Posts Tagged ‘euro’

Will Greece Pay Its Debts Via The Agamemnon Option?

Wednesday, June 17th, 2015

Legend has it that, at the onset of the Trojan war, the Mycenaen king Agamemnon sacrificed his daughter Iphigenia to Artemis, the goddess of (amongst other things) wildness, in order to obtain favorable winds for the Hellenic fleet’s crossing of the Aegean.

Some three millennia after the events that inspired this story, the government in Athens finds itself again attempting to appease greater powers in the face of an increasingly wild regional conflict. And yet again, perhaps Greek leaders have already made a terrible sacrifice of youth which could go some distance to calming the seas their beleaguered nation must navigate, if those greater powers view the offering with favor.

Standing in for Artemis are the so-called “Troika” of Greece’s institutional creditors, the International Monetary Fund (IMF), the European Central Bank (ECB) and the eurozone countries. In the role of poor Iphigenia we have a generation of young, educated, professional and entrepreneurial Greeks. In these more civilized times, however, the sacrificial instruments are not altar and dagger but an airline ticket and an EU passport.

At least two hundred thousand Greeks have emigrated since the financial crisis began, the vast majority of whom are youthful, skilled and facing bleak prospects in their home country. They are the next generation of Greece’s experts in medicine, the sciences, engineering, finance and academia. Their primary destinations are other EU nations – for example, the UK’s Guardian reports Germany alone has received 35,000 Greek physicians.

While many of these émigrés might prefer to return to their native land someday, Greece’s stifling regime of regulation and taxation, its bloated welfare state and rampant corruption are likely to continue to render that nation far too uncompetitive to accommodate their ambitions. The 2014-15 World Economic Forum competitiveness ranking places Greece eight-first, just behind Uruguay (but, in fairness, one ahead of Moldova). By contrast, the U.S is third, while Germany ranks fifth. Rather than implement meaningful additional legal, pension and labor market reforms, Athens proposes to roll back many of those the Troika has already imposed, thus ensuring this unfortunate state of affairs is likely to continue for some time.

Yet there is a kind of tragic silver lining in all this, both for Greece’s creditors and its government’s apparent vision. Consider the value of Greece’s professional diaspora in Europe to its recipient nations. Let’s do an admittedly “back of the envelope” calculation. First, a few compensation figures. For German engineers the average is around $57,000, for bankers around $55,000. The average physician in Germany made $155,000 in 2010, in France a bit lower at $131,000. So for the sake of argument, let’s assume a $50,000 per capita income for two hundred thousand Greek professional émigrés (a number which could rise if Greece continues on its current trajectory) and an average working lifetime of thirty years. Discounting by the current German thirty year bund rate of 1.5% over that time frame (a not unreasonable proxy given integration into largely northern European economies) yields an expected present value of $240 billion. Assuming a 50% rate of total taxation (income,VAT, property etc.) yields $120 billion, or approximately 44% of the $273 billion Greece owes the Troika creditors and the central banks of the eurozone. In particular, this is $30 billion more than the $90 billion the ECB has extended to Greek banks under the former’s Emergency Liquidity Assistance (ELA) program*.

Thus, if the Troika and the eurozone’s central banks are to take a hit on Greece, the transfer of that country’s human capital to the rest of Europe and other IMF members should provide the creditors with some recompense (in an ideal world some inter-creditor transfer system would be implemented to make things fair, given that many Greek expats may head to the non-eurozone UK and the non-EU United States, and that poorer creditors like Portugal may not get a pari passu share of Greek emigration). A full realization of the value of this emigration might ameliorate the Troika’s reticence concerning whatever restructuring, discount, or other euphemism for a Greek default ensues, perhaps to the point of extending the ELA to prevent bank runs, with a bit left over for some form of humanitarian aid.

To be sure, some of the Troika’s actions and proposals have been neither helpful nor realistic, especially as regards overly aggressive near-term primary surplus targets (1% for the next couple of years would be in the outer realm of the possible). Yet the irony here is that, absent very necessary reforms to the welfare state that Athens is loath to agree to, the conditions in Greece are likely to persist, such that young, talented Greeks will remain in diaspora, lending their abilities and energy to the economies of Greece’s creditors. Effectively, Athens will have guaranteed at least a partial repayment of its debts, albeit at the cost of its nations’ youth.

Of course, the Greek polis may not be entirely pleased with its government’s sacrificial policy. After all, in Pindar’s poetic telling, certain members of Agamemnon’s constituency, notably Clytemnestra, mother of Iphigenia and his queen, registered displeasure with the monarch in the manner of a time before the invention of the parliamentary no-confidence vote, making for arguably the most notorious bathing scenes in literature. With polls consistently showing a majority of Greeks in favor of remaining in the eurozone even if that means agreeing to painful reform, Greece’s leadership may yet choose to compromise. Otherwise, they could find themselves grateful that the democratic process allows them to lose power without taking a bath considerably less pleasant than even the one they would impose on their creditors.

Then again, in some old versions of the tale, at the last moment Artemis rescues Iphigenia and replaces her with a stag, so hey, there’s always the chance of a deal, though bailing out Greece will take a lot more than a single buck.

