Time for porcine solidarity among the PIIGS
I’m back in pound-land after five days in the euro zone’s troubled periphery (Greece and Ireland).
The credit boom was clearly criminally misused by the political elites of these nations ( excessive public spending in Greece, and housing in Ireland) but, as Shakespeare’s Polonius pointed to in advising “neither a lender nor a borrower be”, loans are a two-party affair.
Problem loans are a problem for both sides of the equation. And so some pain, austerity, economic reform and more is the price that the PIIGS (Portugal, Italy, Ireland, Greece, Spain) must pay for becoming over reliant on the kindness of strangers.
But the past days must focus the microscope of accountability firmly over the incompetence of those actually running the eurozone.
Germany, Osterreich (Austria), Others (Netherlands, Finland) and Frankfurt (the ECB) are the GOOFs, who have turned a crisis in small countries that frankly should be irrelevant to the world economy, into an existential crisis for the second biggest currency area. Frankfurt especially, but the ECB needs a post all of its own.
Let’s focus on dithering Berlin today. The polls are clear. Germans don’t like bailing out lazy Mediterreaneans. Except, actual election results tell a different story. The politicians who say that, (Berlin election slogan: “Keine Eurobond”) the free democrats, will on current numbers be wiped out of the Bundestag, replaced by the Pirate Party as occurred in the Berlin election.
The opposition social democrats have waxed and waned on eurobonds, but the ex-finance minister Steinbruck backs them, subject to conditionality as does ex-Chancellor Schroeder. The Green Party backs them too, alongside Germany’s export lobby. As Steinbruck is endorsed by Helmut Schmidt, and the leading SPD candidate to challenge Mrs Merkel for the German chancellery, this matters.
I was taken aback by his critique of Mrs Merkel (remember he served as her finance minister in a grand coalition) in the debate approving the EFSF in the Bundestag. Essentially he critiqued her dithering over the crisis.
Porcine solidarity
So do not assume that of the two overwhelming instincts of Germany post-war, the aversion to debt/ inflation will trump its commitment to European solidarity. The euro has served Germany well in recent years, with a domestic market of 350m, falling unemployment and bumper tax revenues, affording Germany the opportunity of an imminent €6bn tax cut.
My essential point is that Germany, France and the ECB are meddling in the domestic politics of Greece, Italy, and in the case of repaying the Anglo-Irish bond, Ireland too. So there is surely a case for those countries pushing back on incompetence in the core too.
Porcine solidarity, is a concept, accidentally invented by myself (with the help of Irish commentator Fintan O’ Toole) on stage at the Kilkenomics festival of economics in Ireland over the weekend.
I flew in straight from Athens to speak at a session of “whether Ireland belonged with the other PIIGS”. I feel slightly uncomfortable about the PIIGS epithet but, like some racial epithets I suggest that those affected reclaim it for themselves and use it to subvert the message that the Eurozone periphery is full of workshy, credit-guzzling layabouts.
The porcine solidarity movement could point to the fact that decisive action in Germany could have simply and expensively buried this crisis a year ago. Now the eventual cheque will be much more expensive for German taxpayers. Italian government bond yields near seven per cent is the key metric here. As is the fact that German industrial production fell by the fastest amount in September since the post-Lehman trade cataclysm.
Total failure, self-inflicted. The three little pigs need some huff and puff, and they will find more support than you might imagine in Germany.
Follow Faisal’s thoughts on the euro zone crisis on Twitter: @FaisalIslam
There are 24 comments on this post
So if loans are a two party affair then surely
when things get tough the resultant pain should also be shared. Yet whilst the voters/taxpayers suffer the austerity programmes they also finish up bailing out the banks.A double whammy if ever there was one. No wonder people are getting frustrated. No accountability by either politicians or banks.
Can you shed any light on the indication that UK contribution to the IMF is now likely to be$40b and not $20b – could this uplift have anything to do do with making up the contribution that the PIGS are now unlikely to be able to afford.
I understand that the USA has still not fixed her 2009 IMF uplift so why on earth should the UK rush round trying to be the good guy. its not as though we can afford it.
The US have no interest in saving the Euro ; on the contrary , they dream that its collapse would mean the return to the US Dollar as the only reserve currency.
They don’t realize that there is many countries who doesn’t want that to happen , like China , and will not let it happen .
China is nor rushing because they want to gain political gain before moving like the EU support for their claim to join the WTO , the Tibet problem and a few more.
For the US it means that not only they will not have the Euro collapse but the big winners will be the Chinese.
The Germans are preparing themselves to ‘do what needs to be done’ but it won’t happen this side of their election next year.
After the election though, when the electorate have been safely parked for 5 years, whoever wins will ‘do the deed’, turn on the taps and flood southern Europe with German taxpayers money.
Back to the 1930s. Fiscal rectitude + massive cuts in Government spending = continuing recession. The Germans are sitting pretty at the moment, but once their markets start to collapse, they’ll start to feel the pain – the result of their own short-sightedness. Of course, the PIIGS need to cut spending & borrowing, but what the Greeks are being expected to go through is too much too fast, with a real risk that the only way to avoid 10 years of serious recession therecould only be to leave the euro. That’s the problem with the euro (you row) – nobody’s steering the bloody thing!
