Wednesday, June 20, 2012

Is Krugman Right About Greece?

Krugman has written another column arguing that the European crisis is really the fault of Brussels. All the things that are wrong with Greece are “beside the point” and have little to do with “the crisis that is tearing Greece apart.” Rather, the “the origins of this disaster lie farther north” with the creation of a “deeply – perhaps fatally – flawed monetary system” and with Europe’s inability to respond to the crisis. Krugman’s view is almost mainstream among economists, and since he is both eloquent and influential, he matters. But is he right? 

Krugman spends two paragraphs on Greece before moving on to critique Europe. In those two paragraphs, he makes four points: 
  1. He writes that,  “Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means.” 
  2. He notes that “Greek labor productivity is … about 25 percent below the European Union average,” although he notes that this is no different than Mississippi relative to the US average. 
  3. Then, he turns to the unfair comments about Greece. Greeks are not lazy because “they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular.” 
  4. Finally he notes that Greece does not have “a runaway welfare state, as conservatives like to claim” because “social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany.” 
Even so, these facts don’t matter, says Krugman. Of course, dispensing of such a complicated economy and society in 163 words before giving it a cleanish bill of health is like your doctor telling you don’t need to come in for a check-up because you sound “just fine” on the phone. This is not a serious analysis of Greece. Let’s look at each claim in some detail. 

Claim #1 is that while corruption is in fact high in Greece, this is not a material fact. Yet corruption is essential in understanding how Greece reacted to this crisis. It tells us a lot about what reforms have not happened and why. It tells us why the public’s response to austerity has been explosive as people see their tax bills grow while tax evasion is rampant. The inability to collect taxes undermines a government’s commitment to change. And, the country’s fiscal hole would be smaller if the country could collect taxes. Insofar as healthy public finances are essential to regain market access, this is not a trivial fact. 

Claim #2 is that Greek productivity is as low as productivity in Mississippi. Let's come back to Mississippi later on. 

Claim #3 is that Greeks work longer hours than Germans. As I have written before, this is a statistical artifact, which says only that part-time employment in Greece is low. Nor does longer mean harder: in fact, per working hour, Greek labor is much less efficient than German labor. The stereotype that “Greeks are lazy” is in fact a stereotype; but Krugman’s effort to refute this idea is poor. An economist of Krugman’s erudition should know better. 

Claim #4 is that social spending is not too high relative to the European countries and, thus, it is not a big deal. But looking at social spending as a share of GDP tells you little. Greece’s problem is not, strictly speaking, the size of the state which is not unprecedented. Rather, the problem is quality: because social services are so poor, there is a parallel system that is draining resources. Middle class parents pay for tutors and evening schools (“frontistiria”). In healthcare, people either bribe to get quality services or they bypass the system altogether and rely on the private sector. These are real costs to households that do not show up – and they matter because many Greeks pay for these services twice thus draining resources. 

Having said all this, Krugman then turns to Europe. He makes two points: first, when Greece joined the Eurozone, “people started believing that it was a safe place to invest. Foreign money poured into Greece, some but not all of it financing government deficits; the economy boomed; inflation rose; and Greece became increasingly uncompetitive.” 

This is true, but Krugman is missing something here. Greece being a safe place to invest was in fact an illusion – but it was an illusion that has since been corrected. Basically, markets assumed that all countries in the Eurozone were equally creditworthy even though they were not. The euro was partly to blame but only indirectly – there is nothing in the common currency that says (public) borrowing should be the same for all countries. As I have noted before, our current crisis is partly driven by markets trying to re-price European sovereign debt correctly. Without the euro, Greece would have suffered an economic crisis that would have come sooner and would have been milder. But the fundamentals of the economy would not have changed much nor is there any reason why normal market forces - higher interest rates - cannot work in a currency union. 

The second critique is that a monetary union cannot work without a strong central government. Krugman says “Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.” 

Well, Greece is not Florida. First, Florida pays billions of dollars in federal taxes ($136 billion in 2007; for 2009, individual income taxes, a subset of the total, were $57.6 billion). Florida gets federal money because it also pays federal money. Balancing Florida's $58 billion (2009) budget would be much easier if Florida were not sending this money to Washington. To compare Florida’s finances to Greece you need to refund Florida lots of money (Europeans do pay indirectly for an EU budget, but its size is small relative to the US federal government).

