OK, sorry, mind wandering a bit there. Greece can work with what they have geographically, but it’s like Varoufakis said in camille’s link: The best economic way forward for Greece doesn’t really correspond to the political demands they were getting in Eurogroup. It’s not about saving Greece from deadly corruption, it’s about looking tough to constituencies back home and and creating opportunities for capitalistic parasites at the club.
Was Schauble wrong? If there is a signed and verified contract between countries, does a country get the “get out of it free” card because there were elections?
Greek MPs just passed the required bills - as expected.
He’s not wrong, exactly. But if there was no ability to negotiate a better deal, Greece should have defaulted for their own sakes.
Sovereign states have the option to repudiate all previous agreements and debts.
Various tin horn dictators in Latin America in the mid-20th century did this. A coup was followed by a new military junta which promptly repudiated the debts incurred by the previous junta.
But they didn’t attract much foreign investment.
Greece was a little larger than most countries who did such things, but that is basically what they did in 2010. In 2011, the national banks of Germant and France (mainly) bought the now-worthless Greek bonds for 50 cents on the dollar.
Which is why Greece can’t sell bonds to finance itself any more, and have to beg the ECB and IMF for more loans (which they will repudiate the moment they think they can feed themselves without
more loans).
Tsipras, back when they rest of the group was still willing to listen to him, was “demanding” a write-off of some or all of the 2010 and 2013 “bailouts”.
Explaining of course the staggering wealth of Ukraine, and the Greece-like doldrums the Swiss find themselves in.
What if Greece left the EU and euro, and created its own currency that was deliberately pegged in value to an existing currency? (Say, one “New Drachma” = $2 US or, maybe, 2 euros.)
You can’t have a failing economy and a convertable currency that is “pegged” to someone else’s.
Around 1979, in Soviet Russia, I remember that the official ruble to dollar rate was 1 ruble = 4 dollars. The black market rate was 4 rubles = 1 dollar. And that was inside Russia. Outside Russia, rubles were worth less than toilet paper, since they were not soft and pliable.
All a government’s pegging its currency to another is establish how that government will attempt to sell its currency.
It does not even come close to establishing what others will pay for it.
If a Greek business tries to pay a foreign debt (as importers must) with an over-valued currency, they will be out of business real soon.
If you owe 100 euros to a French company and send them 50 new drachmas as payment, do not be surprised if they call and say “pay in real money or never shop here again”.
note: with the capital controls in place, the Greeks cannot (legally) pay their foreign bills.
A huge chunk of the Greek economy is shipping, and some shippers have ships stranded in port because they can’t buy fuel.
foolsguinea: In a quick google search I couldn’t find the exact details of the Greek deal, but the IMF has already said it’s unsustainable. The Greek economy is shrinking day by day, which means their debt to GDP ratio increases, even if, or as, they pay off their debts.
Most reports refer to “increased taxes”, but if I remember right, NPR said sometime today they were increasing the national sales tax to 22% - on top of whatever other taxes Greeks pay. Imagine if you were an American, and sales taxes suddenly jumped to 22%. What effect do you think that would have on the economy?
And Greece already has a 26% unemployment rate. During the Great Depression, in the US, unemployment never went above about 22%.
Greece needs to depart from the euro. I understand preparing for that takes time, and that they must prepare for some degree of self-sufficiency in the interim. But continuing down this economy-killing path is national economic suicide. I don’t see an alternative.
Velocity: If they peg their currency to another currency, it defeats the purpose of the new currency. It must be allowed to fall in value until Greek exports become competitive, tourists descend on Greece in mass (to take advantage of the favorable currency exchange rate), and Greek business are able to sell their products to other Greeks (because imports become too expensive).
In other words, the point of switching back to the drachma is to get Greeks back to work, and get the Greek economy moving again.
From what I see, the creditor nations are not being rational. It’s like putting Greece in debtor’s prison: you can’t get money from people who aren’t able to work. It seems like its more about punishing Greece, than getting the money back.
Imagine you’re an Austrian (20% VAT), Belgian (21%), Czech (21%), Dutch (25%), Estonian (20%), Finnish (20%), French (20%), German (19%), Hungarian (27%), Irish (23%), Italian (22%) etc etc etc. What effect do you think that has on their economies?
