Archive for April, 2012


The Euro-Exit Taboo

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Stay or leave? Should Greece persist with its extreme austerity plan, or should it abandon the euro? What about Portugal? Spain? In mainstream political discourse, posing the question of euro exit is taboo. When Prime Minister Papandreou of Greece, an ardent European, unexpectedly proposed a national referendum on the matter (one he expected adherents to the euro to win) he was immediately sanctioned by his EU counterparts and threatened with a cutoff of all aid to Greece. He was soon after replaced as leader by his own coalition government.

But the question of euro exit does not go away just because it has been officially outlawed. It is often vented by the political fringe, from the National Front on the Right in France to Basque nationalists in Spain, the Northern League in Italy and many on the Far Left in Greece. These views are easy to dismiss as extreme, irresponsible or simply uninformed. But it is more difficult to ignore prominent experts, such as Wilhem Buiter, a former member of the Bank of England’s monetary-policy committee and now chief economist at Citigroup. In Buiter’s view, there is a 50 percent probability of one or more members leaving the euro zone.

Greece is in its fourth year of crisis; desperately uncompetitive, its output still falling fast. It is the most frequently cited candidate for euro exit, implying a huge devaluation of its (new) currency and default on its debts. Portugal is in only slightly better shape. More recently Spain, a much larger and historically more dynamic economy, where draconian cuts are being implemented in the face of 23 percent unemployment, has come under scrutiny. Another rather more surprising candidate for euro exit is ultracompetitive Germany, on the grounds that it might find it easiest to leave an arrangement many Germans consider dysfunctional.

While Greece’s Papandreou was being fired for, among other things, posing the question of euro exit, the World Bank, International Monetary Fund and UBS, an investment bank, were busy conducting elaborate exercises simulating the effects of euro implosion on the global economy. Their conclusions do not make for pretty reading. Despite the taboo, the question of euro exit is the most important source of uncertainty clouding the outlook for the world economy.

The polar cases of Argentina and Latvia

Quite a bit can be learned about the choice of staying or abandoning the euro by examining the polar cases of Argentina and Latvia, which respectively decided to abandon and to stay with their fixed exchange-rate regime. The comparison reveals that the choice confronting the countries in the euro-zone periphery is much starker than that either Argentina or Latvia had to make.

In the last decade, Argentina and Latvia, like Greece and other countries in the euro-zone periphery, became uncompetitive, struggled with large external debts, and made diametrically opposite choices on whether to stay with or abandon their fixed exchange-rate regime. Their experience holds important lessons for the euro zone, though ones which require careful interpretation.

In 2001, after a long recession that came on the tails of a great boom, Argentina broke its one dollar–one peso convertibility law and massively defaulted on its debt. In contrast, Latvia, which saw an even more gargantuan boom before the global financial crisis hit in 2008, decided to maintain its peg to the euro and remain current on its international obligations with help from the IMF (Latvia, an EU member, is not yet part of the euro zone but is committed to adopting the euro).

What happened next? In both countries, following the sudden stop of foreign credit, domestic demand collapsed and unemployment soared to above 20 percent. Argentina saw a 75 percent devaluation of its peso and defaulted on its debt, paying back only about 25 cents on the dollar. However, it returned to rapid growth within about two years. Latvia, on the other hand, saw a deeper and much more protracted crisis. Even five years after its adjustment began and despite large-scale emigration, its unemployment rate remains near 15 percent. Growth has resumed, though at a snail’s pace. Still, while Latvia’s government now is much smaller and more efficient, and its access to international capital markets has been restored, Argentina remains a pariah and a predatory state a decade after its devaluation and default.

These cases show that there is no easy option for the euro zone. While Argentina recovered much faster than Latvia, it was helped—the argument goes—by a massive commodity boom, and it ignored its continuing structural weaknesses. And while writing down its large debt helped Argentina restore its economy, it permanently impaired its reputation and inflicted great damage on others. In short, if the perspective taken is strictly national, the Argentine course may be the most rational. But if one takes a broader perspective—including the interests of the global economy—and wants to deal with the country’s fundamental weaknesses, then countries should stick it out like Latvia.