But this is a trivial objection. There are two more basic objections. First, let’s look at Mississippi. In 2009, its $14.1 billion spending included $7.6 billion from the federal government (since it also sent money to the federal government, the net transfer is smaller). Is this transfer helping the economy in Mississippi? Would the economy be more productive if this amount of money were not available? In general, “rentier economies” that receive a steady flow of money tend to reform slowly. Mississippi is not a rentier state, but in some ways it is. Would Mississippi be better off without this federal money? This is a key question to ask for Greece as well and one that Krugman ought to answer. We need to think about the political economy implications of these transfers not just state that the economy would be in less hardship without them. 

The second objection is Greece’s access to capital markets is not the same as Florida’s. When a country hits a crisis, it can cut spending but it can also borrow. Greece’s problem is not that it is in the euro, but that no one has faith in the government’s ability to repay back the debt that it wants to borrow. Now you can argue that this crisis of confidence is linked to the euro and to the doubt that markets have about how Greece will grow. But this is fundamentally a political suspicion, not an economic one. It is a doubt about the country’s ability to change.

Krugman assumes that membership in a common currency means that this elementary market system will not work. But why not? Why can’t two countries with the same currency have different borrowing costs (as they do now) and hence receive different market signals on the need for change? If Greece had compelling politicians, its ability to borrow and weather this crisis would be greater – interest rates are the market’s way of communicating this to the government. 

Krugman ends up by saying that,  “the Greeks can’t solve this crisis anyway.” They cannot solve the European crisis, no. But they can solve the Greek crisis. They can collect taxes and cut wasteful spending. They can fight corruption in public and private life. They can fix health care and education, both of which are broken. They can privatize industries and reform the private sector to combat monopolies and oligopolies. They can establish rule of law and make the country safer for entrepreneurs. All this Greece can do by itself. Krugman is letting his anger at the European elite give Greece a free pass. He should know better.

24 comments:

  1. Dimitris VlachosJune 20, 2012 at 6:24 AM

    Great analysis, my only comment is that having the same currency (or pegged currencies) means having the same monetary policy. If two economies have different cycles - for whatever reasons - and one finds itself in a bust while the other is in a boom, then the common currency is a problem because the readjustment needs to come exclusively from fiscal measures. In addition, the different borrowing costs aren't simply market signals, but also the beginning of a self fullfilling death spiral, since the country in trouble doesn't control the currency in which its debt is owed.

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    1. Dimitri - you're right on both counts. Without monetary policy, you are stuck with a fiscal-only adjustment. What is not clear to me is why that fiscal only adjustment cannot happen within a monetary union. The same, I think, applies to the death spiral. Controlling your currency can be both good and bad - you may want a cheap currency to boost exports but need an expensive currency to prevent foreign-denominated debt from becoming impossible to pay back. It's a tricky balance that many countries fail to strike. That's why I am not so sure you're that much better off with your own currency. If markets have lost faith, you need to restore faith. My sense is that monetary policy often acts as a substitute for substantive reforms.

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    2. Dimitris VlachosJune 20, 2012 at 7:27 AM

      Traditionally, developed economies with their own currency issue most of their debt in it, with the occasional small issue of eurobonds, so foreign-denominated debt isn't a key concern. My point goes more towards that being stuck with the wrong monetary policy when trying to do fiscal adjustments can be devastating. For instance, Greece and the other peripheral economies need to restore competitiveness and fuel growth. Traditionally, this would have happened by lowering interest rates. Sure, this would have led to a weaker currency, but it would have mostly led to an increase of economic activity domestically, which is the main purpose of lowering rates.

      Now, however, the peripheral economies lack this option. Instead, since they are all part of the common currency, their only option is to become more competitive relative to other euro area members. In a low inflation, tight money environment (theoretically the monetary policy appropriate for Germany, the Netherlands, Austria etc.), the only way to accomplish this competitiveness is through deflation and internal devaluation, which increases the debt burden in real terms. Were Germany willing to accept slightly higher inflation for itself, then the peripheral economies would only have to maintain a lower inflation rate in order to restore competitiveness.

