Tot ziens Australie!

It’s been a great 15 years in Australia for me and the family, so we will be leaving lots of friends and colleagues behind as we seek new adventures in London, where from next week onwards  I will be part of a Wellbeing centre, pretty much the same topic as the Australian Research Council has been generously funding me to look at for the last 3 years.

The essential aim of the ‘Centre of Wellbeing’ at LSE will be to put utilitarianism into practice as much as possible. To this end, we hope to be part of wellbeing policy experiments, textbooks on how a decision maker can be a better wellbeing-bringer, longitudinal studies, large data-gathering exercises, policy briefs, Master’s courses, inter-active wellbeing systems, and all the rest of it. We have partners all over the world and an international panel for wellbeing is up and running at the end of next week. If you happen to have a few million lying around to help us get to our goals quicker, then please help!

Whilst the grass is greenest in Australia, variety is the spice of life so I am looking forward tremendously to the new adventure. Still, the family is not truly leaving Australia, as my 3 kids now carry Australian citizenship and one kid is still studying in Sydney. So it is ‘Tot ziens’ (‘See ya later!’) rather than farewell!

To all my friends and colleagues in the Australian economics community: do come and look me up in London; please join in with utilitarian-oriented research projects; and best of luck.

Adverse Action Lawyer wanted in Frijters versus UQ case

I am seeking a lawyer to run an Adverse Action case connected to the recent Fair Work Commission verdict that found systematic breaches of procedures and procedural fairness in the University of Queensland’s actions against me following my research on racial attitudes in Brisbane. I first raised these breaches late 2013, but they were never addressed, with lots of new ones added to them as the case dragged on. The VC of the university was also personally informed of these breaches in April 2014, publicly denying there was anything wrong about UQ’s action in February 2015. He was again informed in March 2015, consistently failing to rectify breaches of procedure brought to his attention. I wish to bring an Adverse Action case to claim back my considerable costs.


I expect the case to be worth at least a few hundred thousand dollars in terms of damages (legal cost, value of my time, etc.), and for it to be potentially one of many others because the FW case uncovered widespread breaches of procedures in UQ’s handling of misconduct cases. So there might well be many others who are now looking to bring Adverse Action cases against UQ.

I offer a pay-for-success contract wherein the first part of any awarded damages would go to the lawyer, but after a threshold payment I want 50% to go to the successful lawyer and 50% towards Vanavil, which is a school for orphaned victims of the 2004 Tsunami flood in India. I feel that helping the poorest Indians will go some way to nullify the damage that the managers of UQ did when they suppressed evidence of adverse treatments of Indians (and Indigenous peoples) in Brisbane and made it harder to research these things in general. And I want to feel that I haven’t wasted my time these last three years on fighting mindless bureaucracies, but that my efforts ended up helping people in need.

Negotiations on the offered contract are possible. Please contact me on email if you are interested or have a good suggestion for a good adverse action lawyer ( p dot frijters AT uq dot edu dot au).

[Ps. The VC of UQ was still making inappropriate claims last week on the UQ media about his lack of involvement and has refused to retract his claims this last week when I pointed his errors out to him.]

The Grexit deal, Varoufakis, and anti-Greek sentiments

The deal yesterday morning between the Greek PM and the Eurozone Finance ministers is an agreement to reform before talks. By tomorrow evening, the Greek parliament has to accept 4 pieces of legislation on a large range of issues (pensions, labour markets, taxation), after which the other 19 Eurozone countries will start negotiations on another bailout. The European Central Bank has refused any loosening of the conditions for more loans to banks, meaning that Greece will have to keep up its end of the deal whilst its banks are essentially bankrupt and the rest of the countries take their time to negotiate and decide whether they agree with the outcomes.

Any negotiated bailout will need unanimity to go ahead. So the Fins, whose government is dependent on the ‘Real Fins’ who are adamant that there will not be more money going to Greece, would have to agree. The Dutch liberal party PM, who brought a long list of broken Greek reforms to the attention of the Eurozone meeting (backed up by the Slovenians and others) would have to break an election promise not to send any more money to Greece. The German parliament, which is being inundated with stories of Greek corruption in the German press, would have to agree. The Baltic, Irish, and Portugese governments would also have to agree to more money for the Greeks, when the Greeks failed to push through the reforms that they did implement the last 6 years.

Forget it. Not gonna happen. Discussions on whether the reforms are useful or whether they would push Greece into another recession are beside the point: the outside money has dried up and Greece will have to live within its means whilst its government and its banks are bankrupt, so you should see the agreed-upon reforms as the first step of Greece outside the Eurozone. A tragedy for the population of Greece.

From an Australian perspective, you would be forgiven for being bemused at this turn of events as the Australian media and commentariat has by and large taken the perspective that the Greeks are victims. I don’t really know why the Australian media has adopted this stance because this is certainly not what the Europeans, or even the UK commentators on average think. Take the recent interview with the UK conservative William Hague who describes Varoufakis as “a demagogic and now departed finance minister who regards as “terrorism” the simple act of lending money and expecting it back one day”. Perchance the Australian media follows the perspective of the half a million ex-Greeks in Melbourne?

