers from pharma companies are not BBC inventions.

“Lazy” is the wrong word to describe Greeks but the system is rotten and most of the population have been happy to go along with the rotten system.

@ Richard W. Interest rates are not a law of nature, not even a law of any kind: they are decisions we make and we can change them. If there is interest in solving this problem the first thing that needs to happen is a cap on the “yields” which are merely the interest demanded in order to finance the debt through securing loans. To suggest that increased yields is not a result of speculation is really odd: if you do not believe the country will repay you don’t buy: certainly not if you are a pension fund which has no business taking risks like that with their members money. If you believe it will repay you do not need higher interest: you can do what you need to do on a lower rate as before. Fact is that the demand for higher interest for increased risk is precisely speculation for profit:it can be nothing else.

Where I do agree is that profiteering companies will do this if they are allowed to. And that is why they need to be stopped. The problem is masked if you accept the premises underlying your analysis, certainly. You presuppose that the hegemony of the markets is unchangeable: but that is the whole difficulty because governments have ceded sovereign power to unaccountable corporations and have voluntarily rendered themselves powerless. That is not inevitable and it is not desirable either.

The idea that there is anything rational or hard headed about market operation is ls questionable, though again it is implicit in your account. The focus on “confidence” gives the lie to it: and it is not me who continually points to that or to the greed/fear balance: that is the markets themselves.

We need to focus on the unfortunately increasingly real possibility of a downward spiral in Europe of public spending cuts, falling GDP and employment with declining tax revenues leading to more spending cuts in the name of financial rectitude. The end result of that process will be another recession.

Try Paul De Grauwe on: The Governance of a Fragile Eurozone
http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf

Prof De Grauwe makes the case that: Only the ECB can halt eurozone contagion, in an article for the FT on 3 August 2011. He explains why the EFSF (European Financial Stability Facility) will never be enough to prevent contagion spreading and makes a convincing case that the ECB must take on the traditional role of a central bank as the lender of last resort. His advice has been studiously rejected so far. For the present, the ECB’s articles of engagement prevent it from acting as lender of last resort.

Time to prevent a recession in Europe is running out.

15. Luis Enrique

I’m not sure that narrative is so wrong, it just needs amending to: “spent to much relative to their tax revenues” and your emphasis on tax evasion agrees with the BBC.

oh, here’s a right winger (centrist) pointing out austerity won’t work in Italy

http://marginalrevolution.com/marginalrevolution/2011/11/why-italian-fiscal-austerity-wont-work.html

[Greece has more problems that tax evasion – I posted a bunch of links on previous thread on this topic. The “too well paid public sector workers” thing is true.]

@ shine67: can you link to evidence for a retirement age of 50? I find that seems to have only applied to mothers with dependent children who could take early retirement with a partial pension: other sources suggest 58 as the standard age before the “reforms” and some say 61.

Like other countries there has been some support for early retirement for older workers as a measure to help with youth unemployment; but Greece is hardly alone in that. It is not an obviously bad idea, actually: but in at least some cases in Greece it is imposed rather than voluntary.

15 – Luis, I think it’s only fair to point out that Tyler doesn’t agree with Sunny either:

That said, more government spending probably won’t work either, unless you think that spending is extremely effective in targeting unemployed resources, which in Italy I believe it is not. Neither contractionary nor expansionary fiscal policy will succeed.

Realise this: the BBC’s main problem is that it’s news journalism has collapsed, as if inevitably must, enfeebled by its monopoly position, and with effective criticism coming only in the form of an increasing impenetrable ‘group think’.

My viewpoint comes from the Right: and it’s plain that the BBC simply cannot imagine – cannot imagine – the views of liberal free-marketeers.

Your viewpoints come from the Left: and it seems that they can’t satisfy you either.

But ultimately, the real problem is not one of which way the bias leans: it’s the question of the severe deterioration in the quality of their journalism. There’s simply no need for BBC journalism to be so crap – look at Channel Four News. It may be fairly unashamedly Lefty, but who’d criticize it, since it’s obviously the best TV journalism we have?

It’s not the bias. It’s the crapness.

19. Luis Enrique

Tim J

I think it’s important to point out – for those that don’t click through – that Tyler is not this Tyler

19 – Eep, good point. But have they ever been seen in the same room?