*Of course this analysis neglects the social welfare cost of the émigrés to their adopted countries; this may be justified to the extent that these young people are already educated and that much of the other expenses will be incurred in old age and thus are to be heavily discounted in terms of present value. Such costs would also be partially offset by revenue from assets transferred out of Greece by the expats and other Greeks, and also by revenue from enterprises founded by disproportionately entrepreneurial immigrants, at least if one goes by the American experience.

It’s Hard To Make That German Export Wiener Without PIIGS — And That Goes For Chinese Dumplings, Too.

Thursday, October 27th, 2011

With all the flack Angela Merkel has taken at home for agreeing to help bail out Greece, one could be forgiven for wondering why the Chancellor would want to yolk Germany’s seeming paragon of export-driven economic strength to the Hellenic basket case, let alone to the fortunes of those other peripheral euro states that, with Greece, are collectively known as PIIGS (Portugal, Ireland, Italy, Greece and Spain). Perhaps counter-intuitively, part of the answer lies in the fact that German exports are actually made more competitive because of the weakening of the euro caused by the participation of the PIIGS in that currency.

A weaker euro means relatively cheaper prices for German goods in the currency of non-Eurozone trading partners, giving German exporters an edge in world markets. To understand this effect, one must first consider two histories: that of the euro since its birth, and of German exports prior and subsequent to that introduction.

For all its troubles, the euro has strengthened considerably since its first day of trading, January 5, 1999. It hit $1.19 that day, but by December 3 of the same year it fell below parity with the dollar. The currency has since risen over 40% to $1.4172 as of this writing (it hit a high of $1.5892 on July 7, 2008). Now this appreciation versus the greenback has occurred despite the presence of the PIIIGS in the eurozone, with all the systemic risk that their potential sovereign defaults pose to European banking and economic growth. Imagine how much higher the euro might trade were the PIIGS to exit Euroland’s pen, remaking the euro into something more in the image of the old German mark!

So how did German exports fare before and after it traded marks for euros? From January 1991 to January 1999, under the old mark (1991 being the first full year following reunification) German monthly exports rose from around 30 to 40 billion euros, an increase of about 4% per year. By contrast, in the euro period from January 1999 to January 2011 Germany’s exports rose to over 80 billion euros per month, an increase of over 6% per year (German exports dropped sharply during the ’08-’09 financial crisis but have subsequently more than rebounded, hitting 97 billion euros in April 2011 before easing to 85 billion in September).

Would German exports have risen as sharply were the nation still using a mark, reflecting solely that nation’s monetary policy, as opposed to a euro in whose valuation German export strength, traditionally tight postwar German monetary policy and relatively conservative German fiscal policy are diluted by the PIIGS’ trade weakness and profligate budget policy, not to mention power sharing in the European Central Bank? I strongly doubt it.

To be sure, 60% of German exports still go to the EU, where the euro’s exchange strength would be irrelevant. But it is trade with China that is providing the growth in German exports, having risen four fold over the last ten years to rival the US as Germany’s largest single national market at 5.6% of the nation’s foreign sales, a figure that may triple by the end of this decade. This ballooning China trade is in turn driving German economic growth. Without the squealing PIIGS of the Eurozone’s periphery, a stronger euro could make German goods less competitive and have serious consequences for continued China-trade driven economic expansion.

There is perhaps some irony that, in addition to a “voluntary” 50% markdown in Greek bank debt, Europe is turning to China in hopes of having that nation finance some of the expanded $1.4 trillion European Financial Stabilization Fund, perhaps directly or through the IMF. Like Germany, China’s expansion is dependent on exports, and the global slowdown that could come in the wake of a euro collapse would threaten those sales. Meanwhile, Chinese inflation is still running high, driven by an undervalued yuan and tight commodity markets, so Beijing may also find continued euro-discounted German manufactured imports not unwelcome. And investment in euro assets provides China with some diversification from its substantial dollar holdings.

Chinese investment could at least lessen the need for debt monetization (see “Europe Learns To Default The American Way, Restoring Transatlantic Balance Of Irresponsibility”) and/or the issuance of Eurobonds directly backed by German taxpayers, perhaps under some kind of Eurozone fiscal union. That would be welcome news for Merkel. The former is anathema to a nation whose prewar experience with inflation had the darkest of consequences. As to the latter, Germany’s 83% debt-to-GDP ratio (it may hit 87% in short order, jumping from approximately 67% in 2007) is not at Greek or even American levels, but still speaks to Germany’s own bloated welfare state, which combined with past and potential bank bailouts, stimulus and Eurobond exposure to the PIIGS could yet make even German borrowing unsustainable, bringing us back to monetization and inflation.

So fortunately for Merkel, China seems to realize PIIGS are a desirable ingredient in dumplings as well as wieners. It remains to be seen if Beijing’s investments will eliminate or merely forestall the need for stronger measures. The Chancellor recently warned that the issuance of Eurozone debt and fiscal union would lead to “solidarity in mediocrity.” Yet when your export-led economy is partially built on the weakness of your currency partners, some economic convergence may be inevitable; a cruel truth, perhaps, but  then they don’t call it reversion to the “mean” for nothing.