      Regarding whether monetary policy acts as a substitute for real reforms, I find the following analogy very useful. Consider daylight savings. The point of changing the clock twice a year is that as the length of the day changes, certain activities need to happen at different times. One option would be for everyone at the same time to start waking up an hour earlier, go to work an hour earlier, have lunch an hour earlier etc. The easier alternative is to simply have everyone change their clocks. The same applies to monetary policy. In an economy you could have every business lower their prices, every worker sign new contracts with lowered wages etc. However, in a system plagued with price stickiness and money illusion doing this is extremely hard and counterproductive. However, loosening the currency supply does the very same thing without all the practical hassle.

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    3. That's a nice analogy. But imagine if you appointed a Daylight Savings Committee whose job is to minimize energy consumption by changing the time. If it just happens twice a year, great. But how many countries hope to have such perfect monetary policy? Not many. And if you focus a lot on time as a way to manage energy use, you might miss the fact that other things (more efficient use) could generate 10x more savings instead.

      I feel the same way for monetary policy more broadly. I agree with you on the mechanics of monetary policy - but I also know that lots of countries get policy very wrong and end up with either too much inflation or too low interest rates that create a bubble. I think this financial crisis in particular has pushed me to recognize the limits of monetary policy as a way to manage the economy and even the business cycle. And especially in the case of Greece, where the foundation is rotten, monetary policy can only do so much. That's at least how I see it.

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    4. I am one of those who has yet to be convinced that a monetary union like the EZ can only work when there is a fiscal union. If the users of a constitution go bananas, the best constitution won't help.

      One would think that with the Maastricht-rules, the threatened consequences for violating them and with the explicit no-bail-out clause, every lender would have thought twice before throwing so much money at the periphery at such low rates. Instead, they all celebrated the conversion of interest rates as proof of the Euro's success story when in actual fact (and with the benefit of hindsight...) one should have considered it the beginning of the end.

      With 40 years of banking experience, I suggest the following explanation: in good (or go-go) times, bankers do not see risk. Sorry, they still see it but they shrug it off. After all, if it were really risky, not everyone else would be lending, too. When risk suddenly becomes apparent, everyone runs for the exit door hoping that he will still get out on time, thereby making things worse. It's the old thing of selling umbrellas when the sun is out but running away as soon as the first rain drops fall.

      Once the crisis erupts, every banker swears to himself never to commit such stupidities again. Only to repeat them when good (or go-go) times return. I have observed this herd-behavior several times during my career (also with myself...).

      The tsunami of cheap money looking for investment after Greenspan had flooded the gates was sensational. Perhaps Greece got a bit more of it as a Euro-country than it might have gotten as a Drachma-country. But remember that Hungary was/is not a Euro-country and foreign banks (Austrian banks for that matter...) were lending CHF to Hungarian banks so that these would make CHF-loans to private Hungarian house builders/buyers. TV-commercials stated that "we don't need your personal financial statements as long as the value of the property is good!"

      One rule of general applicability is: you will never see changes/reforms as long as there is an assured flow of money. From that standpoint, the fact that the ECB is automatically financing the current account deficits and capital flight of the periphery is poison pure.

      The rule tested over and over again over decades is the following: when a country hits external payment problems, it goes to the IMF which is the competent authority for this. The IMF "orchestrates" (without getting openly involved) a debt rescheduling between the country and its private creditors and arranges - together with governments like the EU - the nessecary Fresh Money for ongoing operations. If French or German banks get into trouble because of that, then French and German govenments have to worry about that on their own. The Original Sin of EU-elites was that they thought they knew better and when Mr. Papandreou wanted to go to the IMF, they blackmailed him from doing it.

      It is not illegal under EU-treaties that one country pays higher interest rates than others. Neither is it illegal under EU-treaties that a country reschedules its debts (or even defaults).

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    5. Klaus - My sense is that the economics professions is putting too much faith into the idea of an "optimum currency area." I try not to dismiss it out of hand, but it does seem to me that there are lots of things that don't quite fit with the OCA critique of the EZ and that few people are bothering to refine the theory to fit the facts and instead try to pick the facts that fit the theory.

