The IMF, Greece and the End of Euro-Chauvinism

Interesting set of articles in the Globalist this week on the ramifications of the Greek economic meltdown on and for Europe:

Research Center > Global Economy
The IMF, Greece and the End of Euro-Chauvinism

By Alfred Steinherr and Stephan Richter | Wednesday, March 31, 2010

In dealing with the Greek debt crisis, the worst outcome has been avoided. Bringing in the IMF is a positive development, but the intra-European decision-making process used to come up with a proper response is a clear sign of European dysfunction — but one which may ultimately hold the promise of a solid outcome.

A top French magazine editor recently intoned rather full-chestedly in the context of the debate over Greece’s economic fortunes that “the IMF is for Somalia, Mauritania, not for Europe. It’s a question of pride, and of civilizations.”

Few remarks underscore more clearly the need for Europeans to get off their high horse — and to accept the arrival of true global conditionality.

Europeans need to get off their high horse — and accept the arrival of true global conditionality.

The days are long gone when intervention to correct profound economic and financial mismanagement was a one-directional missive imposed by the (global) North upon the (global) South as a sign of the compassionate grace of developed “civilizations.”

If we are serious in talking about global economic integration, we better abandon any idea that the IMF is a one-directional instrument imposed upon under-developed countries as part of some ill-conceived notion of the West’s “mission civilisatrice.”

Similarly, the European hesitation to embrace the IMF as a useful, and neutral, enforcer of discipline (if needed) and enhancer of credibility because “the Americans dominate the IMF” is quite outdated.

There indeed used to be a time when senior IMF officials with a U.S. passport were spewing out U.S. policy positions — and (ab)used the institution as an extension of the U.S. Treasury Department.

But at a time when the intellectual leadership of the Fund has been thoroughly refreshed (if not — considering the intellectually forceful personalities of its managing director and chief economist — positively “Frenchified”), such worries border on conspiracy mania.

To make a long story of convoluted European thinking short, the involvement of the IMF in the Greek problems is a positive development. This is not just because the IMF has extensive experience in dealing with such situations, but also because any financial support provided to Greece by the Fund does not represent a breach of the Maastricht Treaty, an international treaty that is the basis for the euro.

At a time when the intellectual leadership of the IMF has been positively "Frenchified," European worries border on conspiracy mania.

On a purely technical level, but one that is critically important in this case, the Fund has both the experience and the capacity to establish credible public accounts after detailed research and credible forecasts. In contrast, Eurostat — the European Statistical Office — neither has the necessary manpower nor the authority to do that.

Eurostat, for its part, cannot interfere with the methods or data collection processes and treatments in member countries. It can only present data provided by national authorities. This is called “mutual respect” — and may end up in data hocus-pocus, as it did in Greece’s case.

Despite the laudable involvement of the IMF, there is no denying that the ultimate outcome is, at least in spirit, though not overtly, a negation of the Maastricht Treaty. It invites the market to continue mispricing government debt because it has become clear that, one way or another, there will be assistance.

In particular, bondholders have not been asked to pay part of the bill. Considering that this is quite different from similar instances of overborrowing involving Argentina, Russia or the Ukraine, that is perhaps an indication that true global conditionality still has further to go when it comes to European client states.

While the whole process leading up to the agreement was neither especially laudable for Europe as a whole or for France’s government, the same is true for the German government.

Admittedly, this was the first time any of them were caught up with an eventuality that had been dealt with in the Maastricht Treaty (the “no bail-out clause”) — but one that all governments hoped would never occur.

Bondholders have not been asked to pay part of the bill. That is perhaps an indication that true global conditionality still has further to go when it comes to European client states.

At the European level, the complexity was substantially increased by the fact that there were several sub-groups with conflicting interests at the negotiating table.

There were countries for which the no bail-out clause is an essential part of the functioning of the euro capital market — and countries which have a more flexible interpretation (primarily those faced with already high debt/GDP ratios and no visible efforts underway to lower them).