But if you follow the European news, you will be struck by how widespread the anti-Greek sentiment has become. Stories of broken promises, sabotaged reforms, outright corruption, tax evasion, and wilful obstructionism are daily fare. Not just in Germany, but in the whole of Northern Europe, the Baltics, and the Balkans. The Greek people have lost a lot of good-will in the last 5 years and get blamed for the actions of its politicians and economic elite. Rightly or wrongly, the sense that the Greeks have betrayed the trust of other Europeans and need to suffer for that betrayal runs deep.

The last 6 months in particular have been disastrous for the image of Greece. Varoufakis, admired here in Australia, is seen as a figure of ridicule and derision by the rest of Europe, even by many on the left-side of politics. His pronouncement that the rest of Europe was engaging in ‘terrorism’ when it put conditions on new loans, was a terrible mistake. His constant belittling of the other Eurozone partners in the media and the grand-standing on democracy and how Greece was a ‘victim’ cost the Greeks. The latest Eurotop saw the result of this: a Greek denouement that was well-prepared by both the French (who appear to have helped Greece write its latest proposals and got the Greek PM to meekly accept everything) and Northern Europeans (who ambushed the Greek PM on reforms and spending).

I read the full interview of Varoufakis once he was ex-minister. It makes painful reading. He tells of how he tried to have academic debates with the Eurozone ministers he was negotiating with. They would have none of it, but he seems to have persisted for 5 more months. He tells of how the preparations for a possible grexit went no further in Greece than a few discussions with 5 others in the ministry. He hence tried to enforce his idea of debate on the people he was begging for more money and did not seriously prepare for the eventuality that there might not be agreement. As a commentator said, Varoufakis showed up for a gun-fight with a latte! Painfully amateurish. He then proudly relates how he supplied a Greek victimhood story to his current PM in 2010 and the Syriza party since then, who bought it hook, line, and sinker. He thus dragged his PM and a whole party with him in his personal mission to reform the European establishment and mainstream economics by means of open debate. Instead of living such dreams, he should have pushed through reforms within Greece (rather than reverse the reforms of the previous government), and prepare his country for a grexit.

What happens in the coming weeks? I still think a grexit is coming and that it on balance will be better than the alternatives. Exactly how is hard to know, though I am willing to have a guess. The Greek parliament will probably accept a few new laws by Wednesday, followed by temporary easing of the Emergency Liquidity Assistance conditions on Greek Banks that will keep the banks afloat a few days. Negotiations will then start, but I think stories will quickly appear in the media of how the Greek ministries are not implementing the new laws and how the follow-up laws on the judicial system that are supposed to be approved by Wednesday next week are not what they were agreed to be. That will be enough of an excuse for several countries to veto any proposed deal, which then means the Greek banks will be visibly bankrupt, at which point the Greek government will have little option but to introduce a new currency. Varoufakis himself flags the first two moves in a grexit: the introduction of IOUs to pay the bills and direct control of the Greek central bank.

It seems the Greeks have not printed a new currency in preparation of a grexit. I hope for their sakes that the ECB has been more forward looking and has printed it for them.


Three perspectives on the coming Grexit

The Greek referendum and the hype leading up to it have gone exactly according to my script of 8 days ago, where I predicted a resounding ‘no’ vote and a Grexit to stop the bank-run, with the other European politicians too offended and belittled by Tsipras and Varoufakis to organise another bailout.

The Grexit is now very likely, so likely in fact that Varoufakis’ friend Jaques Delors is writing open letters to European newspapers to implore the rest of Europe not to let Greece go!

To get a good view of what has happened in the last 15 years and what is going to happen in the coming months, let us take the perspectives of three fictitious people: that of an informed Greek businessman, that of an informed Dutch politician, and that of an American commentator.

The Greek business man, February 2015

Syriza has just had its moment with a landslide victory in the elections, getting the population to believe that the Eurozone countries will indefinitely support their pensions and welfare, and allow Greece to not reform in any meaningful way. Party time!

The election after-party was great, with lots of Ouzo and olives, but I know it can’t last. The other Europeans might have seemed gullible to the extreme so far, but even they will not want to be to be hung out to dry in the media like saps, month after month. At some point, the EU countries will stop lending money to anything Greek and ask to be paid back something, whether that is a government, a bank, or a business. How to plan for this, what to do?

Let’s think about what I stand to lose if the Greek government starts issuing that awful Drachma again, worth a fraction of the current Euros.

Firstly, my bank accounts in Greece will halve in value, if not worse. So I am going to take out all the money from my deposits and park it in Northern European banks, or Northern European treasury bills. Moreover, I will give my uncle, the bank manager, a call so as to invite him for dinner and discuss the possibility of taking out a long-term loan with his bank, Euros I will then also park in Northern Europe. When the Drachma is re-introduced, we both know his bank will be in terrible trouble as it simply will not have the Euros to pay depositors what they are owed, but he and I will be doing very well indeed as our loans will be converted into Drachmas whilst our assets are still in Euros in Northern Europe. I am going to get rich from this!!!

