Greek Elections: Returning to the Unsustainable Status Quo
-Megan Greene (RGE Analysts Blog)
New Democracy (ND) just barely pulled ahead of the anti-bailout, left-wing Syriza in the election on June 17th. According to the Greek constitution, the party in first place wins 50 bonus seats in parliament. With roughly 85% of the votes counted and Syriza having conceded defeat, it looks like ND will have 130 seats, Syriza 71, Pasok 33, the Independent Greeks 20, Golden Dawn 18, the Democratic Left 16 and the KKE 12. The markets will view a ND victory as good news, but is it really? I expect the rally to be short, as this election has just returned us to the utterly unsustainable status quo.
ND wins—now what?
The only thing that the leaders of the main parties in Greece can agree on is that Greece needs to form a government, and quickly. This represents a significant shift compared with the May 6th election, when it was clear early on that most parties were more interested in party politics than the national interest (ND spent only six hours trying to form a coalition, and Syriza in particular was intent on pushing the country to new elections).
Once Greek President Karolos Papoulias gives New Democracy the green light to form a government, ND will have three days to attempt to form a coalition. Syriza will insist on remaining in opposition, and who can blame them. Syriza can stand on the sidelines and soak up new supporters with its anti-austerity rhetoric as the new government struggles to comply with the terms of the bailout. This could put Syriza in position to win the next election once this government collapses. Pasok initially said that it would only participate in a coalition with ND if Syriza also joined as a partner. Since then Pasok has softened its rhetoric and indicated that it would prefer a coalition to include Syriza but its priority was to not leave Greece ungoverned. I expect an ND/Pasok coalition to emerge, with the two parties commanding around 163 seats in parliament (151 are needed for a majority). The Democratic Left may also be brought into government to share the burden of implementing the terms of the bailout.
Then the Hard Work Starts
Once a coalition is in place, the really hard work will start. The ND-led government will be immediately visited by troika representatives for a delayed quarterly review. Greece is also supposed to find around €11bn in new savings by June 30th to hit the targets agreed in the second bailout. ND has said that it plans to renegotiate the terms of Greece’s bailout, but it is unlikely there will be a full renegotiation. More likely, Greece’s fiscal targets will be relaxed slightly and some minor measures will be included in the bailout to attempt to boost growth. Even if the terms of the bailout are relaxed somewhat, there is no reason to expect a ND/Pasok government to succeed in implementing the memorandum of understanding in the face of such austerity fatigue.
Greece will therefore remain in its downward austerity/recession spiral. As the government is forced to implement further austerity, social unrest will rise and opposition to additional retrenchment by MPs will cause the government to collapse by the end of this year. Greece has entered a new period characterized by such a cycle of elections, additional austerity, social unrest and new elections. Increasingly squeezed by austerity measures, the Greek electorate will eventually put in place a government willing to consider alternatives to the current path of retrenchment and bailouts and will choose to exit the EZ.
The Eurozone – A Microcosm of Imbalances
-Daniel Alpert (Dan Alpert’s Two Cents)
Apropos of the election results in Greece, I will put matters into perspective as follows:
The Eurozone is a special matter all its own, and in many important ways a microcosm of the bigger global picture when it comes to the debate over expansionary austerity. In agreeing, for the time being at least, to share a common currency and grant control over that currency to a unified central bank that is charged with nothing more or less than maintaining the value thereof, the nations of the Eurozone individually lack the exorbitant privilege of printing a valued reserve currency and have surrendered the ability to engage in the types of monetary intervention that provides a hard currency lender of last resort to developed economies. On top of that, in the absence of a real fiscal union, there is no ready ability to transfer wealth among the countries of the zone to balance out relative economic strengths and weaknesses among them. Finally, there is the matter of sharing a common currency in the first place in an economically unbalanced environment.