Another dividing line was formed by the countries whose banking sectors have high degrees of exposure to Greece (such as France, Germany, Italy and Luxembourg) and would thus be hurt by a Greek “bankruptcy” — and those countries whose banks were not greatly exposed.

A further dividing line separated those countries that might become beneficiaries of a flexible interpretation of the no bail-out clause (think Italy, Portugal, Spain) from those countries that do not expect to become beneficiaries.

As to the German role, it mattered especially in this case not just because it has the continent’s largest economy, but also because the underlying Maastricht Treaty was largely shaped by Germany and signed rather hesitatingly by other EU members — a conflict which has now re-emerged.

Probably the biggest problem was the German position shifting — in an uncharacteristic, even un-German fashion — many a time during the negotiations. That created tremendous confusion — and provided no clear leadership.

Germany's Confused Path of EU Leadership

By Alfred Steinherr and Stephan Richter | Thursday, April 01, 2010

Europe has struggled to agree upon a continent-wide approach to Greece's fiscal crisis. The biggest problem in recent negotiations was Germany's frequent position shifting — in an uncharacteristic, even un-German, fashion. That created tremendous confusion — and provided no clear leadership.

lthough it was clear from the beginning that Germany, along with several other countries such as Austria, the Netherlands and Sweden, favored a no bail-out solution, Germany was initially against an IMF intervention.

It only seized upon that opportunity when the Greek government threatened to go to the IMF if European assistance was not approved in a timely fashion.

The question is not whether or how much Germany could pay. Nor is it whether German tax-payers would agree to tolerate payments for Greece.

Previously, Germany had toyed with the idea of establishing a European Monetary Fund — but only until it found out that this would take time and could not be of any real use to Greece. It also found out late that setting up an EMF would mean an end to the no bail-out clause and negate the traditional disciplinary forces of capital markets on borrowers.

None of that precisely adds up to a credible show of leadership — all the more so considering that the confusion reined just within Chancellor Merkel's own party, the CDU, so she could not even argue that it was a result of coalition politics.

As a result of these multiple failings on the pan-European, French and German levels, diplomatic skills, to put it mildly, were only parsimoniously used.

But in the end, the IMF’s involvement as a credible disciplining force is to be welcomed, not last from the perspective of German diplomacy. Demonstrations in Greece focused on Ms. Merkel — and some European media christened her, predictably enough, the “German Thatcher” — or, more creatively, “Ms. Bismarck.”

Ever since its experiences in Korea, the IMF is well-suited to take the heat of the streets — and serve as a useful lightning rod.

And while, in general, it makes perfect sense that Europe should be able to deal with a European problem such as Greece, the well-ingrained European way to deal with such problems has typically come in the form of a generous redistribution of funds — but without establishing a clear quid-pro-quo.

The real cost to be avoided is for Germany to be judged by the market as overextending itself and having too much debt — and too many soft assets (loans to Greece, for example).

As a result, the EU has not shown itself capable to deal with the two key issues when push really comes to shove: First, between lenders and borrowers, there can be no equality. And second, between respect of law and neglect of law, there can be no communality. Both of these points may be hard to swallow at first, but are inescapable in the ultimate analysis.

To make a long story short, the credibility of the euro is too important to be left to shady political compromises. For that reason, it is better to involve the IMF.

All those who believe that Germany should have been “more generous” or “more flexible” ought to consider the following scenario: What would happen if Germany itself ran into confidence problems? If Germany were downgraded by rating agencies, something that may soon happen to the UK, the euro would no doubt suffer seriously.

That was why Germany needed to proceed cautiously. True, whether this is to its liking or not, the country continues to be the paymaster of Europe (providing up to one-third of the funds if Greece needs support).

For all the zeal to get the Germans to pay up whenever a country encounters problems, what is overlooked is the fact that, on a per capita income basis, Germany only ranks as a very middling country in Europe.