Secondly, once the Drachma comes back, my holiday resort will have Greek workers paid in Drachmas and foreign guests who want to pay in Euros. That should work just fine and, since I know my workers will then be paid a lot less, I can start to withhold their pay in the months just before the reintroduction of the Drachmas. I will then pay them later in fewer Euros or perhaps not at all if the mess is big enough and I manage to go bankrupt for the fourth time this decade. All the assets are in my 2-year old son’s name anyway, so I should be able to get away with that trick again. By the same token, I can make a deal with my old school-mate who is now a tax auditor so as to delay paying my taxes until just after the reintroduction of the Drachma.

Thirdly, I am going to have to think about all that German beer I stock for the tourists and thus have to pay for in Euros. There has got to be a way I can use the coming Grexit to have my beer and not pay at all. They don’t trust me at all over there in Germany, which means they insist I pay beforehand, but perhaps I can wriggle out of that if I have to for a few months. Oh, I know what to do: I am going to set up a post-office business in the Netherlands via which I then buy lots of beer with credit, which I then transport to my resort. Those post-office businesses provide a means for American companies to hide from their tax authorities, so why shouldn’t I set one up to defraud a German beer company? By the time they find out what has happened and have traced things back to me, all the intermediary companies will be bankrupt anyway and I will have that beer but no need to pay for it.

Now, what other opportunities will open themselves up? Surely, there will be a humanitarian crisis here once the Grexit happens. How can I make money off that? Perhaps my daughter, who studies in Paris, can set up an aid agency for ailing Greek Islands like the one I live on. I should plan the aid brochure, which incidentally makes advertisements for my resort: those aid workers have to stay somewhere and they need to rent some place for those starving old ladies!

The price of particular supplies might also skyrocket at such moments. I bet the Internet can tell me what kind of goods usually increase in price, so if I start hoarding those, preferably using loans, then I will be in a great position to profit once our two political leader have taken us out of the Euro. Hmmm, this Grexit might work out beautifully for me….. hurray for Syriza ….. perhaps I should have lunch with my old mate Varoufakis and ask him just when he plans to blow the current deal with the Europeans so that I have everything in place at the right time….

The Dutch politician, June 2015

That bloody Greek crisis again, man!!! I had the main Dutch pension fund on my back when this thing went pear-shaped in 2008/2009, blabbering on about how they had hundreds of billions of Euros forthcoming from these Southern European banks and governments. Something about interest-rate swaps where they were on the right side of the bets. The mega-deal with the Greeks, Italians and Spanish secured them most of those profits, but has that been the end of it?

Not in the least. It has been one thing after the other with those damned Greeks. If only they could be like the Spanish, or better still, the Italians. With the Italians you know you are going to have a good glass of wine in the evening, talk about shit and compare mistresses, whilst you do a quiet deal that is not too bad and out of the media in the morning.

But with the Greeks? In the evening you have to read in the Greek newspapers that you are a Nazi stealing from old Greek ladies. In the morning, you get to read in your own newspaper that that peroxide-blond right-wing nutcase in your own parliament has called you a weak-kneed heroin-pusher again. And in the meantime you have to hear how undemocratic you are and how much better for the world if you simply lent all the money you were ever going to have to lend out and then keep quiet and be ashamed of how uncool you are. It’s like being at university again, infuriating, you just can’t win!

What was it this time last year? Last year, you had this great deal sown up with Samaras, a very reasonable-spoken Greek prime minister, where he agreed that they would finally start laying off some of the teachers and doctors who never actually showed up at the schools and hospital they supposedly work for and simply get salaries for no output. He would blame me for forcing him into this in his own media and I would say I finally got Greece to be responsible. Being portrayed as a Nazi again in Greece was a bit of a bugger, but I wasn’t planning on going on holidays there anyway (the mistress prefers the lakes in Finland), so that was ok.

Now, as a result of his ‘outrageous concessions to Northern European Nazis’, the Greek population, with unproductive teachers and doctors in the front row, has voted themselves a party that promises to re-hire everyone who was fired for gross incompetence. That old show-off Varoufakis now flat-out refuses to even pretend to pay back those generous new loans Greece was given not much more than a year ago. Man, the ingratitude of some people!!

Worse, I have been to college with some of those Greek jokers now in the government, and they are all the same politicians and their advisers again. They just jumped ship from the old Pasok party to this new-fanged Syriza gang. But they are all still the same people, whom Christine Lagarde has told me are individually dodging their own taxes and have large bank accounts in Switserland. I know exactly what it is they are hiding, but I don’t have the freedom to release that information to the press since Christine wants the Greeks to sort out their own tax evaders. What was she thinking of? It is like expecting the foxes to ramp up security to the chicken coop!

What do these Greeks want now? They want the ECB to keep lending their banks unlimited amounts of Euros via the ‘Emergency Loan Assistance’ scheme, presumably until all the Greek deposits have left that country and are safely in one of my own banks. And they want me to openly support their demand that they won’t ever have to pay anything back of the loans made to the Greeks over the last 15 years, even though I already agreed to halving their loans in 2010-2013 in return for reforms that they didn’t implement.