Why Europe’s Choice is Starker

But despite similarities in the Argentina and Latvian case studies, the choice for euro-zone countries is even starker, with staying in or leaving having more far-reaching consequences.

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We take a look back at the mess that has become the eurozone.

A version of this article originally appeared on our US site,

Wrapping your head around the European debt crisis can be quite a headache, and all that commotion can be hard to follow at times. What with austerity packages, government strikes and bond yields, it feels likes there’s no end in sight.

Just in the last couple of weeks, 10-year bond yields in Spain approached 6% and the country declared itself officially in a recession; France took a step closer to electing a socialist president sceptical of austerity; and the Dutch government fell apart over budget cuts that would bring its deficit under 3% of GDP, as the eurozone mandates.

How it all began

International banking collapses often lead to sovereign debt crises, and this time around was no different. The Great Recession and the destabilisation of financial markets pushed European deficits to unsustainable levels, and the shared currency put a further bind on the more profligate countries as they could not pump more money into their economies nor could they let their currencies float to encourage exports.

In 2008, only Greece and Ireland had deficit-to-GDP ratios above 6% — twice the EU’s limit — but by 2009 nine EU countries broke the 6% threshold, with Greece the biggest offender at 15.8%. In October of that year, new Prime Minister George Papandreou revealed that his predecessor had been understating the deficit for years. Credit downgrades soon followed, and government officials and union members began striking against austerity measures such as an increase in the retirement age. In May 2010, Greece received its first round of bailout loans, totalling $152 billion from the eurozone and IMF.

We can see the Greek crisis play out through the lens of stocks like the National Bank of Greece (NYSE: NBG.US) and DryShips (NASDAQ: DRYS.US). The National Bank of Greece traded above $40 before Papandreou revealed the deficit bubble and has since sunk to near $2, while the Greek shipper traded above $100 before the financial crisis and now goes for about $3. Greek stocks experienced none of the recovery that other markets did after the financial crisis, and the Athens Stock Exchange Index is now worth just 15% of what it was five years ago.

Elsewhere on the continent…

While Greece was spiralling out of control, foreboding signs from Spain, Portugal and Ireland appeared in the form of contracting growth rates, bank bailouts and debt downgrades. Throughout 2010, the euro continued to drop to lows not seen in several years, and in November, Ireland received an 85 billion euro bailout from the EU and IMF and passed the country’s strictest budget in history.

In May 2011, Portugal became the third eurozone country to receive a bailout, getting 78 billion euros, and during that summer Greece received its second round of emergency loans, this time for $157 billion. Soon after, yields on Spanish and Italian bonds jumped, and the European Central Bank announced it would buy those bonds to help control borrowing rates. Fears of a double-dip recession abounded in September after data showed the eurozone’s private sector declined for the first time in two years.

In January 2012, after several rounds of talks failed to produce effective results, the SP downgraded the debts of nine EU countries as well as the eurozone bailout fund. Fears of falling into another recession raged in the proceeding months as data showed negative growth in the continent and a record-high eurozone unemployment rate in March. The following week Greece received a third bailout of 130 billion euros, and in April, Italian and Spanish bond rates rose again, stoking new fears about their countries’ solvency.

How we stand today

Attention in recent weeks has focused on the struggling Spanish economy, which recently dove back into recession due in large part to its record high unemployment rate of 23.6%, the highest in the eurozone. Investors in Spanish heavyweights like Telefonica (NYSE: TEF.US) and Banco Santander (NYSE: STD.US) have felt the pain, as shares of both companies have been sliced in half over the past year. Unlike in other suffering eurozone countries, which became victims of their own debt burdens, a housing bubble was central to Spain’s epidemic as home prices grew 44% from 2004 to 2008. Once the bubble burst, the construction sector fell apart with it, and now the government is trying to fill the huge deficit created by the jump in unemployment benefits and the loss of tax revenues.