So while its coffers are indeed limited, it brings something vital to the table. Germany has the largest economy in the eurozone, a respect for legal obligations and relatively solid and trustworthy public finances. For that reason, it is the anchor of the euro system.

If Germany overburdened itself, that would immediately turn into the real risk for the euro. Whatever her shortcomings, and she would be the last to claim there are none, Chancellor Merkel is aware of that responsibility.

Germany is the anchor and benchmark to the European debt markets (and credibility), while the United States serves the identical function globally.

Her ultimate position, favoring an IMF involvement and not succumbing to playing the generous-friend game, is not the result of lack of sympathy — but the result of a keen sense of economic and political responsibility. It has, in the end, little to do with German polls or positioning her party for upcoming regional elections, as is often claimed.

The question is not whether or how much Germany could pay. Nor is it whether German tax-payers would agree to tolerate payments for Greece. The real cost to be avoided is for Germany to be judged by the market as overextending itself and having too much debt — and too many soft assets (loans to Greece, for example).

Credibility in the markets is a fragile asset. Just ask the U.S. Treasury and the Fed which, in view of depressingly large, long-term deficits, need to preserve the belief in the markets that the U.S. government is fundamentally sound.

In that sense, where Germany is the anchor and benchmark to the European debt markets (and credibility), the United States serves the identical function globally. Whatever their past merits, both countries have to carefully contend with lengthening odds as anchors.

As regards Greece, what it needs now most is reforms. Its planned savings in public finance are only one side of the adjustment coin. With reduced government deficits, there will not be enough demand to sustain the present level of economic activity. And the country’s external competitiveness is weak.

Whatever their past merits, both countries have to carefully contend with lengthening odds as anchors.

For that reason, the engagement of the IMF is important beyond the short-term financing deal. The really big job is in transposing the vital elements of what used to be the Washington consensus to restructure and modernize the Greek economy.

In short, the IMF needs to act where Europe, with its past ways of resorting all too easily and uncritically to providing general (and generous) regional aid funds, has flunked as a serious economic manager.

Editor's Note: This article was written by Stephan Richter and Alfred Steinherr, President and Chief European Economist, respectively, of The Globalist Research Center.

http://www.theglobalist.com/StoryId.aspx?StoryId=8385
 

seaweed

LE
Book Reviewer
RIP
Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering misgovernment is beyond me.
 

Biped

LE
Book Reviewer
seaweed said:
Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering misgovernment is beyond me.

My bold

or the EU for that matter.
 
Biped said:
seaweed said:
Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering misgovernment is beyond me.

My bold

or the EU for that matter.

The US is not far behind.....

According to the BBC, the gross national debt of Greece is now about 125 percent of its gross domestic product. This number may seem preposterous, but this figure was at 86 percent for the United States in 2009, according to the Congressional Budget Office!!!

And this from the New American several weeks ago Linky

Seeing Us in Them

In the meantime, there is plenty of pain coming, and not all of it will be confined to European shores. “What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch,” wrote Harvard economic historian Niall Ferguson in the Financial Times recently. He continued:

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven.” US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

In other words, the United States is doing precisely what Greece has done, but on an immeasurably greater scale, and withal one which no coalition of foreign economies could possibly bail out, even if they were inclined to do so.
 
Those in Europe knew Greece 'cooked'the books in order to ascend into the Eurozone.Therefore this crisis was inevitable.

I guess the Greeks and others thought the Germans would come to the rescue.Unfortunatly for them Germany did not play ball.
 
Yes, Greece is high with debt at 125% of GDP but Italy runs a significant second with 103%. Of course, the basket case of Zimbabwe at over 240% is ridiculous but Japan has 170% of debt to GDP.
UK is around the 50% mark which is much lower than the great depression of the 20s and 30s where it was over 150% and after WW2 where it went to over 200%.
http://www.ukpublicspending.co.uk/uk_national_debt_chart.html
 
I do not think it is just limited to the Greeks however. There is a lot of chatter about Spain, then Italy etc. I suppose it is the new version of the "domino theory" and it should not go unnoticed that the common thread of these economic cataclysms is a socialist (generic meaning) construct whereby the people have been taught to rely more and more on their respective governments for "entitlements" in a surreal context that there is a bottomless bucket of money miraculously available to pay for it all.