I hence am going to have to take my economic advisors seriously who have been telling me for years now that a Grexit is inevitable. Ok then, man-up and think this through, what are my risks?

First off, openly admitting that Greece is bankrupt means that the European Financial Stability Facility will come knocking on my door because we helped to guarantee the loans they gave to Greece. I remember the great party where we agreed to this, but now this is going to come back and bite me. We will have to openly admit a loss of some 10 billion Euros (if not more, hard to remember just how much it was. How much were we liable for again with the ECB? Have to ask in the morning!). This of course means budgetary pressure for years, which might cost me the next election.

I am going to have to find a way to blame the Greeks for this. To that end, I am going to have to quickly start portraying them as lazy junkies who have lied to all of us all this time. Easy peasy because the population already is prone to believing that. I know that blonded right-wing rat-bag will yell ‘I told you so’ from now till the next election, but if I just keep calling him a racist, the electoral fall-out shouldn’t be too bad.

Perhaps I can go one better though and avoid having to own up to that 10 to 20 billion Euro mistake entirely. Maybe I can get together with the other Northern European countries and argue to the EFSF and the ECB that we take on this loan onto our own books as other Eurozone countries, but that they should lend us the money to pay these loans back, with the loan tied to what Greece does. Perhaps special bonds that we will only have to pay back if Greece pays back its loans to us? Hmm, it sounds a bit too dodgy when it is put as clearly as this, but perhaps we can get the whizzes in our financial unit to think of a more complicated way to have the loss converted into something that needn’t be visible till a few elections down the road and I am safely retired, enjoying stints in the board of directors of the major Dutch banks. The media release will have to use the words ‘threat of contagion’ liberally. That always sounds scary to the population and yet is too difficult for them to understand and hence allows for a bit of discretion.

Second off, those bloody Greeks are threatening to open their borders and let in millions of Africans and Asians smuggled via Turkey into the EU. We are going to have to talk about strengthening border patrols around Greece, for which I need to talk to their neighbours – Bulgaria and Macedonia. Those politicians are a corruptible mess themselves and I know that the Schengen-neighbours just wont trust them to do our bidding, so we are going to also have to think about setting up controls in the next ring up – Hungary, Austria, and others. We are also going to have to insist with the airlines that they start checking passports again for passengers on any flight from that region. God, this is going to be messy!

Third off, even though the Greek elite has gotten super-rich from all this, it will still be a tragedy for the majority of the Greek population and I can’t be seen to be uncaring, so we are going to have to be seen to have some humanitarian plan ready. What will they need? Shelter, food, health care, and water: the basics. We are going to have to talk to the Greek ministries about ways in which we can support just those basic provisions in Greece without being seen to bail out the whole country and I know this is going to simply open up another gushing financial wound: the Greek political system is now set-up to take advantage of such outside funds, slushing it to Switserland or banks in my own country (but owned by them, not me, so that if I ever organise a bailout for my own banks, I will be bailing them out!).

Fourth, we are going to have to think about the legalities of having Greece in the Eurozone whilst they also have a drachma. With all that grand-standing that the Greek politicians have been doing the last 20 years – insisting only their cheese is called ‘feta’, blocking Turkey’s entry into the EU, and blocking Macedonia’s association with the EU just because they dare call themselves the same name some Greek province does – I just know that they are going to fight us tooth and nail if we try to kick them out of the Eurozone deliberations and structures. Those nit-picking European courts are going to agree with them as well, even if we just bar them from the ESFS and ESM system in the future. It is like walking around with a goddamned junky on your tail who won’t stop clinging to you as long as you have something to share.

Damn, what a mess!!! Why on earth didn’t we just let them go bankrupt in 2010 and simply supported our own banks and pension funds from the fall-out if that was really necessary? I need a Finnish holiday….

The American blogging economist, June 2015

My audience of econ grad students expects another juicy piece on Greece.

Of course, my audience doesn’t even know where that country is or how the Byzantine politics of Europe truly works, let alone that no-one is really in charge there. But it’s in the econ-news and you can’t be a self-respecting economist without having all your pet theories confirmed in this saga, so I gotta write something.

What am I going to go for this time? Have a go at Krugman who keeps bleating that the Europeans should print more money for Greece and not force them into austerity? He is easy to refute, simply by pointing out the massive capital flight from Greece: there has been no shortage of money going to Greece at all. It simply doesn’t get spent there as it leaves the country almost as soon as it arrives, ending up in old socks or Northern European treasury bills. It is the incredible political dysfunctionality of the political elite in that country that is the economic problem there, not a lack of money or any true austerity (an austerity which generations of Greek politicians have simply refused to actually implement). Indeed, if the Greek saga shows anything, then it is that throwing nigh unlimited funds at a small country will not help it avoid a big recession once the political and bureaucratic system has metastasised to nearly pure rent-seeking. Having loans of 180% of GDP plus extra ELA loans, and having lots written off already, it is hard to argue that not enough money has gone to Greece! So I can have a go at the old Krugger for abusing the Greek saga to score an ideological point, but the argument might not be understood by my audience because I will then be seen to pick on the poor but-oh-so-brave Greeks.