While not as substantial as the wage and population imbalances between the developed and emerging nations as a whole, the imbalances between Germany and the Netherlands (and a handful of other vastly smaller economies) and the rest of the Eurozone are enormous. To put this in perspective, in 2011 Germany (at $204 billion) and the Netherlands (at $63 billion) enjoyed a combined surplus capital account balance of $267 billion. Five countries, Austria, Estonia, Ireland, Luxemburg and Slovakia, essentially ran at break even with a combined $10 billion surplus. And the remaining 11 countries of the Eurozone ran a $237 billion current account deficit—essentially bleeding themselves to import goods and capital from two enormous surplus nations. Toss in the other major European current account deficit country—the U.K.—with its 2011 deficit of $46 billion, and you have a European “Union” more akin to a European feudal serfdom of yore.
And yet, throughout the Eurozone, and the U.K., the only prescription written post-crisis has been that of austerity—belt tightening. Inside the Eurozone, deficit countries cut off from a central bank lender of last resort, cut off from control over the value of their currency relative to that of other nations of the zone (because they share the same), and just plain cut off by lenders in the surplus countries, austerity means the unsustainable pressures of internal devaluation: the forcing down of wages and consumption amidst still high prices for an enormous volume of imported goods and services. In other words, the inability to devalue or flood markets with their own currencies has left the current account deficit nations in an Oliver Twist-like world of dependence on the “generosity” of creditors combined with what is really “internal deprivation.”
While internal devaluation may work as a matter of calculation (and it is quite calculated by creditors to maximize recovery) it cannot work as a model for resolving cross border debts. And the ultimate problem with the application of expansionary austerity in the Eurozone is, in fact, the option/incentive that continued sovereign borders and the lack of fiscal integration (and the transfer economics that would result therefrom) gives the populations of overly indebted nations to simply default, re-monetize in a domestic currency of far lower value than the Euro and recover relative competitiveness on their own.
It is useful to liken the Eurozone to a well-to-do and costly neighborhood of 17 families (17 sovereign nations, in this case). A family down on its luck can continue to pay the high rent (or mortgage) to stay in the neighborhood and suffer in every other aspect of its existence, or it can move to a cheaper neighborhood and have a more tolerable life. Ultimately, wishes for the coming of the ‘Confidence Fairy’ are dashed by the brutality of austerity and the failure of same to provide relief to unemployed, hungry and depressed populations. A “cheaper neighborhood” will be obtained through external, not internal, devaluation and the reduction in the “rent” via the repayment of debts in a less valuable and less costly currency.”
The Elections that Really Matter
-Rebecca Wilder (The Wilder View)
The results of the Greek election are rolling in, and New Democracy has won. Next step is for New Democracy and Pasok to form a government – the likelihood is that they will. Amid the drama surrounding the Greek elections, the second round parliamentary elections in France have been largely glossed over. However, in my view, the outcome of the French elections is much more important for the direction of European policy than is the outcome of the Greek elections.
Results show Hollande’s Socialists taking an absolute majority in parliament. This means that Hollande is going to have a great deal of power as regards domestic economic policy and international European negotiations. Hollande is now one of the most powerful leaders in Europe and will challenge the German austerity-only policy.
Name Your Price
-Edward Hugh (Don’t Shoot the Messenger)
This weekend I have been thinking what the world is gonna look like on Monday, and have come to the conclusion that it won’t be that different from the way it was last Friday. The main news of the weekend seems to have been that Greece qualified for the quarter finals of the Eurocopa, beating the Russian team by 1-0.
Oh yes, they had elections in Greece, didn’t they?
The most likely outcome seems to be a neck and neck finish between the far left Syriza and the centre right New Democracy, with the key to the resolution of the outcome lying in the fact that whichever party comes first gets a bonus of 50 seats. This will mean that if New Democracy win they will probably be able to negotiate a deal with the other smaller parties around some sort of face saving formula which will enable a government to be formed and a deal struck with Berlin.
Naturally, if Syriza wins no one has a clue what will happen. The party doesn’t want to leave the Euro, but does want to reject the memorandum. The only problem is that the only parties Syriza could form a government with would most likely want out of the Euro too.
Having said all this, I still think even if Syriza wins some sort of government will be formed, since in the game of brinksmanship which will be played, they can blackmail Berlin with the threat of disorderly exit, while Berlin can dangle money, lot’s of it I imagine, before their eyes, if only they agree to help form a government.