This (IMHO) irrationality is increasingly taking over in the US such that there will no longer be anyone left to bail the others out. The incredible growth of the so-called "unfunded mandates" of the burgeoning benefit programs in the US simply cannot be paid even if the government were to confiscate all wealth. One would think our brilliant leaders would simply "do the math." Even the (supposedly) non-political Congressional Budget Office now estimates our deficit to metastasize to $12.7 trillion by 2020.

As one of your lot, Lord Thomas MacCauley wrote on May 23, 1857, in a letter to an American friend:

A democracy cannot survive as a permanent form of government. It can last only until its citizens discover that they can vote themselves largesse from the public treasury. From that moment on, the majority (who vote) will vote for those candidates promising the greatest benefits from the public purse, with the result that a democracy will always collapse from loose fiscal policies, always followed by a dictatorship.
 

Mr._Average

Old-Salt
Le_addeur_noir said:
Those in Europe knew Greece 'cooked'the books in order to ascend into the Eurozone.Therefore this crisis was inevitable.


This, for me, is the key issue with the EU as it is currently structured. Integrity (at all levels) is sacrificed for political expediency and 'done deals'.

Until that is sorted the whole thing is just plain crooked.

The economic debacle that is Greece is just the latest example.
 
Mr._Average said:
Le_addeur_noir said:
Those in Europe knew Greece 'cooked'the books in order to ascend into the Eurozone.Therefore this crisis was inevitable.


This, for me, is the key issue with the EU as it is currently structured. Integrity (at all levels) is sacrificed for political expediency and 'done deals'.

Until that is sorted the whole thing is just plain crooked.

The economic debacle that is Greece is just the latest example.

My gut tells me you are correct and thus we are, to use the vernacular, screwed.
 

seaweed

LE
Book Reviewer
RIP
Lord M's point was put succinctly by a voter approached by Admiral Cochrane when he was standing for Parliament in 1806: "I votes for Mister Most."
 
seaweed said:
Lord M's point was put succinctly by a voter approached by Admiral Cochrane when he was standing for Parliament in 1806: "I votes for Mister Most."

Indeed!
 
Hello,

never mind the economics,what about the writing!
Whoever edited that piece should be sacked.
I am guessing Stephan Richter and Alfred Steinherr got paid by the column inch.
They appeared to reuse at least seven sentences.


tangosix.
 
seaweed said:
Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering misgovernment is beyond me.

Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering selfishness is beyond me.
 
whitecity said:
seaweed said:
Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering misgovernment is beyond me.

Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering selfishness is beyond me.

Give us time WC, give us time...... :(
 
jumpinjarhead said:
whitecity said:
seaweed said:
Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering misgovernment is beyond me.

Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering selfishness is beyond me.

Give us time WC, give us time...... :(

Britain's already lost. It's only time before the pseudo-socialist virus reaches across the pond. :(

Your mid-nineteenth century quote is almost precisely what stimulates the British voter in deciding which box to scribble his/her X.

Still, I can't complain. I live in a country where I have no vote and thus claim no reponsibility for the pseudo-socialist shower now ruling the heap.
 
The religious militia arrested recently in the US apparently believe that the Anti-Christ is about to be appointed President of the EU any day now. A common line of thought if this thread is to be taken at all seriously.

If the West financial system collapses it will not be due to democracy: it'll be due to the fact that Wall Street and the City of London are both a rats' nest of crooks, conmen, thieves, liars, spivs and total incompetents. Most of whom have made most of their money out of selling the West's golden inheritance, its manufacturing capabilities, to the Chinese. Since this has resulted in a massive increase of unemployment in Western economies, it follows without a shred of surprise that tax receipts are down and social payments have had to be increased.