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  2. Ok some of his arguments are not well presented and maybe don't support his reasoning. I still can't see why Krugman gives Greece a free pass. He doesn't mention that it's 100% european problem and that Greece doesn't have to pay for the sins of the past. He says that the structural formation of the EMU forced Greece to collapse. Sooner or later, because of the nature of our monetary union (dimitris approached it in a great way), more and more EMU (peripheral) countries will face fiscal
    problems, countries whose public sector doesn't suffer like Greece. EMU is in need of a strong central government that could resolve in a more mature way all these debt issues like USA do. That's his main point and that's Europe fault.

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    1. The reason I think he gives Greece a free pass is that he says that Greece's problems are "beside the point" and that "the Greeks can’t solve this crisis anyway." In that sense, he is completely absolving Greece of any role in this crisis. I don't think this crisis is 100% Greece's fault nor is it 100% Europe's fault. But Krugman strikes me as incredibly unbalanced.

      As for the statement that the nature of the monetary union means that countries will face fiscal troubles is not obvious to me. If you look back at the 2000s, there were countries in the EMU with great fiscal health and there were countries in bad fiscal health. I understand that having a common monetary policy makes it likely that you end up with an overly expansionary or overly contractionary monetary policy. But then again the United States had its own monetary policy and it too had a bubble in the same period - bubbles are hardly the prerogative of countries without independent monetary policy.

      What I am getting at is that we need a balanced diagnosis of the crisis. There is plenty of fault to go around. But Krugman and others tend to assign to a currency union a lot of "inevitable" side-effects, many of which are either not inevitable at all or that could have happened even without the union.

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    2. Krugman has a political objective -- to convince the American people that larger government debt is acceptable, and that government can spend its way out of the crisis. Krugman's opponents have pointed out, "You don't want to end up like Greece." This is a way of reminding the government that they can't just let their debts balloon indefinitely.

      Krugman also tried to say that Estonia's approach to the crisis was terrible, because they made efforts to bring their debt under control. The president of Estonia called Krugman, "smug, overbearing & patronizing."

      Midway through May, Krugman predicted: "Greek euro exit, very possibly next month." Krugman's other political objective tends to be trying to talk down the value of the Euro. This sowing of panic encourages more people to buy US Treasuries, which in turn gives the US government the ability to sustain such large debts.

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    3. Tel - you are of course right that Krugman is trying to have a debate about US government spending. And in that argument, I buy much of what he says. i just wish that he stuck to what he actually knew in making that argument and left Greece out of it.

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  3. I would be one of those who assign to a 'currency union, without a political and fiscal union, a lot of "inevitable" side-effects' that would have been adjusted by flexible exchange rates regardless of how corrupt its government is.

    Fixed internal exchange rate, and the treatment of German and bond rates as close substitutes, allowed over-lending and over-borrowing (moral hazard can apply to both sides). The debt hangover from the first 10 years of Euro has remained unresolved.

    The accumulation of debt, private or public sector, and the way that it has been dealt with by European leaders, makes it an euro rather Greek crisis. The Greek government (it is questionable to what extent any state can really control its own fiscal and monetary policy) no longer makes policy, but is measured by how it enacts policy. The crisis in policy-making is European.

    It will remain a euro rather Greek crisis as long as the priority underlying policy-making is in saving the creditor - banking system bailout. The debt is unsustainable, with debt service killing off any hope that reforms might bring, and credit rating agencies are right to continue downgrading periphery euro states.

    As long as debt service and austerity continues, euro economies will continue to diverge counteracting any possible benefits reforms might have. In Greece, reforms become monstrous deformities. Profitable SMEs, deprived of liquidity & growing markets, collapse and new ones face hostile conditions. Low and middle income groups (without externally stored wealth) suffer the most, paying an 'externality' of bad financial decisions made elsewhere. Imperfect market structures are reinforced with fewer and fewer people having the resources or finance to enter. Public sector workers and protected private professions have no private sector to move into.