Fiona:

“Like other countries there has been some support for early retirement for older workers as a measure to help with youth unemployment; but Greece is hardly alone in that. It is not an obviously bad idea, actually: but in at least some cases in Greece it is imposed rather than voluntary.”

Superficially that sounds a good idea but think it through and it has serious flaws.

Assume a rough rule of thumb that working for 40 years funds 20 years of retirement.

The moment you have people working fewer years then you can’t afford to fund retirees unless other spending cuts are made.

The UK has 30 million workers. Twenty years ago we had 20 million workers. A nation has to create NEW jobs it can’t just get rid of older workers and replace with younger ones.

@Shinsei67

If there is a fund you would be right: but at least in the UK it is pay as you go so that does not apply (whether pay as you go is a good idea is a separate argument)

But I am interested in this promotion of the idea that these southern europeans are lazy and do not work long years. Can you evidence a retirment age of 50? Eurostat shows average retirement age in Greece of 61.1 years and the european average as 58.4. So that does not seem to be true. UK is 56.2

http://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do?dvsc=0

13. Fiona

Fiona, the sell off was in the secondary market. As sellers dump their holdings the price falls and the inverse of the fall in price means that the yield rises because there are more sellers than buyers. How are you going to cap a spike in yields in the secondary market. Order sellers that they cant sell below a fixed price? Make it compulsory for buyers to pay more than they want to pay. You don’t think that this would impact how much investors were prepared to pay in the primary market? Fixing a cap in the primary market auction is simple. Here is the catch, it is an auction and if the cap is below the risk that investors assign, they will not bid. Result is you will not raise any funding at the auction. So who are you going to order to to buy debt at an interest rate below what they want? I don’t think you have thought this through.

” To suggest that increased yields is not a result of speculation is really odd. ”

Well one can be semantic and say every action is speculative. Here is the speculation. Holders of the bonds no longer want to hold them, they speculate that they may lose some of their investment so they sell them to someone else who is prepared to bear the risk at a lower price. You may call that a speculative attack. I call it normal behaviour.

” Where I do agree is that profiteering companies will do this if they are allowed to. And that is why they need to be stopped. ”

Appalling that anyone would want to be compensated for lending money to a government. Well it is quite easy to stop them by stopping borrowing from them. Maybe the tooth fairy could help.

” The problem is masked if you accept the premises underlying your analysis, certainly. You presuppose that the hegemony of the markets is unchangeable: but that is the whole difficulty because governments have ceded sovereign power to unaccountable corporations and have voluntarily rendered themselves powerless. That is not inevitable and it is not desirable either. ”

I only presuppose a really strange notion that when you borrow from someone they invariably charge you for the privilege.

” The idea that there is anything rational or hard headed about market operation is ls questionable, though again it is implicit in your account. The focus on “confidence” gives the lie to it: and it is not me who continually points to that or to the greed/fear balance: that is the markets themselves. ”

Implicit in your account is that markets are being greedy through charging governments for borrowing. It is la la land to expect them to do it for free.

@ Richard W.

Not really: if the ECB won’t act like a proper central bank; and the countries are not allowed control over their currency either, then what you say is true. Once you close all sensible options only stupid ones are left. But there is nothing inevitable about it. There are many other options if the political will is there: it isn’t. Nor is the political power if the premises of plutocracy are accepted. Nothing inevitable about that either. What seems to me to be certainly true is that if we continue to follow this path the people of europe are going to be beggared for no gain exept to the very rich. That may be acceptable to you: it is not to me.

I only presuppose a really strange notion that when you borrow from someone they invariably charge you for the privilege.

Oh, there’s a fine old European (English, indeed) tradition of the ‘forced loan’ to sovereigns. Not a particularly promising one, if you don’t like Civil Wars, but the precedent is there!

Who exactly does Fiona believe will lend to Italy or Greece at “capped” interest rates?

The point of this thread is how, once again the BBC is so biased in the tory favour. So brow beaten are they that their coverage is fawning of the tory position.

Newsnight is unwatchable these days. The hand picked tory clones just repeat their masters mantras. A once great institution reduced to nothing more than a tory rag.