To blame the average worker and the average voter for this is like blaming ducks for a drought. What's happened is that our top financial 'brains' thought they could teach the Chinese about capitalism. The Chinese were running a world wide capitalist trading system when infrastructure in Europe were horse tracks and America was a bison dung spattered wilderness. Surprise, surprise, our oriental partners have shafted us like a bunch of drunken nuns at a Viking orgy.

Since this can't possibly be our fault, our financial problems must be down to the Greeks, or if not them, the Luxembourgers. Or perhaps it's all because of the Dame of Sark. It certainly can't be due to the fact that the US and its close allies ante up three quarters of the world's total military budget. Nor that the American government absolutely refuses to impose fair and proper taxes on the US mega-wealthy. After all, somebody has to make the world safe for Republicans.
 
The French and Germans, have,one way or another,for at least 400 years tried to dominate Europe,the E.U.and the Euro are only the latest phase in this cycle,the fact that it has consistantly failed is to them neither here nor there. Some where down the line it never occured to them to evaluate "the square peg theory"! Most people and countries,have their own foibles,and ways of doing things----to their own benifit,and will not or cannot fit into the theoritical model. Europe has never been nor will it ever be a "UNITED STATE".To many square pegs not enough round holes! National self interest historical differences,hundreds of years of mutual mistrust and emnity,never mind freedom to act in ones own self interest,have been willfully ignored. The one example I will quote is the Republic of Ireland,the "Celtic Tiger",look what has happened once the E.U.subsides shifted to Eastern Europe,things have gone "OOPS".The Greek,Italian,Spanish,Portuguese economies were always "iffy",but never mind,in the name of a United Europe,we'll force those square pegs into round holes.Still,I'm hopeful,the whole edifice will crash without to many tears.
 
whitecity said:
jumpinjarhead said:
whitecity said:
seaweed said:
Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering misgovernment is beyond me.

Decent of the US taxpayer to cough up so that the Greeks can continue to slop around in the sort of self-indulgent Socialism the US would never tolerate at home! Why the Greeks should be saved from their own gibbering selfishness is beyond me.

Give us time WC, give us time...... :(

Britain's already lost. It's only time before the pseudo-socialist virus reaches across the pond. :(

Care to explain to us what you understand pseudo-socialism to mean WC? Or are you sticking to socialist because you arn't confident of your case without the s-word to fall back on as an emotional trigger?
 
littlejim said:
The religious militia arrested recently in the US apparently believe that the Anti-Christ is about to be appointed President of the EU any day now. A common line of thought if this thread is to be taken at all seriously.

If the West financial system collapses it will not be due to democracy: it'll be due to the fact that Wall Street and the City of London are both a rats' nest of crooks, conmen, thieves, liars, spivs and total incompetents. Most of whom have made most of their money out of selling the West's golden inheritance, its manufacturing capabilities, to the Chinese. Since this has resulted in a massive increase of unemployment in Western economies, it follows without a shred of surprise that tax receipts are down and social payments have had to be increased.

To blame the average worker and the average voter for this is like blaming ducks for a drought. What's happened is that our top financial 'brains' thought they could teach the Chinese about capitalism. The Chinese were running a world wide capitalist trading system when infrastructure in Europe were horse tracks and America was a bison dung spattered wilderness. Surprise, surprise, our oriental partners have shafted us like a bunch of drunken nuns at a Viking orgy.

Since this can't possibly be our fault, our financial problems must be down to the Greeks, or if not them, the Luxembourgers. Or perhaps it's all because of the Dame of Sark. It certainly can't be due to the fact that the US and its close allies ante up three quarters of the world's total military budget. Nor that the American government absolutely refuses to impose fair and proper taxes on the US mega-wealthy. After all, somebody has to make the world safe for Republicans.

At any rate, 'glad to see you are back up to standard and manning your place on the ramparts comrade. :D
 

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