It is clear for everybody except A.Merkel that the best solution is to use the ECB the same way the US are using the FED.
As long as she will not accept the idea , the crisis will continue.
It is also very clear that this crisis suits very well the US because the collapse of the Euro wuld mean the return to the God Dollar as the only reserve currency.
This is why US funds are playing the CDS game against Eurozone countries and US rating agencies downgrading Eurozone countries who doesn’t alwys desserve it.
France with a deficit of 5,7% with a planned reduction to 3% in 2013 and a growth forecast of 1% is threatened with downgrading ; but is the situation of the UK much better ?
But the UK is not part of the Eurozone !!!
Being an economics illiterate, I find it hard to understand why the markets keep insisting on pushing the various Eurozone countries into deeper and deeper crisis by jacking up interest rates on their loans.
Lending money to people at a rate so high they have no chance of paying it back and so need to cut so hard they have no chance of growth or to be bailed out by someone else, seems an enormous gamble to me.
Why not lend at a rate they can afford to repay? Better to be sure of a 3 or 4% return than hope Germany will cough up the cash to give you 7%.
But, no doubt, all these bets are hedged with counter bets and the only thing the markets are looking at is a short term profit and to hell with how many thousands of people suffer to give it to them.
Because it has nothing to do with repaying ! It has to do with sinking down countries part of the Eurozone; and this all US made policy.
Read my other post for a more detailed explanation
Hello Sam. The interest rates referred to are the yield on an existing Bond that has been sold by its owner to raise cash. Most Bond buyers are savings banks and pension funds who are seeking a reliable return so that they can meet their obligations to people like you and I.
Because pension fund managers should be careful where they put our savings, they often take out an insurance policy to cover the risk that the Bond issuer might default. They then cover the cost of that insurance policy by offering a lower price than the face-value of the Bond. That lower price has the effect of raising the interest rate they will receive and which covers the annual premiums on the insurance policy.
All of which leads to the re-sale price to rise on Bonds issued by States thought likely to default.
Clearly, if the Bond yield on re-sales of Italian Bonds rises to, say, 7%, it follows that any new Bonds issued will have to be offered at the same rate – or my pension fund manager won’t bid for them!
Which (I hope) explains how Bond rates change.
[Please give my best wishes to Shipley].
What a pity no one else had the courage to support Papandreou’s bold attempt to call the outrageous Sarkozy-Merkel bluff?
Each of the Euro-zone’s governments share some blame for this ‘crisis-that-must-be-solved’. [which it must be somehow].
Instead Sarkozy-Merkel have chosen to blame and punish the Greek people for following their well-known culture. A ‘relaxed & sunny’ culture shared with most other Mediterranean States.
Maybe the wintry northern European culture is just as much to blame for this crisis?
Nobody is responsible except the Greeks for giving false balances and information about the Greek economy when they joined the Euro.
Nobody is responsible except the Greeks that they continued to lie during 7 years !
People in the street are not responsible ?
They re the ones who enjoyed early pensions they should not have had , civil servants jobs which were not necessary and other benefits.
Why should French or German tax payers pay for that ?
Greece should have never been applying to join the Eurozone and they should not have been accepted.. But at least the Greeks enjoyed being members and the citizens of other Eurozone countries have to pay for it.
Pierre, are you suggesting that every citizen should make a full economic audit of its country’s books before accepting the pension awarded by its politicians? Isn’t that taking personal responsibility a shade too far?
And while the Greek government is clearly culpable not only for spending too much but also failing to collect the necessary taxes, do not overlook the major accounting firms who helped them hide the facts.
Hello Pierre,
Maybe either France or Germany should have vetoed Italy & Greece from joining the Eurozone? After all they both fell a long way short the EU Maastricht Treaty conditions ALL EU States had agreed.
Nor was any effort made by either France or Germany to ensure that those two States reported their true statistics, and changed their behaviours to meet those strict and agreed criteria. It’s been ten years since. What was the Eurozone doing about Greek & Italian non-compliance in those ten years?
Moreover, neither of those errant States meets our agreed internal competition requirements. Which has left both as uncompetitive, and with stagnant productivity growths.
Aren’t France & Germany to blame for those critical omissions too? Those failures may be part of the problems we must overcome, or sink together.
How disappointing to see you pop up on last night’s C4 program, how Greece works for the politically illiterate who like to play nationalism – can your credibility withstand it Faisal?
I came across this video on RTAmerica’s Youtube channel about an upcoming film/documentary called ‘Heist’ by Donald Goldmacher, exclaiming that the economic collapse has been a deliberate affair by corporations in the West.
See what you think:
http://youtu.be/2AIWDsRS0i4
Hi Sam , I consider that citizens are always responsible for what politicians are doing because they have been voting for them.
All this wrong doing has not been done by fascist generals after military putsch. It has been done by elected politicians and if people voted for them on the basis of totally surrealistic promises , they are guilty and now have to pay for not knowing the famous say ” The promises of politicians are the problem of those who believe them ” .