28. Luis Enrique

here’s what you are talking about:

http://en.wikipedia.org/wiki/Financial_repression

@ Fiona:

“If there is a fund you would be right: but at least in the UK it is pay as you go so that does not apply (whether pay as you go is a good idea is a separate argument)”

Doesn’t matter whether there is a fund or not, the argument still remains true. If people work shorter working lives there is less economic wealth generated by the country as a whole and so less wealth to fund pensions or other public services.

“But I am interested in this promotion of the idea that these southern europeans are lazy and do not work long years. Can you evidence a retirment age of 50? Eurostat shows average retirement age in Greece of 61.1 years and the european average as 58.4. So that does not seem to be true. UK is 56.2”

Bear in mind I didn’t say Greeks were lazy, just that they colluded in a rotten system.

The 50 year retirement age came from C4 programme last week. It wasn’t the average retirement age for the entire Greek nation just an example of how early retirement worked in some professions.

28 – Surely both capital controls and requirements for Italian banks to purchase Italian sovereign debt on artificially poor terms would both be contrary to EU law?

Well, I mean obviously they would be contrary to EU law, but I mean so contrary to EU law that it would be virtually a derogation from the EU? And if they’re going to go that far, why not just leave the Euro?

@ 24. Fiona

Well yes, but we are speaking about the dynamics and constraints of the current situation. If the ECB was an unlimited LOLR, that would change things and they could potentially buy the whole EZ debt market. However, they have been quite explicit in saying that they are not going to be a LOLR. Therefore, considering the self-imposed constraints, it is not irrational for investors to be wary of some peripheral states.

I actually agree with you that the whole EZ debt crisis is effectively a failure of political leadership. The EZ in its entirety is the wealthiest part of the world and is solvent. That is why it was absurd for them to be approaching China for financing. There is no shortage of money, but there is a failure of political leadership.

32. Luis Enrique

this is today’s important news story on this topic. The Bundesbank says no to ECB acting as lender of last resort.

http://www.ft.com/cms/s/0/641237a8-0dcd-11e1-91e5-00144feabdc0.html#axzz1dgLHZtRi

He says ““I cannot see how you can ensure the stability of a monetary union by violating its legal provisions,” Mr Weidmann argued. “I don’t see how you can build trust in a system that violates laws.”

but if the ECB stepping up is the only way to save the Euro, that is tantamount to sitting by and allowing the Euro to disintegrate in order to protect its “stability”

“The crisis in Greece came to light after it emerged that under the previous (right-wing) government, the spending deficit had been hidden away thanks to an accounting scam invented by Goldman Sachs (who else?). ”

The GS/Greece deal was in 2002. Worth looking up who was in government at that time…PASOK.

The, err, socialists.

Well yes, financial repression is always possible with your own banking sector. However, a government can’t compel a bank or institution outwith their jurisdiction to buy. It is the outside holders who are de-risking from Italy. Force the Italian banks to be reluctant buyers and their share price will collapse and the silent bank runs and capital flight will be the outcome.

(Italy is running a budget deficit for example

I said earlier, when all this started. Pay attention Tim! Italy’s problems did not start with a sudden realisation about its deficit.

I said earlier, when all this started. Pay attention Tim!

You’re starting to get a bit long term for me then – Italy has been running deficits for the last 20 years. Sometimes small, sometmes large.
http://www.tradingeconomics.com/italy/government-budget

Are you perhaps talking about a primary budget surplus? Because they’re different things, you know.

@32 Luis: “but if the ECB stepping up is the only way to save the Euro, that is tantamount to sitting by and allowing the Euro to disintegrate in order to protect its ‘stability'”

Exactl – thanks for that illuminating link.. Herr Weidmann, head of the Bundesbank, was clear about what courses of action were unacceptable but had nothing to contribute – in public, at least – as to the way forward. By implication, the only policy option open is austerity and more austerity on the part of heavily indebted countries with uncompetitive economies regardless of whether that pushes the Eurozone into recession or causes the zone to break up.

I suppose the only gain so far is that new PMs for Greece and Italy – respectively, Lucas Papademos and Mario Monti – will mean that the incoming technocrat PMs will have more credibility with the Bundesbank, which is evidently running the show now.

On the issues with Italy, try the link @4 to John Prideaux in The Economist. Italy’s current fiscal deficit is relatively small (c. 3pc of GDP) but it entered the Eurozone with a national debt worth more than 100% of Italy’s GDP – well beyond the eligibility guideline for Eurozone membership. Italy has a huge competitiveness problem as indicated by a large trade deficit but as a member of the Eurozone there is no option to devalue its currency to restore competitiveness.