Of course, the money I am talking about involves EU funds, not men in black suits carrying suitcases, although if the recent 270 million fine accepted by Siemens for bribing Greek officials to obtain lucrative telecommunication contracts is anything to go by, we shouldn’t rule the other possibility out entirely.
Actually Angela Merkel has already hinted at this sort of solution. “This is why it is so important that, in the Greek election tomorrow… a result emerges in which those who form a government in the future tell us, yes, we want to keep to the agreements,” she told a meeting of party faithful in Darmstadt, “This is the basis on which Europe can prosper.”
What the forthcoming Greek government needs to do, then, is say in public is that it will stick to the memorandum. Say in public mind you, not necessarily follow the statement through in practice. The phrase being asked for certainly isn’t an Austinian performative, equivalent to saying “I do” in a wedding. In this case uttering the phrase does not constitute implementation. Another example of something which also does not constitute what the British philosopher JL Austin would have termed a performative would be the expression “I promise to pay the bearer on demand the sum of…” which appears on the back of UK bank notes, and is evidently not a promise, or even a lick. It is simply just another way of spilling ink.
Then, with the protocols safely out of the way, the real deal can be done. Francois Hollande is already talking about an EU growth programme of around 120 billion Euros. And the Financial Times has revealed this weekend that, “European officials are preparing to dangle a package of incentives in front of a new Greek government to convince it to stick to the country’s current bailout deal after Sunday’s high-stakes elections. The package would include further reductions in interest rates and extended repayment periods for bailout loans, as well as EU money to spur investments in Greek public works programmes through the European Investment Bank”.
The reason for this sudden rush to keep the Greeks happy is evident. Germany has done its sums, and found that it is at even greater risk of getting hit by fall-out from the Greek election than Greece itself is. The thing is the Germans have now cunningly boxed themselves into a corner, and whichever way things go their position can only become worse. In this sense I think the upward trickle in German Bund yields we have been seeing over the last week or so is pretty significant. It is almost as if the market is beginning to prepare for a two stage scenario. The first stage would be a Greek non-exit. Then in a second stage, the EU would not be moving ahead of the curve fast enough, and the common currency could lurch towards disintegration. Germany, as the creditor country who would not be paid, would then be perceived as becoming one of the biggest losers.
I think German policy from this point on will be increasingly dictated by a belated attempt to avoid just this sort of outcome, and that we will see evidence of this over the next couple of weeks. Far from being a threat, Francoise Hollande might even help get Merkel off the hook. On the other hand, Fernando Santos, the Portuguese coach who trains the Greek national side, reportedly told the press his players victory was more inspired by Greek history than by Angela Merkel. Well, if I remember my Thucydides aright, most Greek cities fell to their opponents not in pitched battle, but via “informal negotiations” held somewhere close to an unguarded side gate.
Economics of Crimean-Congo Fever
-By Emre Deliveli (The Kapalı Çarşı: Emre Deliveli’s blog on the Turkish economy)
A conference on infectious diseases, starting today in Istanbul, has made me wonder why there is no vaccine for CCHF. A multinational pharmaceutical executive told me they simply would not be able to recoup their expenses since the market for such a vaccine is too small. There are only a handful of countries with more than 5 cases per year, whose combined GDP is less than Italy’s.
Click to Enlarge
Economist Michael Kremer of Harvard University saw this problem a decade ago. His solution was that developed countries could make a binding commitment to buy a vaccine once it is developed. While this “advance purchase commitment” was proposed for deadlier diseases like AIDS, it could certainly work for CCHF as well.
Turkey is rich enough to make such a commitment by itself. Besides, while the disease appeared here much later than in other countries, Turkey accounts for the most cases by far, with 7000 occurrences in the last decade, 400 of which werefatal.
But Önder Ergönül of Koç University, one of the leading CCHF researchers in the world, noted, during a chat on Friday, that it would take time to develop a vaccine, so he highlighted the importance of early diagnosis and treatment. Ribavirin, a broad spectrum antiviral drug, has been shown to be effective against CCHF, so he recommends its administration even in cases where infection is probable but not certain.