What other story important in the States can I pretend is definitely settled by the Greek saga? Perhaps how you need a fiscal union if you are going to have a monetary union? No, that wont play out so well with all the individual states here who are simply allowed to go bankrupt if they spend too much. Hard to argue that Greece should have indefinite bailouts when we allow our own states to go bankrupt. I’d have to argue it should never have been bailed out in the first place, which wont play well with pictures of starving old Greek ladies soon in the news.

How about blaming the Germans for being German then? Stories of inflexible and insensitive Germans normally go down well. I can pretend that Merkel is the one who gets to decide what happens to Greece and berate her for demanding the impossible of Greece, conveniently ignoring the other 20 governments and 10-odd institutions that have to agree and that are dominated by Southern Europeans. My audience probably won’t know all of that and many like to believe the worst of the Germans anyway, so I can shove that under the carpet. I can detail the idiotic things that the Troika has asked of the Greek government over the years, such as increasing the pension-age to near-US levels, or making it possible to actually fire Greek civil servants who previously had a constitutionally guaranteed job for life…

Ehmmm, no, skip that argument and those examples, I will clearly have to stay away from actual details. I can go for older stuff though, such as how the French and Germans didn’t hold to the Maastricht criteria either, or have ignored various experts at various times who told them how the Greeks and others were cooking the books. I guess that would work somewhat towards making them sound like meanies towards Greece, but there will still be a nagging doubt in the minds of much of my audience that someone who lends money has some right to demand good behaviour from the other side. The Germans might come off looking too sympathetic with any angle that portrays it as a simple game between a lender and a borrower.

I know what to do: I can of course go for that golden oldie and blame the European bankers for all the woes of Europe. Easy to do that, for the ECB has been guilty of printing money for them via those easy loans they offered to big banks, hidden behind the name ‘market sterilisation’. The bankers’ bonuses are huge; the boards of banks are full of ex-politicians; the ECB has refused to become a people’s bank; and the European institutions have pretended to start to monitor banks whilst there is still no institution with the actual manpower to do the monitoring. So I can point all that out and seem an informed person when I then make the leap to say the politicians have all been hoodwinked by the bankers when it came to Greece. My audience will lap it up. It is not quite fair to lots of European politicians whose first thought was their voters and their own pensioners, and it doesn’t fit the reality of how lots of rich investors have lost their shirts over Greece, but one cannot spin a good old morality tale without taking a few short-cuts.

Starving Greek ladies paying for European fat bankers and being made an example off for daring to stand up against the capitalists of Europe? Yeah, that has a nice ring to it. Even if you turn out to be wrong with a story like that, you sound sympathetic. You are almost bound to be on the right side of what ends up as the written history of this saga.

My Perspective

The Greek saga has been an unanticipated cluster f-up all round. I don’t believe for a second that the Greek politicians in 2008 saw the misery of their own country coming, nor that the main politicians doing the deciding in 2010 knew what was coming.There are too many decision makers involved in many different types of institutions for any single interest to have been decisive in the decision making. No, the prolonged Greek recession and the descent of the entire Greek political and bureaucratic system into rent-seeking apathy has caught them all out.

The main policy failure has thus been of not reading correctly how Greek politics and the Greek economy would evolve when put in a situation of almost unlimited loans and a troika that would come round and ask them to do sensible things that went against the interest of the politically powerful. They should have seen coming that the Greek politicians would start to blame the people who were feeding them the money, even though that money supported their political clients. They should have seen coming that huge loans and open conditions would make things far worse, not better.

It is thus a failure of political theory, both in economics and other social sciences, that is to blame. The European elites are steeped in historical education on politics but were nevertheless naive about the internal dynamics within Greece and stuck to that naivety for far too long after it became crystal clear round about 2011 how hopeless the situation within Greece truly was.

My take-away message: don’t lend vast amounts of money to parasitical political elites and don’t send them more once you found out you were mistaken about them earlier! It is not good for their populations, nor your own.

Why is a Grexit now likely?

Greece owes the IMF 1.6 billion euro that it doesn’t have but is supposed to pay tomorrow. Unless the ECB lends it to the Greeks, effectively converting the IMF debt into an ECB debt, Greece is bankrupt tomorrow. In months to come, much bigger debt repayments are scheduled to the ECB-IMF in tranches of 4 billion, and Greece won’t have that money either as its economy is still contracting.

Greece didn’t have the money to pay off the previous debts in the last 5 years either though, and that just lead to more debts in return for symbolic reforms that weren’t implemented.

Why not muddle then then and let the Northern European politicians present a pretend-reform package to their population as a victory? And why would bankruptcy force a Grexit, given that there is no official mechanism to force any country out of the Euro, once it is in?

What I think is forcing the Grexit now is the combination of the referendum on the symbolic reforms, together with the bank-run on the Greek banks that has this morning lead to capital controls.

