The press is buzzing with talk of Greece leaving the euro. And if Greece leaves, what next? The press is also buzzing with talk of a possible, if not probable, breakup of the euro altogether – a Eurodämmerung as Paul Krugman calls it.
So is Greece likely to leave the euro, or will the Greek electorate vote next time for the parties supporting the austerity package they negotiated with the EU?
If Greece does leave the euro, what would be the implications for the Greek economy? And what would be the implications for the rest of the eurozone? Would it fall apart: would there a be a domino effect to Spain, Portugal, Italy and Ireland and then the whole eurozone? Or would Germany and the ECB do whatever was necessary to prevent any more countries leaving?
The following articles ponder these weighty questions. In the meantime, stock markets around the world have plunged on fears of the damage a disorderly Greek exit could do to the eurozone and to the global economy.
Greece, euro exit and the drummer in the band Reuters, Luke Baker (14/5/12)
Greek fire could singe rest of euro Financial Times, Richard Milne and Patrick Jenkins (14/5/12)
Eurozone: If Greece goes … Financial Times, Chris Giles, Peter Spiegel and Kerin Hope (13/5/12)
How would Greece leave the euro? BBC News, Kabir Chibber (10/5/12)
CBI: Greece eurozone exit ‘would be like an earthquake happening’ The Telegraph, John Cridland (14/5/12)
Forget what you’re hearing: Greece won’t quit euro soon Globe and Mail (Canada), Brian Milner (14/5/12)
Could the euro survive a Greek exit? BBC News, Robert Peston (14/5/12)
Greekonomics (see also) BBC News, Paul Mason (9/5/12)
This is how the euro ends – not with a whimper but a bang The Telegraph, Jeremy Warner (15/5/12)
EC and ECB working on emergency plans for Greek euro exit, says trade commissioner Karel De Gucht The Telegraph (18/5/12)
Fiddling while Athens burns The Economist (19/5/12)
Exodus, chapter 1 The Economist (19/5/12)
The Greek run The Economist (19/5/12)
Greece will leave the euro. But what then? Independent on Sunday, Hamish McRae (20/5/12)
No quick fix for Euro – maybe a slow one? BBC News, Stephanie Flanders (24/5/12)
Questions
- If Greece left the euro, what would happen to bank deposits in Greek banks?
- What would be the costs and benefits to the Greek economy of a reintroduction of the drachma?
- Why might individuals and companies, if they were able, move their euro deposits out of Spain, Portugal, Ireland and Italy into accounts based in other eurozone countries? What would be the implications of such financial flows?
- What can the ECB do to support the banking systems in vulnerable eurozone countries? Is there any theoretical limit to the amount that the ECB can offer?
- What is the role of the central banks of individual eurozone countries in a transfer of large-scale funds from one eurozone country to another? How does this impact on the receiving country (e.g. Germany)?
Original post (24/4/12)
The result of the first round of the French presidential elections on 22 April make it likely that François Hollande will be the new president.
M. Hollande can be described as an austerity sceptic. In other words, he questions the wisdom of trying to meet the target agreed by eurozone countries of reducing public-sector deficits to no more than 3% of GDP.
If elected, M. Hollande promises to adopt a more Keynesian stance of stimulating demand in order to prevent a slide into recession. This would mean a reversal of cuts and a growth, at least temporarily, of the public-sector deficit.
Currently France’s deficit is much higher than the 3% target. In 2010 it was 7.1%; in 2011 it had fallen somewhat to 5.2%. But it is set to rise in 2012, thanks to the slowing economy in France and most of the rest of Europe.
And it is not just in France that ‘austerity sceptics’ are on the ascendant. In the Netherlands the centre right government of Mark Rutte fell. He was unable to get his coalition partners to agree to sufficient cuts to achieve the 3% target. And yet, the Netherland’s deficit is considerably lower than most eurozone countries’. In 2012 it is projected to be just 4.6% of GDP.
So if doubts about the 3% target could lead to a change in policy in the Netherlands and France, what hope is there that the targets could be adhered to by countries with much larger deficits and where the pain of the cuts is already causing political turmoil?
The growth in austerity scepticism has spooked the markets. The day following M. Hollande’s first round victory and the fall of Mark Rutte’s government, stock markets around Europe plummeted and bond prices rose. The higher bond prices will make it even harder for governments to refinance maturing government debt. Take the case of France. As Robert Peston remarks in his article below:
According to IMF figures, 59% of France’s government debt is held overseas – which means that well over half of all lending to the French state is not motivated by sentimentality or patriotism in any way.
To put that figure into context, just 24.8% of UK general government debt is provided by foreigners.
Perhaps more relevantly, the French government has to borrow a colossal sum equivalent to 18.2% of GDP this year and 19.5% next year to finance debt that is maturing and the current deficit.