IMF pushes reality. NYT: [INDENT]The I.M.F. memo amounts to an admission that the eurozone cannot work in its current form. It lays out three options for achieving Greek debt sustainability, all of which are tantamount to a fiscal union, an arrangement through which wealthier countries would make payments to support the Greek economy. Not coincidentally, this is the solution many economists have been telling European officials is the only way to save the euro — and which northern European countries have been resisting because it is so costly.
The three options laid out by the I.M.F. would have different operations, but they share an important feature: They involve other European countries giving Greece money without expecting to get it back. [/INDENT] http://www.nytimes.com/2015/07/15/upshot/the-imf-is-telling-europe-the-euro-doesnt-work.html?rref=upshot&abt=0002&abg=0
Lenders sometimes need to bite the bullet. This is one of those times.
What if, hypothetically, it takes months to order currency and prepare for Grexit day? What if, hypothetically, this must be done in secret to avoid making the banking crisis worse? What’s the proper policy in that highly improbably –urk– situation?
A: It probably looks a lot like jerking around.
Frankly I’m withholding judgment on the competence of the main players for a year, maybe 3. We’re in a situation where all options are bad, so managing this is difficult.
Sorry, had no idea sales taxes were so high in Europe. In the US, sales taxes usually run in the 6%-8% range.
Edit to add: I’ve always thought sales taxes were a terrible way to raise money. FWIW, my understanding is that unemployment in Europe (overall) is about 11%, vs. about 5% in the US.
The standard VAT rates you listed are misleading, because those countries have reduced VAT rates for certain things like restaurants, hotels, food, entertainment, pharmaceuticals, etc. Some reduced rates are as low as 3%
Greece has a 23% standard VAT rate (not 22%). They are now being told they must apply the standard rate to almost everything, which affects 2 of their largest industries (tourism and construction). They must even apply it to every day items like tampons and groceries, affecting the poorest citizens who are already struggling.
Their tax collection needs reforms, but the reforms proposed by the creditors do not help the Greek economy to grow.
BTW, there are still a lot of misconceptions about Greece going around.
Because of the high rate of self employment under reporting, and the high rate of unemployment, the government finds ways to overtax just about everything and everyone else to get this revenue. So it’s a vicious cycle of people feeling they are being robbed by the government, and therefore justified in avoiding taxes whenever possible.
I would expect that pushes consumer demand and the retail sector down a bit, for obvious reasons. Granted, they may have good welfare systems and high wages, which would push consumer demand up, and the mix of policies may cancel each other out a bit.
Why, what did you expect?
German per capita standard of living highest in Europe
The emotional bias you decry in others goes both ways. Yes, the Germans are “meticulous”, hard working, and efficient. On the plus side for Greece is that they haven’t massacred millions of people in recent history. They were, in fact, the victims of such, which is part of the reason for their dysfunctional culture today.
Please don’t turn this into a morality play.
So Schaeuble is still pushing his “temporary Grexit” idea.
There isn’t much info on how this would work, other than mentioning that it would be a “Paris Club” type of arrangement (debt restructure/forgiveness), technical assistance, and humanitarian aid.
**My question: Why wouldn’t Greece consider something like this as preferable to the horrible deal they just voted for? **
Assuming they would get the assistance and reserve capital needed to go back to the drachma, wouldn’t they be better off? What benefits remain for them by sticking with the euro? Even if current depositor savings devalue (by how much?), wouldn’t they have similar purchasing power if local consumer prices were also lower?
What am I missing?
It reads like a smart move by the Germans; Merkel is the good cop (yeah), Schaueble the bad.
A temporary exit is exactly what markets abhor - uncertainty. Nothing goes away. The whole point of suggesting it is to make Merkel look conciliatory and to bully by suggestion.
It’s absolutely not a real world solution.
My guess would be hyperinflation. By what would be backed the drachma? Greece’s economy is in shambles, unemployment absurdly high, the situation could become worst. Who would want to be paid in drachma? They still would have to pay their imports in hard currencies, and where would they find them?
However, I still think that they might be eventually better off if they left the Euro and repudiate all the debt. On the other hand, I guess they might end up staying in the Euro and never pay back the debt anyway (delayed reimbursment, forgiving of interests, haircuts, and ten years down the road, forgiving of whatever is left).
5% unemployment in the US is a statistical lie. The true rate is currently 10.5%.