@ Luis/tim J

Tax evasion is indeed an issue with greece and italy, but solving that problem isn’t enough. Their public services are horribly expensive, wasteful and inefficient.

I’ll give you an example. A friend is involved with the Greek railway asset selloff/privatisation. The two major barriers there are the hugely expensive, unionised workforce and the fact that it would be cheaper in terms of cost per passenger per km to shut the railways down and make every journey by taxi.

@ fiona

You clearly don’t understand finance or what is really driving bond yields. It’s not speculators driving yields higher. I doubt anyone is really short italian bonds at all at the moment – it’s simply too expensive to be short these things.

What is happening is pension funds, who are long only and have to hold assets, are having to sell italain bonds because they are worried about haircuts and that CDS contracts will be banned or not pay out on a default. This is driving the price of bonds down (yields up). These funds have a duty to invest their customers money conservatively. Are you suggesting they should invest in junk just to help the euro project out??

39. gastro george

@32 Luis

‘… but if the ECB stepping up is the only way to save the Euro, that is tantamount to sitting by and allowing the Euro to disintegrate in order to protect its “stability”’

Exactly – what we discussing in a previous thread.

Everything else is just praying for “something to turn up”, which isn’t going to happen.

You may be right, Tyler. I said at the start I am a beginner on this. But still I am not convinced, because it seems that Spain is next, judging from the “yields” demanded today. There is no reason I can see to expect an Italian default except for the “yields”: they are now the problem, and will be for Spain, and then whoever is next.

Pension funds may be the major movers in this, as you say. Do you have figures, or at least a link which demonstrates that?

41. Luis Enrique

here’s an interesting argument that I’ve not seen elsewhere

http://blogs.reuters.com/felix-salmon/2011/11/14/europes-liquidity-crisis/

shorter: banks aren’t holding enough sovereign debt for their solvency to be in peril, this is a classic liquidity crisis and the ECB needs to solve that problem.

[yes, that Daniel Davies]

@41 Luis: “banks aren’t holding enough sovereign debt for their solvency to be in peril, this is a classic liquidity crisis and the ECB needs to solve that problem.”

Right – great link – but there are still fundamentals at issue even if the immediate liquidity problem of banks is resolved by the ECB acting as lender of last resort.

The high bond yields that Italy’s needs to pay to refinance a tranche of maturing national debt are a sympton of its underlying economic problems. The scale of those problems can be judged better from the data here:
http://www.economist.com/node/21538179

Italy’s current account deficit on its international trade is shown as 3.7pc of national GDP while its budget balance is -3.7pc of national GDP (Britain’s is -8.8pc). Spain’s fundamentals are worse than Italy’s: the current account deficit is 3.8pc while the budget balance is -6.5pc.

@cjcjc

Basic economics – some people would demand Italian bonds at a capped rate – the market just wouldn’t clear. The question is surely how much “some” is and what actions the ECB/Italian government could take to plug the difference

@ fiona

I don’t have data for italy but for every country pension funds are by far the biggest holders followed by banks, who hold govt bonds for liquid asset requirements. As such neither are ever short.

Hedge funds can go short but even the biggest HF is dwarfed by real money/pension funds.

The cost of shorting italian govt bonds is also prohibitive as well – you’d be paying upwards of an annualised 6% off the top of my head.

What is really likely to be happening is simply that pension funds want to get out of some of their italian risk, and banks don’t want any more. Basically there are no real buyers. It’s a similar situation to when short selling bans were put in place on french financial stocks – they fell hard – as the impact of short selling speculators was wildly overexxagerated.

The simple fact is this though; europe almosy as a whole, as well as various other countries (US, Japan) have been running deficits for years, and grew their debts heavily, both private and government. The growth needed to “grow out of debt” is simply not realistic, especially when looking at the last decades historical growth, which was itself pumped up by a credit boom. Before the credit crisis a country might have got away with it for a while, but now everyone has re-evaluated the risk of lending across the board any lax spending behaviour is going to get punished. If there is any real chance of not getting paid back people simply won’t lend to you. Austerity might be short term painful but long term it won’t cause as much disruption as a default, and will make those economies going through it more productive and efficient over time.