    We cannot speak about a 'perfect' or 'operational' monetary union' etc etc until the 'bailouts', resulting from (choose your favorite cause) the first 10 years of the monetary union, have been resolved. Apart from saying 'No', it is not within the means or ability of Greeks to resolve this. This overhang overshadows the "Greek crisis", "Spain crisis", "Portuguese Crisis", "Irish crisis". etc

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  4. the portuguese guyJune 21, 2012 at 7:10 AM

    Although I understand (and share part of) your concerns, Nikos, your text falls short of showing the flaws the thesis of development based on Keynesian policies within a monetary union. Now, Krugman is smart enough not to suggest that those policies are a cure; rather indirectly, by referring the example of Mississipi, he is saying it is only a palliative. To quote Pangloss, it is "the best of possible worlds". He knows from observation that, in a monetary union, capital always flows from less competitive to more competitive places. I'll say more on that, later on. I'll first discuss the case of Mississipi.

    Mississipi had once been a very competitive state, with an industry based on cotton production and slave labor. The South's cotton industry was an engine of growth of the US from 1800 to the 1860s. After the civil war Mississipi's economy was destroyed: the (labor intensive and high added value) cotton industry was one of the activities where slave labor was competitive against wage labor. In the aftermath of the civil war, Mississipi's highly specialized economy has never been able to recover its former glory.

    I believe that if the EU follows Keynesian type policies within a monetary union, both Portuguese and Greek economies will become chronically ill, much like Mississipi, and may never recover, even if compensated with massive money transfers from a reinforced European Union budget.

    Here is the reason. We can see that all the money transfered to Mississipi by the federal budget did not bring any development to this state. This transfered capital flows back to its origin. There is also some corruption in the US related to public investment, but corruption alone does not explain the full extent of capital drainage on Greece. The level of corruption in Portugal is lower than in Greece, but the end result is the same. On that I concur with Krugman; the extent of corruption would have been of little consequence if the "dirty" money was reinvested back in Greece. But even clean money flowing form public works, money payed to local subcontractors in exchange for real goods or services or as salaries to Greek workers IS MAINLY SPENT ON IMPORTS. And the existence of a monetary union increases this effect. Since trade with other states (using the single currency) has the same risk as intrastate trade, there is no incentive to jump-start local production if the same product is already being produced effectively elsewhere in the union. Many nontradable goods became tradable, just by the existence of the single currency. The only hope would be for Greece or Portugal to try to profit from new business opportunities, in a sector were everybody else is also starting (say, green energies).

    Georgia also suffered almost as much as Mississipi, but it was able to fully recover its economic preeminence during the 1980s. But Mississipi also failed to profit from the industrial revolution of the 1980s. Unlike Georgia -- which invested in higher education from the beginning of the 1900s -- Mississipi's labor market was in no condition to take advantage of that opportunity.

    Thus we see that monetary policy -- i.e., using a local currency, with a local central bank that retains control over it, and a wise policy of tariffs over imports -- is the only set up where Keynesian policies may benefit the country. It is the best way to regulate the economy in order to foster local production needed to keep money generated by big public works in the country.

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    1. Maybe I am misreading your comments, but it seems to me that you agree more with me than with Krugman :-)

      When you say Georgia recovered due to good policies but Mississippi did not, you are saying that smart policies mattered more than the fact that both states were part of the same monetary union. That's why I disagree with Krugman when he says this is all beyond Greece's control. In effect Georgia was smart and Mississippi was not, even though they both lived in the same world of a single currency.

      I very much agree with your point that transfers will make Greece and Portugal chronically ill as they did with Mississipi. But that undermines Krugman's thesis that you need to transfers to make this work. OK, it's a palliative - but a crappy one at that. I guess that's the main difference between me and Krugman: I don't dispute that transfers and, say, the ECB buying debt would alleviate the pressures on the Greek (and other) economies. What I doubt is that these policies would make the economies any more productive, which is what really drives living standards.

      The only place where I think we disagree is on the idea of imports. I don't see why a common currency creates purely an import bias - it also creates an export bias. It enlarges your target market. Now if your economy sucks you will just import more and more; but if your economy is strong you can export more and more. So I think it goes back to economic fundamentals rather than monetary policy.