Take the case of nurse Kübra Yazım who in 2009 became infected from a needle at Samsun’s 19th May University and then died. She was not given Ribavirin, probably because Hakan Leblebicioğlu, the head of the Infectious Diseases Department at the university, is one of several academics who believe the drug is ineffective against CCHF.
To judge for myself, I read a paper written by the proponents of this view. I am no medicine man, but calling the statistical methodology of the paper “flawed” would be an understatement. Another paper that argues against Ribavirin, co-authored by Leblebicioğlu, has been subject to severe criticism, not only on statistical but also ethical grounds.
By the way, Leblebicioğlu was appointed to the Turkish Academy of Sciences last week, so I wouldn’t be too offended if you preferred his views over mine. But as a recent paper notes, “Ribavirin is the standard of care in several nations and ratified by the Centers for Disease Control and Prevention and WHO”.
It is true that the drug is rather expensive, but the government has been very successful at getting costly vaccines at dirt-cheap prices, so I could not understand this resistance, at least until I found out that some pharmaceutical companies produce it while others don’t. It seems CCHF treatment has fallen prey to the “battle of the pharmaceuticals”. To make matters worse, rumor has is that research of the anti-Ribavirin camp has been funded by companies not producing the drug.
But even more worryingly, I was told that the Ministry of Health is considering randomized controlled trials. That immediately brought to my mind the infamous Tuskegee syphilis experiment, in which African American patients were not administered penicillin even after the drug had been validated as an effective cure for the disease.
It would be great to see a “Turkey CCHF experiment” make it to case studies in ethics classes of major medical schools.
Latest Data Show US Export Drive is Faltering
-Ed Dolan (Ed Dolan’s Econ Blog)
The latest international trade data for the United States show that the country’s export drive, which has been a bright spot in an otherwise weak recovery, is now faltering. Nominal exports of goods grew a modest 1.6 percent in Q1 2012; a broader measure of exports that includes goods, services, and income receipts grew just 0.7 percent.
These data will come as a particular disappointment to the White House. In his 2010 State of the Union address, President Barack Obama promised a doubling of U.S. exports over a five-year period. The promise was couched in general terms, but many observers have taken it to mean a doubling of nominal exports of goods. There was considerable skepticism about the promise at the time, but for the first two years, exports moved close to the doubling track, as this chart shows.
Now even by the favorable measure of nominal goods exports, the actual data are dropping below the doubling path. It is hard to fault administration policy for the shortfall. The White House has worked hard to promote U.S. exports. Winning Congressional approval of long-delayed free-trade pacts with South Korea, Colombia, and Panama was one of the president’s few major legislative victories. Instead, forces outside U.S. control appear to be to blame for faltering export performance.
One of those factors is a strengthening dollar, caused in part by the euro’s troubles. At the same time, the Chinese yuan, which had been strengthening gradually but steadily against the dollar for the past two years, has begun to weaken again as the Chinese economy slows and capital flows reverse. The following chart shows the broadest measure of the strength of the dollar, the real effective exchange rate (REER)—a measure of the exchange rate that is adjusted for differences in inflation among countries and weighted by each country’s share of U.S. trade. After falling steadily for more than a decade, the REER has now begun to appreciate.
At the same time, world economic growth is slowing. The latest World Economic Outlook from the IMF shows slower growth in both advanced and emerging market economies, as summarized in the next chart. In fact, many observers think the IMF projections for 2012 may be overly optimistic. The data underlying the chart project only a mild recession, -0.3 percent change in GDP, for the euro area; the outcome could well be worse. Similarly, the chart assumes 8.2 percent growth for the Chinese economy, an outcome that now seems at the top of the range projected by China-watchers.
No doubt the slowing export data will become a topic of debate during the Presidential campaign. The incumbent will point to the recently ratified trade pacts as evidence that it has pulled out all stops to boost trade. The challenger has already promised to strike a harder line with China beginning his first day in office. The fact of the matter is, though, there is little the United States can do unilaterally to get export growth back on the doubling track.