@44: “Austerity might be short term painful but long term it won’t cause as much disruption as a default, and will make those economies going through it more productive and efficient over time.”

That is a claim, not an established fact.

Austerity is not costless or painless as compared with the option of currency depreciation for countries not in the Eurozone – or those in the zone that default and drop out.

National austerity will depress the GDP of trading partners as well as national GDP. The extent to which austerity will improve national trading competitiveness – by reducing unit labour costs, meaning that labour productivity must rise faster than average earnings – is highly uncertain.

Economies depressed by austerity measures are not encouraging commercial environments for business investment. Already in the news, individual and families who think they would have better job prospects abroad are considering emigration – in short, austerity is likely to promote brain drains in countries with austerity. That will make it harder to improve productivity and competitiveness.

Adjustment will be less painful if competitive economies – those with trade surpluses and more balanced budgets – apply expansionary measures in their domestic economies but there is little indication so far of their willingness to see adjustment as a symmetrical, rather than an asymmetrical process.

The monetary union in Europe will continue to be unstable unless it is supported by a fiscal union to transfer funds from chronic trade surplus contries to countries with chronic trade deficits – that is what we do in Britain, which is both a monetary union and a fiscal union.

46. Leon Wolfson

@9 – Cracking down on tax evasion. Which of course you’re deathly afraid of…

@38 – So still cheaper than the UK railways then. And of course you blame decently paid workers for everything. Never mind the the Greek public sector wasn’t that big before this started.

Luis – that blog post by Felix Salmon is slightly worrying.

He says at the end someone needs to come up with a plan. But the blog post essentially says no one is quite sure what the problem is either. So how exactly will they respond with a plan?

(doesn’t surprise me its the same DD. He’s quite active on Twitter)

@45 Bob B

Currency depreciation is an external devaluation, whereas “austerity” is an internal deval.

People feel the internal deval more, and it is probably more painful for many economies. Don’t for a moment think that the alternative – external devaluation – is pain free though. The main advantage od the currency deval is it happens much quicker, and is politically more palatable.

@48 Tyler: “Currency depreciation is an external devaluation, whereas “austerity” is an internal deval.”

I’m familiar with the terms and the distinction. The latter – internal devaluation – usually involves far more social pain.

The Pound depreciated by c. 25pc on exit from the European Exchange Rate Mechanism (ERM) in September 1992. That proved to be a blessing in disguise. By the final quarter of 1995, Britain’s standardised (ILO) unemployment rate was lower than that of France, Germany or Italy and the employment rate of working-age people higher and stayed that way up to the financial crisis of 2008. Britain’s terms of trade (export prices / import prices) stayed more or less steady until 2000 – I was checking.

Sam Brittan, writing in the FT in July: “The relative decline of the British economy in the century up to the late 1970s has been reversed. Since then, the UK has caught up with and even overtaken its principal trading partners. The previous two sentences are neither a typing mistake nor a daydream. They are the sober conclusions of the country’s leading quantitative historian, Prof Nicholas Crafts”
http://www.samuelbrittan.co.uk/text399_p.html

@ BobB

External devals are usually quicker and less painful than internal, as I said, but not always.

If a country depends significantly on imports those prices can rise dramatically, pushing inflation higher, ever compounded by a weakening currency. Pensioners end up paying for that one, assuming inflation doesn’t get out of control.

Also if a country has large external debts currency deval makes the problem worse not better. Look at hungary and it’s swiss franc mortgages for example.

The point is that even external devals are painful, but it tends to be easier and quicker to force a country back to competativeness through an external deval. People still lose money or get poorer during it though – its not a panacaea.

Sunny, crossing out budget doesn’t make it true that Italy wasn’t running a deficit – Italy was and is running a deficit. It’s just if you don’t count interest payments (which, um, you should because they’re a cost) that they are running a surplus.

That’s interesting in the context of a default, because it theoretically means that they wouldn’t need recourse to the bond markets following a default on their debts, but it doesn’t mean that they aren’t running a deficit. Clear?

The narrative across much of the Westminster media, who know little about economics

@Tyler: “If a country depends significantly on imports those prices can rise dramatically, pushing inflation higher, ever compounded by a weakening currency. Pensioners end up paying for that one, assuming inflation doesn’t get out of control.”