Hi Andrew ; you are right regarding the responsibility of the German and French governments in accepting Greece but who is more responsible , the thief or the one who says nothing when he sees the crime ? Interesting question .
Furthermore Greeks in the street are also those who voted for the politicians who cheated simply because they wanted to believe it was possible to live well without working a lot or paying taxes.
And in any case now French and German taxpayers are going to pay for the mistakes of their previous governments when Greeks refuse to do the same !
Greeks & Italians ARE being asked to pay dearly for the profound dishonesty of their previous governments.
The rest of us are also paying for our errors in not taking notice of the ample warnings of these international crises.
Each of us should accept some share of the blame for this.
Hi Andrew : you are right ; Greeks and Italians ARE ASKED to pay ; but will they do ?
Watching the Greeks protesting every morning and part of the Italians politicians announcing they will not support a excessively drastic plan , you can be skeptic about the situation.
Another element : if it has been agreed that banks will take a 50 % loss on their Greek bonds , why French banks made a provision of 60 % ?
Maybe because they don’t believe Greeks will respect the deal.
It is very clear , they cheated the system and they have the intention to do it again !
Greeks have no choice but to accept the agreed Merkel-Sarkozy terms. Had Greece been refused entry to Eurozone in 2001, they would have paid higher interest on their Drachma Bonds and been able to watch their currency decline as they paid themselves higher nominal pay. Despite Maastricht treaty terms, Greece was accepted and we must all pay for that Eurozone error.
It is part of that recent agreement that the (foolish) Banks that bought Greek Bonds will take a loss of 50% on them. (Not more, for now).
Banks that anticipate a greater provision for a loss on their balance sheets than 50%, will also reduce their profits and (therefore) their tax liability until they ‘discover’ that the had made an excessive provision. It’s a handy way that banks can use to delay their tax payments. I wish we could all do the same!
Hi Andrew : Greece was accepted also because Goldman Sachs created derivatives to help them manipulate the real accounts .
Incidentally you might be interested to know that the new Greek PM is a former Goldman Sachs employee; a situation which justify their US nickname ” Government Sachs ” due to the high amount of former employees who are in government positions around the world . Also incidentally the new Italian PM who has been Goldman advisor during many years , and also the new ECB boss .
May be what we have to fear is not the crisis but the control Goldman has on European economies !
Regarding the banks , there is another approach to the situation which I think is more realistic ; first because the huge reduction in benefits means also that they had to suspend dividends , a decision which is never taken lightly , but also that to make a 30% provision now will make it less painful when they will have to accept 100% when the Greeks will not pay ; because thsi is what they are planning : accept the conditions to get the money and they don’t implement the full program . They should not have been joining the UE ; right they should have joined the Arab League.
Hello Pierre, I’m uncertain about the timing of the Goldman Sachs project paid for & at the Greek Government’s request. I suspect that it was sometime after Greece became an Euro member?
At any rate, it was widely discussed in 1991 that Italy did not meet the Maastricht criteria, and in 2001 that Greece did not either. Nor did either State make much effort to change their culture.[arguably Spain, Portugal & Belge didn't either]
The collective reason why Britain’s Labour government declined to join the Euro is that we could not guarantee that the UK could keep to both the necessary & Treaty based economic conditions of the Eurozone. Had Spain, Italy and Greece been encouraged to similar conclusions, we might not be in this position.
Unfortunately, the sentimental wish to make the Euro as wide as possible over-ruled the harsh logic of incompatible economic cultures. Whether French & German electors should have over-ruled their governments is mere history.
Hi Andrew , one thing is certain is that the wish to make a wide Euro is responsible for the situation , but the wish started with making a wide EU ; and I am afraid that has to do more with business than sentiments.
We should always keep in mind the fact that Germany represents 25% of Greece imports , and the adhesion of the former communist countries is also based on the interest of Germany to boost their business close to home , more or less in a private garden.
Regarding ” Government Sachs ” they were working with Greece before they joined the EU so the cheating started from the beginning .
Hello Pierre. Well I agree with you.
AND I do feel more comfortable when I know that the motivation of self-interest is in play: I can better anticipate what the next move should be!
Germany will pay heavily for its carelessness, and France will pay for its excessive ambitions. At least our government often warned the European Council of the potential pitfalls and of the need to take actions. But that’s mere history.
We shall all suffer. We should count ourselves lucky we’re not in Afghanistan or Syria right now.
Hi Andrew . I am afraid they is much more suffering to come here in the UK ; if we believe Mr George Soros who is supposed to know about economy the REAL situation of the British Economy is worse than the Spanish one !!!
No wonder the PM is desperately trying to block any kind of fiscal integration in the EU , even if everybody knows that there is no other option.
To oblige the UK to use the same parameters to calculate the debt would mean such an increase of the debt that we could say good bye to the AAA rating and would have to pay higher interests .
What is not included as debt here is for example the pension contribution the government will obviously have to pay and pensions are already so low that it is impossible to reduce them ( what France is doing , but pensions are considerably higher ); you add to that the ageing population and you get clear picture of the problem.
Then you have other things like the Financial Sector Intervention which is not included.
You are right , we shall still be better off than the Afghan but is it a real consolation ?