The referendum is called for this Sunday, one or two days before the banks supposedly re-open for open business. The idea is that Greeks vote on whether to accept the current set of symbolic reforms, which would entail cuts to pensions and loss of employment of many civil servants. The government will campaign against them, and the majority of the Greek parliamentarians are with the government, successfully whipping the country into a ‘no austerity’ mood. There is hence no way that the Greek population would vote ‘yes’. And even if they did, the Greek government then would not implement reforms as its own backers would constitute the ‘no’ vote.

But the referendum also makes it impossible to agree on something symbolic beforehand: it binds the hands of the Greek politicians who called for it (almost surely so they wouldn’t be blamed for the coming Grexit). This means nothing can be offered to them that would prevent bankruptcy tomorrow.

Previous symbolic reform packages were not implemented, partly because the Greek governments didn’t want to implement them and partly because they couldn’t even if they wanted to. Tax collection, for instance, would take many years to clean up and, as a Greek economist told me half-jokingly recently, it is still normal to send Greek tax collectors home in an election year! But to the Northern Europeans, the Greek politicians at least pretended they were going to pay back the loans and reform. The referendum is now expressly fought on a platform of not even pretending either, taking away the much-needed fig-leaf that the Northern Europeans wanted.

Worst of all, the referendum is a slap in the face of the other politicians who were negotiating at this late hour with the Greek politicians on the terms of the next symbolic set of reforms. It is part of the rules of the game in Brussels that this was a real deadline that forced everyone to agree to some face-saving formula. The referendum has made this impossible: the Greek politicians won’t play by the European rule-book. No face saving, just Greek theatrics and grand-standing.

So the other European politicians have been sufficiently humiliated that they feel they need to be tough, an attitude you see most clearly in Christine Lagarde from the IMF who made it clear tomorrow’s deadline is not negotiable.

Hence the referendum will likely be followed by a continuation of the bank run by Greeks who calculate their country’s approaching bankruptcy, and this time there cannot be a bailout: the only bailout that is now possible within the Greek political system is one whereby the ECB lends money without symbolic reforms, an open loss for the Northern Europeans. That means there will be no bailout. In concrete terms, the Greek central bank will not be getting any more Euros to distribute amongst its banks. The Greek government wont be able to pay to its employees, welfare recipients, and other recipients of state money.

So the day after the referendum, neither the Greek central bank, nor the Greek government has money to prop up the Greek commercial banks nor pay its own workers. That is what will force the Grexit, I think, not the inability to pay back loans to non-Greeks: the slow bank-run, in which billions in deposits are withdrawn weekly from Greek banks, will force them into it.

If the Greek government does not introduce a new currency then it will have no means to prevent the bank-run and the Greek banks will run out of money and go bankrupt themselves. Without an intervention, that will wipe out all the savings in those banks and lead to a major disruption of the Greek financial sector and the Greek economy. Tax avoidance will go up as the visible money streams that go via the banks will stop and the remaining economy will go via invisible money streams that are harder to tax. Greek civil servants will not get paid, nor will welfare recipients get their payouts, meaning they will have no money either, forcing them to join the bank run to pay for groceries.

So the Greek government will face financial collapse in the days after the referendum. Capital controls will slow the collapse down, but the only thing it can do, really, is to take over the obligations of the commercial Greek banks, guarantee the deposits of the population, and pay its employees and welfare recipients with something else. That something else is a new currency, whether it starts life being called an I-Owe-You (IOU) or a Varoufakis-florint: it will have to be declared legal currency inside Greece so that one can make payments with it. Hence in order to save its own banks and thereby its depositors, Greece will have to Grexit.

Now, no-one can force Greece to give up the Euro, so Greece can in principle maintain a dual currency system for a long time, having both the Euro and the new currency as legal tender. This is not abnormal, as Hong Kong airport has shown you can run a 3-currency system indefinitely: you can pay there with Honk-Kong dollars, Euros, and US dollars. Yet, if the state sector runs on fast devaluing drachmas and the rest on stable Euros then the Greeks will be incurring a lot of transaction costs.

It will not really matter though whether Greece hangs on to two currencies or just the new one: with the re-introduction of a separate legal currency, Greece will have effectively left the Eurozone and become like Macedonia and Bulgaria, where you can also pay in lots of places with Euros but that are no longer official members of the Eurozone. It will be sufficient excuse for the ECB to declare that Greece has exited from the Eurozone.

I wouldn’t be surprised if stacks of the new currency are already in Greece, ready to replace the Euro as the official currency, with contingency scenarios now being taken off the rack in the main financial European institutions (EIB, ECB, EU-C) and in the individual countries. This means a Grexit is also a physical possibility now whilst it probably could not have been done 5 years ago.

Is there a way to prevent the coming Grexit? Normally, I expect the political system in the EU to come up with a watery compromise at the last minute, and you hear plenty of rumbling to that effect. The Greeks politicians have however, I think, made this impossible with a referendum that takes away the ability for compromises to be offered and accepted. Time will tell though: the ability of the EU to muddle through is astounding.

Will a Grexit be good for Greece? In the medium-run, I do think so as the state-related sector takes a much needed price-correction vis-a-vis the exporting sector. In the short run though, pain is coming, particularly for the old and infirm in Greece dependent on the state. And the recovery will be hampered by the fact that the Greek economy is tied to the rest of Europe, whom the Greeks have just had a falling-out with.

