Germany Chastises Canada, Sort Of…

Germany reiterated calls today for Canada to participate in the beefing of the IMF funding. The IMF is currently seeking to raise its war chest to 430 Billion dollars in preparation of possible new bail-outs in Europe to serve as a firewall against liquidity contagion of sovereign debt financing. Canadian Prime Minister Stephen Harper and his finance minister Jim Flaherty have resisted demands for the country to participate. While Canada has received praised from Germany for its take on austerity it continues to be admonished for showing little ‘solidarity’ in matters of bailing out Europe.

Harper has repeatedly said that taxpayers in Canada would not participate in financing the welfare state of some of the Richest nations of the World. It must be noted however that Germany is showing a little lack of consistency in its criticism. Much of the political difficulties in the current European sovereign debt crisis stems from Berlin’s refusal to risk its own taxpayer moneys on alleviating required austerity in the Eurozone periphery, so how can Angela Merkel, Germany’s Chancellor, turn around and ask of Canadians what it won’t ask of its own people.

When a country goes bankrupt it makes sense to stabilize that country’s finances and currency through an IMF led debt restructuring with the objective in mind to return that country to a sustainable growth path and government spending. But when the World is faced with the likes of Greece whose sense of state welfare entitlement is so strong that it refuses the policy prescriptions attached to IMF lending, why should the World backstop its governmental spending. European style welfare states require generous taxpayer funding and strong longterm growth to be sustainable, countries desirous of receiving lending from the IMF must accept a model that both generates growth and taxes heavily. For countries to achieve those dual requirements they cannot be hampered by distorted fiscal incentives, which lax IMF lending standards embody.

It should be unacceptable that the IMF, funded by every country in the World including its poorest, should serve as a tool to preserve un merited entitlements in the richest nations of the World. The Conservative governments stand is that the IMF should only serve the Worlds poorest governments, this isn’t right, the World Bank is there to help the poorest, the IMF’s role should be to stabilize the World’s financial system by increasing sovereign liquidity to governments hampered by temporary market pressures.  But Harper is right with regards to who those fledging governments are.

Spain is a prime example of a relatively responsible government facing pressures outside its control and in need of a temporary backstop. Greece however is the antithesis of a responsible nation, underserving of outside help since all its problems are internal. Canada should increase its participation in funding the IMF, but this extra funding should come with conditions. Those conditions should be that the IMF serve strictly the needs of governments willing to accept the longterm rebalancing of their public expenditures, as has been the historical norm. Countries that dither and object to bail-out conditions ex-post, should be blacklisted so that the IMF may concentrate its ressources on countries like Spain who can actually benefit from it and Ireland who has shown responsibility and a willingness to proactively deserve it.

Germany has made many correct economic arguments over the course of the current crisis, let’s hope she can continue to make them consistently going foreword.

The Key to Eurozone Stability Isn’t Monetary

The Eurozone debt crisis has raised important issues in the profession of economics. With regards to monetary integration much knowledge has been developed thanks to the crisis. Economist have virtually all rallied to the idea that  monetary unions exacerbate competitive imbalances. The Proof is in the widening gap of current accounts between the germanic like economies and the profligate periphery economies. Germany has never exported so much while the PIIGS have not suffered so much in a while. While the causes of the crisis are apparent to almost everyone (except maybe the Greeks) policy prescription differences abound. The prevailing view is to infuse massive amounts of liquidity into sovereign debt markets to stop the liquidity haemorrhage. The theory that the Eurozone is in a temporary liquidity crisis has strong proponents such as Paul Krugman or Roger Bootle. While Ireland has a strong growth profile and Italy does have a primary surplus that could justify monetary stopgap policies the problems of the other Euro profligates cannot be tidied over by temporary monetary measures because their issues are of a structural competitive order.

Once monetary policy impotence is accepted two policies approaches remain. The first is fiscal integration. A lot of economist advocate Euro bonds to alleviate market pressures on individual member finances. The obvious problems pertain to moral hazards. One of the causes of the crisis was that the reduction in sovereign interest rates because of decreased currency risk would induce profligacy. Such a phenomenon would be continued and compounded by Eurobonds. A fairness issue would also arise as lower debt countries would pay for the debt spending of others and AAA rated countries would actually pay heftier interest than they deserve. A problem in construction is also obvious. Eurobonds would be a substitute investment for sovereigns, unless Eurobonds replaced sovereigns entirely they would cannibalize demand for sovereigns and might actually help increase sovereign yields as German bunds have done to French Bonds today.

Instead of pooling liabilities to decrease individual sovereign risk, why not pool assets? This might be somewhat more palatable to German hawks. One way of pooling assets would be to federalize Unemployment Insurance. All members could pay into a fund that would back payments of insurance payouts. This would further effectively create an internal counter cyclical government spending stabilisation. As some states power ahead the transfers would automatically alleviate budgets in ailing economies. This already exists in Canada to great inter-provincial budgetary stability, the proof being that Quebec’s yields are at historical lows although the province has comparable debt levels to many PIIGS. Unfortunately as with all insurance schemes moral hazards subsiste, but the idea remains a good way to alleviate massive intra monetary union budgetary differences.