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  5. What is really testing my nerve is the one-sidedness of many of the distinguished commentators of today (Prof. Krugman included). It is either a Greek problem or an EU problem. The Greeks are either rich or poor. They are either lazy or hard-working. Etc. etc.

    Don't these very distinguished commentators understand that by oversimplifying complexity they undermine their own credibility?

    Who says that there is only one problem and that that problem is either Greece or the EU? An illiterate could guess after the last few years that there must certainly be more than one problem in Europe. There obviously is a problem with the Eurozone's workings and its structure and that has to be dealt with at the EU-level. France obviously has massive problems with its overregulated and increasingly uncompetitive economy and that must be dealt with by the French. The Germans obviously have a problem with their demographic development and that must be dealt with by the Germans. And, finally, Greece has its own list of very serious problems and only Greeks can deal with those.

    When I hear a university professor arguing that Greece should not do anything on its own until the problem at the EZ-level is solved, just like Ohio could not do anything on its own during the Great Depression, then I wonder how silly students must be today to flunk an exam when their professors preach them such sillinesses!

    Krugman, of course, sees everything with his American mindset but the US has a couple of major advantages over all other countries. First of all, the US is the only country in the world which can print the currency in which it owes its debt to foreigners and, secondly, much of the US debt is held domestically, i. e. Krugman is right when he says that, for the most part, the American debt "is owed to ourselves"; i. e. not to be so much worried about. Thus, I fear Krugman lacks a bit the mindset of, say, a Latin American country which knows that once it runs out of foreign currency, it has a real problem (the same problem a EZ-country has once it runs out of Euros).

    All either/or-arguments strike me as somewhat irresponsible because it is so obvious that we are talking about as-well-as-situations. I would get irate at someone who blames all the EZ-problems on Greece but I get similarly irate at someone who absolves Greece (or any other county, for that matter) from the responsibilities it has to its own citizens and to the union they belong to!

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  6. Another important problem with the euro-zone that Krugman doesn't emphasize is current account imbalances. Here is a technical analysis of these imbalances as a result of the monetary union, and here is an illustration of european imbalances and their consequences.
    The point is: can the system be sustainable with these imbalances getting worse and worse? Wouldn't we expect that this would lead to private and public debt crisis as we are seeing today? Here is a theoretical explanation of why permament imbalances lead to debts.

    So yes: Greece is corrupted, Greece is not efficient and so on, but how would it be reasonable to expect that Greece would change so fast to go out from the PIIGS and save itself from the doom of the southern europe?

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    1. Marco, thank you much for this comment. I have to say that this point is not as self-evident as it looks. For one, countries have experienced current account crisis under all sorts of monetary regimes so there is nothing unique about the EZ periphery. Nor are these necessarily macro-driven imbalances - yes, Ireland's and Spain's housing bubble triggered capital inflows, but for Greece, this was merely excess government spending driven by capital inflows. It's not obvious to me that this cannot be corrected through higher interest rates. To be honest, I am not sure that we fully understand the peculiar nature of intra-EU imbalances - they are not as trivial as say the trade between Texas and New Mexico, but they are also not the same as the traditional links between two sovereign countries.

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  7. Excellent analysis! Krugman is just another example that a Nobel prize in economics does not protect you from making bad, even catastrophically bad judgements. Merton and Scholes and their management of the LTCM, which nearly caused a worldwide financial crisis, were another.
    I find it surprising that Krugman does not see that the relationship between Ohio and the United States is very different from that between Greece and the euro area.

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  8. This blog sticks out among many others in that not only the blogger is delivering sober analyses, but the readers actually enrich the discussion (instead of derailing it).

    Hope I'm not derailing it when asking:
    Would it be (economically) appropriate, Nikos, to supplement your shrewd analysis of Krugmans breathtakingly superficial (and in my opinion informed by an anti-German bias) diagnosis with the following statement:

    "It wasn't the Californian taxpayers who bailed out Florida [assuming that here for a fact]: Poor Chinese workers (and dumb Germans) did it!"

    My rationale behind this claim:
    Fed printed money and gave it to the US-Government. Government passed it on to Florida; Floridans bought toys from China and cars from Germany - and paid with nothing but printed paper.