Observations on a possible Grexit

[this was first posted on Clubtroppo 9 days ago. Since everything went to script after that, the text below is unchanged]

After two weeks of a new government in Greece, a Greek exit from the Euro (termed a ‘Grexit’) looks more and more likely. The betting markets give it about 30% to happen this year, and Greece is the out and out market favourite to exit the Euro before any other country.

Though I have not followed it super-closely the last 2 years, I have some observations to offer:

  1. Greek politicians are very used to being in the situation of owing other countries money and negotiating more favourable terms. In a way, their hand is the easy one to play as they can credibly claim not to be able to pay back the debts and then offer to promise to pay back something, with the alternative being open bankruptcy for which they would then blame the lenders. If the lender is owed enough money, the lender often reluctantly plays along in the hope of getting something back. This strategy has worked well for the previous Greek governments, which have quite successfully in the last 7 years gotten 3 bailouts, and the current government should be favourite again in the current situation to come out with an even better deal than before.
  2. The political imperative to pretend that Greece will pay back its loans is diminishing on both sides of the loan relation because of increased concentration of debts. The Greek state now directly owes the rest of the EU in that 80% of its debt is mainly to tax-payer owned entities outside of Greece (EU governments, the ECB, the IMF, etc.). This puts Greece into a great position to get a better deal as the Greek state has taken over many of the debts owed by Greek banks (meaning bank collapses are less of a worry), and European tax-payer institutions can rationally hope to simply have the ECB print the equivalent amount of money that they would have to write off as lost Greek debts. This printing-to-cover-debts is already starting to happen as the ECB has announced it wants to buy up government bonds, effectively a form of money printing for governments. For Greece, this means that an official bankruptcy would save the Greek state close to 150% of GDP in terms of liabilities, without the Greek banks being as exposed as in 2007 (Greek banks owe the ECB around 75 billion euro in fairly low-interest loans).
  3. Previous Greek governments have successfully sabotaged many reforms they agreed to. The most glaring example is tax evasion, where Greece was ‘forced’ to increase the number of tax audits, the severity of the punishments, and the transparency of tax duties and tax arrears (read here). Yet, tax arrears still increased from 45 billion in 2011 to 70 billion at the end of October 2014, as the previous government made it simpler to have taxes declared uncollectable. There is also no indication whatsoever that the 2000 high-profile Greeks who were named and shamed in the famous ‘Lagarde’ list of tax frauds have lost their influence in Greece or in any other way been held to account – though the Greek journalist who leaked the list that the Finance minister had kept secret for years had to fight off 2 court cases. Similarly, the story of the supposed privatizations of state assets in Greece is one whereby Greek politicians were keen to ensure a lack of transparency and impartiality in the sale of their assets and frustrated any real privitizations (you can guess why!). Somewhat humorously, Germany has again offered the new government to send 500 tax collectors to Greece.
  4. The plan floated for some years now by the Greek finance minister Yanis Varoufakis and his friends in Europe (such as Jaques Delors) to have a large EU-wide spending spree via an accelerated spending of the ‘structural funds’ strikes me as deeply naïve. For one, the budget of the structural funds, some 40 billion Euro per year, makes up no more than 0.3% of EU GDP, making it small biscuits in the scheme of things. More importantly, the whole idea that there are lots of big projects to be identified by central bureaucracies that will engage the masses of unemployed in meaningful activities, smacks of a bygone belief in central socialist planning. The European Investment Bank and the structural funds are already struggling to find meaningful projects to finance, often accused of funding expensive goat tracks, so one should not expect the same European bureaucracy to suddenly find a large flood of meaningful things to do for the Greek unemployed. I personally think the way to go would be to have all citizens of Europe have a direct account with the ECB which can the create liquidity via those accounts, bypassing banks, a proposal you now see more often in European economic debates.
  5. The new Greek government is floating silly stuff, like a claim for German war reparations, unnecessarily berating the Troika, threatening to become friends with Russia, and grandstanding about democratic values. Whilst this might appear cool for the home front, it is essentially empty bluster that will alienate the decision makers in the capitals of Northern Europe and Washington. It will make it harder for the ECB and European leaders to be seen to agree with further Greek bailouts and thus increases the probability of a Grexit – European leaders have shown in the last 7 years they don’t mind subsidising a hopeless cause but to do so whilst being publicly berated would make that choice dangerously visible.
  6. If one considers what the fundamental difficulty with a single currency is in Europe, then the only ‘deep’ reason I have been able to come up with in the last few years is a difference in the ability of some political systems to curtail the wage increases of public sector employees and welfare recipients: one needs an asymmetry in market distortions across Europe to explain why market price adjustments haven’t yet ‘cured’ the problems of a single currency, and asymmetry in the price policy of governments is the key candidate. The story is that in Southern Europe, including France and Italy, the introduction of the Euro was followed by large real increases in the wages and welfare payments of those connected to the state, whilst in Northern Europe these increases were more modest since they followed a longer tradition of low inflation and negotiated central bargaining. Before the Euro, these increases in prices set by central governments in Southern Europe were simply off-set by bursts of inflation, maintaining a healthy ratio between public sector payments and private-sector wages, and hence not destructive. Being in the Eurozone took away that natural market reaction though, which then lead to increases in debts, property bubbles fed by these debts, distortions in the allocation of talent in the economy (the talented were queuing up for the over-priced and safe government jobs) and eventual collapse. The only real way to redress the price imbalances within the Euro system were then to openly reduce public sector wages, fire public sector workers, and reduce state payments across the board, which reluctantly happened to some degree, but of course lead to levels of unemployment and unpopularity that inflation (which has the same effect) would not have led to. Outside of the Eurozone, inflation could have returned relative prices to sanity much quicker and to levels not pre-determined by governments, which is why in hindsight I think it would have been much better for Greece, and perhaps also the other Southern European countries, to go bankrupt in 2008 and re-introduce their currencies. Btw, I never for a moment bought the line that Southern European governments could escape this ‘austerity’ via some nirvanic Keynesian spending spree that would lift all boats and prevented this tough relative price decline.
  7. How bad would a Grexit be for Greece? In the early days of 2008/2009, it would have been pretty bad, with massive capital flight and a string of banking collapses. Currently, I think it would only have a short-run negative effect on Greece, followed by a strong upsurge, much like what happened in Iceland after its bankruptcy (tellingly, Iceland unemployment rates currently stand at below 5%, compared to over 20% in Greece). You see, Greece already has a primary government surplus and much of the savings and the capital already left in 2010 and 2011, with capital flight reappearing in the last 6-months in anticipation of a possible Grexit. The internal relative prices in Greece are still out of whack though (see here for comparisons of public sector pay across the OECD, which identifies Greece as having levels of pay for teachers close to that of Sweden, on a GDP per capita close to the Check republic with roughly 30% lower wages), for which a bout of inflation would be the obvious solution that its membership of the Euro is preventing from happening.
  8. The main internal problem in Greece is that it has been run by the wrong crowd for a long time now – the very people who were avoiding taxes and abusing their political power were being asked by European governments and institutions to solve the problems they had created, and you can guess how they worked that to their advantage! The main thing you can accuse the Germans of is naiveté with regards to the Greek elite leading to their de facto support of the wrong crowd. The new government has promised to take this old elite on, which will be a mammoth task as they will occupy local councils and be dominant inside most of the public institutions. Inside the Euro or outside, that will be the main battle and the rest of Europe will, I think, have little effect on the outcome: imperative in the political struggle to increase accountability and the rule of law throughout the upper echelons of politics, business, and ministries, will be the emergence and maintenance of a group of new political leaders who start out with the right intentions and who face the right incentives. That requires mobilisation of a whole generation of new leaders who see little alternative. European money in many ways creates the wrong incentives in that it increases the value of simply being in power and hence being the first in line to receive foreign aid. Without European subsidies, increasing the size of the local pie will become more important to Greek politicians, and it takes away the ability to blame outsiders for failure.