On the whole, the eurozone seems to be caught in a macroeconomic Catch-22. Further austerity measures may jeopardise economic growth, but an economic stimulus, as US Treasury Secretary Tim Geithner and others have called for, will only add to the debt rolls. A looming demographic crunch also awaits the continent if it can make it past the debt crisis. Low birthrates and generous entitlements are likely to further constrain budgets as some European countries’ populations should start falling by 2015.

Where do we go now?

Now may be Europe’s moment of truth. Much praise can be heaped on a region that’s gone from twice laying waste to itself in the first half of the 20th century to joining under the same currency and collectively forming the world’s biggest economy. In the end, though, the current struggle to stay together may prove as formidable as any other challenge the continent’s faced.

In the days to come, elections in France, the Netherlands and Greece will help clarify the next steps in the debt crisis. French Socialist candidate Francois Hollande narrowly won the first round of presidential elections and favours growth-oriented measures over more austerity. The French will go to the polls on 6 May to select their president. Greece will also vote in a new government the same day to replace the interim administration that followed former Prime Minister Papandreou, who was pressured out last year by France and Germany. Poll watchers expect a coalition government to result. Elections in the Netherlands will also likely take place soon, after its government fell apart Monday following disagreements over budget cuts.

Finally, as Spain teeters, some have suggested that it may need a cash injection, which would drain the eurozone bailout fund since Spain is much larger than any other country that’s received a bailout.

For now, in this age of globalisation all eyes remain on Europe.

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PATRAS: Greek Socialist leader Evangelos Venizelos warned voters they were opening the gates of parliament to the “goose-stepping” far right and appealed for understanding over his party’s support for austerity in return for an international bailout.

Venizelos took leadership of the Socialist PASOK party, for decades Greece’s largest, earlier this year to try to win back support in next Sunday’s election, when voters are set to punish those parties that backed painful austerity measures.

In an interview, the former finance minister warned against the rise of the ultra-nationalist party Golden Dawn, which could win around 5 percent of the vote, comfortably above the 3 percent threshold for entering parliament.

“Golden Dawn is an extreme phenomenon, I believe they are an example of fascism and we radically oppose them. It’s an offense to our history and to parliament,” he told Reuters, suggesting Greece could be experiencing its version of Germany’s “Weimar” years which led to the rise of the Nazi Party and Adolf Hitler.

Golden Dawn, which vows to expel both legal and illegal immigrants and meets under a flag of an ancient Greek symbol similar to the swastika, has won over many of Greece’s poor by giving away clothes and food parcels.

It says it is simply a nationalist party and has attracted a large protest vote by attacking the bailout and what it calls German domination of Europe.

So concerned are the co-ruling parties about the rise of the far right that the government has in recent weeks rounded up thousands of illegal immigrants in central Athens and begun to build detention camps to house them in.

Venizelos suggested the only way for Greece to secure its future was to have several pro-European parties ruling in a coalition. “Over 75 percent of our people say they are for Europe and the euro. This must be expressed,” he said.

The powerful orator urged the European Union to address the rise of the far right in the region, suggesting the success of National Front leader Marine Le Pen in the first round of France’s presidential election was proof of the lurch right.

She won about a fifth of the vote.

PASOK and its main conservative opponent, New Democracy, have seen support leak to smaller groups before the March 6 election, threatening their ability to form a government that will stick to the conditions of the international bailout to keep Athens from bankruptcy and in the euro zone monetary bloc.

The latest opinion polls showed New Democracy leading and PASOK in second. None of the four parties that follow support the bailout from the EU and International Monetary Fund.

Many of the fiscal cuts fell on important parts of PASOK’s political base – public-sector workers – and the party has seen a mass of long-time supporters defect to other parties.