But that is not what happened after Britain’s forced exit from the ERM in September 1992. As shown @49, on the evidence that proved to be a blessing in disguise: Britain’s unemployment rate fell, the employment rate improved and GDP growth increased.

With commited inflation targeting by central banks, accelerating inflation can be avoided. And I accept that additional fiscal stringency is necessary to meet the absorption conditions for devaluation to imrove the trade balance – in other words, domestic absorption of resources must reduce to make room for additional exports and import substitutes if the economy is working near capacity – the classic citation is: SS Alexander: The effects of a devaluation on the trade balance (IMF Staff Papers 1952)
http://wenku.baidu.com/view/d0a4a16a561252d380eb6e48.html

Several economists with Nobel laureates are saying that austerity measures alone in chronic deficit countries, with no exchange rate flexibility and no expansionary measures by chronic surplus countries like Germany, will depress European economies and inflict social pain. But the option of exchange rate flexibility means being outside the Eurozone. The EU – and America – are pressing China to boost its internal economy in order to reduce China’s huge trade surplus through increased imports. But China can properly ask: Why isn’t Germany doing that for the same reason?

53. Luis Enrique

Sunny,

it might not be a terribly satisfactory answer, but general fear and doubt caused by the sovereign debt crisis might be all there is to it.

here’s more on the topic, from Soro-funded INET

http://ineteconomics.org/blog/money-view/liquidity-public-and-private

54. Leon Wolfson

@52 – And none of what you says excludes the pain it DID inflict on pensioners. Denial, etc.

And China has been holding down their currency artificially. It can’t this forever, and when it soars, they have FAR too little domestic demand to stop it being a complete disaster for them. The question you posed to Germany is irrelevant, the Euro ISN’T being held down in the same way.

@54: “The question you posed to Germany is irrelevant, the Euro ISN’T being held down in the same way.”

In the Eurozone, Germany has a chronic trade surplus – as the downstream result of what Tyler here has (aptly) termed an “internal devaluation” to restore competitiveness after DMark entered the Euro at an overvalued exchange rate in 2000. Internal devaluation involved slowing German GDP growth by fiscal measures, some deregulation of business activities, and reforms of Germany’s (generous) welfare benefit system to enhance incentives to return to work after sickness or unemployment

Greece, Italy and Spain have chronic trade deficits through failing competitiveness. In the absence of the option of exchange rate flexibility in the Eurozone, internal devaluations are needed to restore competitiveness but those will need to be more austere in scale and scope, and therefore more socially painful, if chronic surplus countries don’t at the same time adopt policies to engage in “internal revalutions” to reduce their competitiveness and trade surpluses – by boosting internal demand through fiscal measures as they have no longer have national control over monetary policy.

The consequence of asymmetric adjustments for diverging competitiveness means that austerity measures alone will exert an overall depressing effect on economic activity in the Eurozone. This evident asymmetry led Norman Lamont to aptly rename the ERM as the European Recessionary Mechanism.

In the 1950s and 1960s, West Germany was persistently tardy about revaluing the DMark under the then prevailing Bretton Woods system of pegged but adjustable exchange rates. This enabled the West Germany economy to enjoy the benefits of export-led growth from an under-valued currency for years at a time but inflicted strains on the economies of West Germany’s trading partners.

Those strains finally ended the Bretton Woods system when the US Dollar was unpegged from its gold value in 1971 and the GB Pound was floated the following year. As most of us now recognise, the efforts made by the Conservative governments of Thatcher and Major to put the Pound into the Exchange Rate Mechanism (ERM) in October 1990 were a big mistake and the negotiated provision in the Maastricht Treaty for Britain to opt out of EMU was very wise.

Try David Hume’s essay On Commerce (1752) which explains how, under the Gold Standard, a trade surplus leads to an inflow of gold and therefore an increase the money supply resulting in an increase in the domestic price level (= internal revaluation).

The regular problem was that countries with trade surpluses sterilised incoming gold – central banks sold bonds into finance markets to mop up additional liquidity and so prevented the incoming gold from increasing the money supply and, hence, the domestic price level. The burden of adjustment fell asymmetrically upon countries with trade deficits and outflows of gold. This asymmetry was one reason why the Gold Standard finally broke down and why the Bretton Woods scheme of fixed but adjustable exchange rates was adopted in its place after WW2.
http://www.econlib.org/library/Enc/bios/Hume.html


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