Fiscal integration however will not in the long term eradicate structural problems. The crux of the Eurozone problem is quite simply competitive differences. For a monetary union to survive in the long run productivity must balance out across its membership. Standardizing macro-prudential or regulatory frameworks across the zone is a good idea, but only when the policies standardized across the monetary union are good. Mis-regulation at a central level is worst than at the individual problem, imagine what the Eurozone sovereign debt crisis if everyone had emulated Greece or Spain’s policies. Diversity and regulatory competition is good so long as it leads to emulating of best practices. That countries aren’t emulating Germany is testament to political and not economic issues.

The only issue remaining is that of markets prevented from punishing political cultures conducive to bad policy. Greece has a political culture conducive to demagogy and fiscal populism. Markets are sending Greeks a message, “change your ways or suffer” that the European Union prevents this pedagogical process from unfolding is the real long term risk to Eurozone stability.

Greece! Go Away!

I sometimes shiver with humiliation at the memories of my adolescence and the utter immaturity that characterized them. I comfort myself with the thought that I have outgrown them. I used to believe that people outgrew their baser adolescent instincts of selfishness, laziness and general disdain for responsibility, I could not phantom the possibility that an entire populace could degenerate into a mindless mob of collective adolescents. Greece has proved me oh so wrong. Now before anybody get’s up and antsy about the broad generalization I recognize that not all greeks are in the streets hooded in black and throwing fiery cocktails around. However, the despairing state of the Greek economy is the business of all those people and the general result of their cumulative collective decisions. The guilty parties are, in no particular order: tax evaders, union leaders and members, politicians, savers, voters, anarchists, socialists, wannabe monopolists, retirees, students and anyone silent on the going-ons of the county. That list I believe covers more or less the majority of the people from the small nation that gave the world democracy.

Reading up on the back and forth between Athens, the Troika and various European capitals I’ll admit to a sinking feeling of despair. Berlin’s demands just keep mounting and the absurdity of Greek politics never retreats. German flags are being burned in the streets of Greece, right-wing papers in the country compare Merkel to a Nazi while across the divide any remaining AAA country in the Euro are simply loosing interest in Greece who has proved a most unreliable partner in the battle for economic stability.

I’m no Keynesian but the repeated bouts of austerity demanded by Greece’s Euro creditors are pummelling the periphery’s economies harshly. I don’t believe I’ve ever heard a Monetarist or even an Austrian economist recommend pro-cyclical fiscal policy systemically. Austrians economists might say that recessions are good because they kill bad business models permitting the flowering of sustainable industry. However even the most die-hard fiscal hawks (me) have to admit that at an above 6% contraction yearly with no hope in sight for growth, even good businesses will flounder. That’s why fiscal consolidation in Greece needs to be accompanied by stimulus spending funded by the competitive parts of Europe. Pan-European unemployment insurance is the most sensible proposal that has not gone main stream yet. The moral hazard that will ensue is undeniable but until permanent mechanisms for intra-Euro fiscal transfers can be worked out, the benefits are surely worth the cost.

That said that the money masters’ responses to continued contraction in the periphery are inadequate, the reaction from the patients are increasingly unacceptable. In Italy the unions responses to the Monti plan for liberalization are tantamount to the summum of Human selfishness. While the house is burning the unions are trying to save their clothes while some are still trapped (the unemployed) admittedly while some have already fled (the tax evaders). The retired are equally deserving of blame silent on the whole affaire so long as their golden retirements are not threatened even when these same retirement plans are bankrupting their nation. But while Spain and Italy’s yields come down showing the markets forgiving side, or just the ECB vast manipulation skills, Greece and Portugal edge towards the brink. While tame in Lisbon, reactions in Athens are flaring up to an extreme.

I long ago learned that the most vociferous voices rarely represent or even understand the silent majority. The silent majority in most western countries are hard working middle class and relatively rational voters. Even when they are swindled into voting for a party that ill benefits their country’s these voters always (almost) correct their aim sending back their political systems to the center. This does not seem to be happening in Greece. Not only has the majority let its political leaders lead them to a path of reckless fiscal irresponsibility and stupidity, they now seem unwilling to admit to the wrongness of their ways. For God’s sake Greece’s politicians are asking to be the least trusted west of Tehran. Its anarchist youth are trying to give 80’s Italian terrorist youths a run for their money. To reverse an oft heard insult, the Greeks’ silent majority is about to be hoodwinked into poverty faster than Germans were into Nazism. Greeks have committed the cardinal sin of fiscal profligacy, they have been found guilty by the markets, they are now in a liquidity and solvency jail. The rest of Europe has posted bail, and now has promised to take Greece into a pseudo form of receivership in order to buy the fledging country a little decency and freedom. Greek response to the modest conditions demanded of it, spitting in the AAA’s faces. The audacity and hypocrisy demonstrated in the land of classical drama is baffling to say the least and shockingly amoral.

While I wish a speedy recovery for all of Europe and hope that the beauty of the European project can be furthered, I’d be lying if I didn’t say I believe the Greeks have lost all rights to participate in the next chapter of Europe’s history.