Venizelos has deflected some anger despite presiding over much of the program as finance minister. He was seen by many as a late comer to Greece’s debt crisis, drafted in at the last minute by his predecessor Prime Minister George Papandreou, who has shouldered most of the criticism.

“We will not allow neo-Nazis to goose-step into parliament with Hitler salutes. Greek society will persevere, it will not submit to fascism,” Venizelos told 2,000 supporters on Friday evening in the western port city of Patras, reminding them how Greece had suffered under Nazi occupation in World War Two.

But the rally in a small indoor gymnasium was a pale imitation of the mass gatherings of earlier elections in Patras, a traditional socialist stronghold and seat of the Papandreou family which founded the party.

Locals remember when more than 100,000 people or half the city’s population turned out to hear the late founder, Andreas Papandreou. In 2009, 53 percent voted for PASOK and 29 percent for New Democracy, electing four socialists to parliament.

“We should get two this time,” said long-time supporter Michalis Kanistras, 61, admitting George Papandreou’s handling of the debt crisis that shook the euro and plunged Greece into its worst recession in decades, had eroded support.

“But Venizelos is giving new wind to the party. He knows how to handle the crisis, he has the brains,” he said.

Venizelos has revived the fortunes of PASOK since taking over from Papandreou in March, bringing the party from as low as fifth to second place.

Papandreou’s last-ditch appointment of Venizelos, put his finance minister in the firing line. EU leaders criticized Venizelos for failing to abide by reforms, but he clinched a second, 130 billion euro ($172.37 billion) bailout and a debt swap that shaved over 100 billion euros from Greece’s debt.

He faces the tough task of defending his party after decades of mismanagement and against a background of economic decline. With Greece in its fifth year of recession and one in five out of a job, many youths are leaving and the old barely make do.

“We are fighting hard to convince the Greek people that the path we follow is difficult but safe,” he said. “I am honest and self-critical but I try to explain that what we did was to protect, not hurt, the Greek people.”

In the coffee shops of Patras people say they are disappointed in the party they have backed for years for not dealing with the city’s problems. Dozens of illegal immigrants live in squalor near its port, hoping to sneak onto a boat out.

“At night, you can’t walk around there. Papandreou disappointed us, especially because his family is from here,” said Giorgos Magdalinos, 37, an office clerk.

A gate to the west, the port city’s old neoclassical buildings are dwarfed by modern apartment blocks. A state university boosts its economy and keeps its palm-lined promenade cafes bustling at all hours of the day.

Papandreou attended Venizelos’s speech on Friday evening. They entered the gymnasium together to cheers from fans but also chants of “Thieves, Thieves!” from leftist protesters outside. Papandreou’s aides said he would make no other appearances in Patras, where he is running as an MP.

“I backed PASOK in the last two elections but I don’t even want to vote now. Many people say they will vote for Golden Dawn but I wouldn’t. I might vote for one of the smaller, leftist parties,” Magdalinos said.

Venizelos said he was confident the European Union would agree with a plan to spread the pain of the austerity program over three years instead of two to give the economy a boost.

“Our difference with New Democracy is that we don’t give old-party style promises,” he said. “We propose a complete plan to exit the crisis in three years instead of two. We have not yet agreed with (lenders) but I believe it will be accepted.”

Political analysts say the two main parties will have no choice but to cooperate after the election, when they are expected to get a combined majority of roughly 35-40 percent.

But it will be a shotgun wedding.

New Democracy leader Antonis Samaras has made clear that, although he accepts the main goals of the austerity program, he will renegotiate how to reach them and that he would rather rule alone.

Venizelos said Greece needed a wider consensus and that he was confident people would vote for parties that would pull them out of crisis.

“The number of undecided is so large that discussing any result is pointless. The elections will be judged in the last three days,” he said. “Greek people may be bitter but are wise.” ($1 = 0.7542 euros)

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