In short, hurray for a Grexit! May it happen sooner rather than later, though if I had to bet I would gamble on further muddling through via additional Greek bailouts. The real game is inside Greece though and I wish the new government all the best with their endeavours to dislodge the old elite and put a more accountable one in its place. I do hope Yanis and his friends stop grandstanding though about stuff like German war reparations and being holier-than-thou when it comes to democracy, for it makes them look decidedly shabby.

An MYEFO mystery: what’s with the resource tax?

It’s the time of the mid-year Economic Fiscal Outlook (MYEFO) and we’re told that we’re about 11 billion deeper in the red this financial year than we thought, with the treasurer blaming the dropping iron price and the reduced wage growth. I have gone over the MYEFO documents (which are an exercise in obfuscation if ever I saw one), found that wage growth and the dropped iron ore price would ‘only’ cost us 2.3 billion each in this financial year (2014-2015), noted that this was far short of the 11 billion headline, and thus went looking for the ‘real story’.

This threw up the mystery of the resource tax. Here is what it says on table 3.2:

Table 3.2: Impact of Senate on the Budget (underlying cash balance)
Estimates Projections
2014‑15 2015‑16 2016‑17 2017‑18 Total
$m $m $m $m $m
Impact of decision taken as part of Senate negotiations(a)
Repeal of the Minerals Resource Rent Tax and related measures -1,684 -2,334 -1,670 -947 -6,634

which seems to means that the repeal of the minerals resource rent tax (and related measures) is costing us around 2 billion per year. Yet, in the ‘Overview Part’, the MYEFO says “The repeal of the Minerals Resource Rent Tax and other related measures will save the budget over $10 billion over the forward estimates and around $50 billion over the next decade.”.

What is going on?

Update (thanks Chris Lloyd): it seems to be a language issue. Part of the story seems to be that the MYEFO is counting the repeal of the mining tax, which was an election promise, as something the Senate inflicted on the budget, so the 2 billion a year is ‘revenue foregone’. So the MYEFO is blaming the Senate for the outcome of an election promise, using an odd formulation to say that the repeal will save us 50 billion when it seems to imply it would cost us 50 billion. Weird.