    The szenario is obviously very pointed, but doesn't it also describe the way Mr. Bernanke (and, before, Mr. Greenspan) have "saved" the American economy?

    Actually, it did look to me much like the Greek situation (in another - relative - dimension, and with much different side conditions of course). Up till now I was under the impression that the US was 'going Greek'.
    But lately, I've read in a WELT-Interview (for those who speak German: http://www.welt.de/finanzen/article107210200/Krisenexport-Die-USA-stehen-vor-einem-Absturz.html) that basically the US economy was on an upward path due to to shale oil and shale gas production in North Dakota on the one hand and China losing its advantage in production cost on the other.

    Okay: That's two subjects now. In case you reply, but don't want to tackle both (which, in detail, are probably complicated) I'd be more interested in your opinion on the 'Chinese bailout for the US' hypothesis. (Which bears an obvious analogy to 'European bailout for Greece'.)

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    1. Cangrande - thanks for the kind words and for the input.

      Let me put shale oil and gas to the side - partly because I try to avoid talking about oil and gas (to keep professional and personal separate) but also because it's a massive story.

      Now, on financial flows, this is an important point. As I wrote before, most of the money that the official sector lent to Greece went out to foreign investors. Now given that German yields are very low (and at times negative) due to the flight to safety, it would come as no surprise if you had Greek investors buying German debt so that Germany lends that money to Greece. Your point on China is similarly well taken.

      The one difference between the Fed and the ECB (insofar as the ECB is being called to monetize debt) is that the Fed is not exactly propping up debt that no one wants to buy - in fact, the US has no problems (so far) selling its debt.

      But you're absolutely right that in discussing these financial flows, it is always useful to think about who is ultimately paying what to whom and for what.

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  9. Thanks for your reply, Nikos.
    One point I don't quite understand (or misunderstand):

    "... the Fed is not exactly propping up debt that no one wants to buy - in fact, the US has no problems (so far) selling its debt."

    I was under the impression that the Fed was buying US-bonds to the tune of 1 or 2 trillions*. So while the rest of the bonds does indeed sell well, the Fed-purchaes would keep some of the US government debt away from the market.
    * I've cancelled my previous commentary with "billions" which is, of course, the German word for American "trillion".

    That was my understanding from what I (not being an economist) have read in the news etc..
    Did I get something wrong there?

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    1. Cangrande - You're right that the Fed owns a lot of US debt. But the Fed's mandate is to promote full, employment, price stability and moderate long-term interest rates. Within that context, it buys and sells US government debt. If for some reason markets started to doubt US debt and started pushing up interest rates, the Fed could only respond as long as doing so fulfilled its mandate (at least in theory).

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  10. Some observations from a recent holiday in Greece.

    Even though people were talking about the crisis, of course, I found no difference in life-style in my immediate surroundings. We were treated with the same hospitality as in the past regarding the food being offered and us being invited and driven around. So there is no reason not to make holidays in Greece. It all looks and feels the same as always (at least on the surface).

    Beaches were choke-full and bars and clubs also (on Saturday night). This does not say anything about consumation, of course.

    Individual families suffer, especially those who had problems before the crisis. But there are still reserves around, especially coming from the (grand)parents.

    One family had to sell their car. Another family could only finish half of their new building. One guy was "working", but did not receive any payment for over a year (unthinkable!, but seems to be fairly common).

    My mother-in-law had to pay 1000 Euro in cash for medical treatment during our stay alone. It was not clear whether or not she would get back anything from social insurance.

    Solar energy, or lack of. We stayed with my parents-in-law for most of the time (personal austerity measure) and it drove me crazy that even though the appartment was boiling-hot, you had no warm water to shower because the electrical heater was not switched on. How is it possible that people do not automatically put a solar-panel on the roof?

    Prices: taxis are very cheap, compared to Austria. Everything else is not. Gasoline: more expensive. Food: the same, or more. What drove me nuts was the fact that 10 minutes of trampoline jumping (for children) costed the same (2 Euro) or more (2.50 Euro) than in Austria (2 Euro). How this is compatible with the wages, I have no idea about.

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  11. Looks like the bankruptcy lawyers got the better of mr. Krugman that time because of his sloppy assessment of the whole thing.

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