So what are the implications of the rise in austerity scepticism? Will it make deficits harder to finance? Will a collapse of confidence push the eurozone into a deep recession. Might the eurozone break apart? Or will a dose of Keynesian policies turn the tide and allow growth to resume, making it easier to service government debts? The following articles explore the issues?
Update (7/5/12)
François Hollande was indeed elected president on 6 May. The question now is to what extent he will be able to enact measures to simulate the economy. In his campaign he had talked about renegotiating the European treaty on budget discipline. Angela Merkel, responding to M. Hollande’s victory, said that the European fiscal treaty had been agreed and could not be renegotiated. Nevertheless, she said she was happy to consider new growth strategies that did not involve increased budget deficits.
Articles
François Hollande’s potential spending spree in France has caused concern in austerity Europe The Telegraph, Bruno Waterfield (23/4/12)
European turmoil, American collateral Guardian, Robin Wells (24/4/12)
Political risk returns to eurozone debt crisis Financial Times, Richard Milne (23/4/12)
The rise of Europe’s austerity foes Business Spectator, Karen Maley (23/3/12)
Europe: A crisis of the centre BBC News, Paul Mason (24/4/12)
Is Hollande enemy or prisoner of finance? BBC News, Robert Peston (23/4/12)
President Hollande and the IMF BBC News, Stephanie Flanders (23/4/12)
French Bond Yields Test Hollande’s Economic Fealty Bloomberg, Mark Deen and Anchalee Worrachate (24/4/12)
Dutch and French politics bring us back to reality BusinessDay (South Africa), Ron Derby (24/4/12)
Crisis topples governments like dominos Deutsche Welle, Bernd Riegert (24/4/12)
Eurozone leaders push for growth BBC News (25/4/12)
Additonal articles (after 6 May)
Francois Hollande to set France on new course after win BBC News (7/5/12)
Europe elections: German Chancellor Angela Merkel welcomes Francois Hollande but warns Greece The Telegraph, 7/5/12)
A Merkel-Hollande bust-up? Less likely than you might think Guardian, Philip Oltermann (7/5/12)
Merkel Rejects Stimulus in Challenge to Hollande BloombergBusinessweek, Patrick Donahue and Tony Czuczka (7/5/12)
François Hollande’s chemistry with Angela Merkel crucial for Europe Guardian, Ian Traynor (7/5/12)
Q&A: End of austerity? BBC News (7/5/12)
Austerity and the people’s verdict Guardian letters, Shanti Chakravarty and others (8/5/12)
Europe: The big debate BBC News, Stephanie Flanders (11/5/12)
Data
European Economy: Economic data Economic and Financial Affairs, European Commission
Eurozone Statistics ECB
French Economic Statistics INSEE, National Institute of Statistics and Economic Studies
Netherlands Statistics CBS, Statistics Netherlands
Questions
- Why do investors worry about the pursuit of Keynesian expansionary fiscal policies? Are their fears justified?
- How important is it for countries, such as the Netherlands, to retain their AAA credit rating?
- What determines bond yields?
- Do a search to find the policies advocated by M. Hollande. Assess the likely economic impact of these policies.
- What conditions are necessary for the pursuit of a tough austerity line to achieve economic growth in (a) the short term of 12 to 18 months; (b) the longer term of several years?
- Is an increased use of public-private partnerships a solution to finding a way of delivering greater infrastructure expenditure without increasing the short-term deficit?
After a marathon 13-hour session in Brussels, ending at 5am on 21 February, eurozone finance ministers agreed a second bailout for Greece. The aim was to lighten Greece’s debt burden and prevent the country being forced to default.
Under the deal, Greece will have some €107bn of its debt written off. The main brunt of this will be borne by private creditors, who will see the value of their Greek bonds fall by 53.5% (some 70% in real terms). Old bonds will be swapped for ones with longer maturities and lower interest rates. In addition, Greece will be given further loans of more than €130bn through the EFSF on top of the €73bn already lent. The monies will be put in a special escrow account and can be used only to service the debt, not to finance general government expenditure.
In return, Greece must reduce its debt to GDP ratio from the current 160% to 120.5% by 2020. It must agree to continuing tight austerity measures and to significant supply-side reforms to reduce the size of the public sector and increase efficiency. Implementation of the measures would be overseen by an EU Task Force based in Greece.
But while governments in the EU and around the world are relieved that a deal has been finally agreed and that Greek default seems to have been averted – at least for the time being – the problems for Greece seem set to get worse. The further austerity measures will deepen the recession, now in its fifth year. Growth is not expected to return until 2014 at the earliest, by which point real GDP is expected to have shrunk by some 17% from the start of the recession. The question is whether the Greek people will stand for further cuts in income and further rises in unemployment, which had reached 20.9% in November 2011 and is still rising rapidly.
Articles
Eurozone backs Greek bailout Euronews (21/2/12)
Greece Wins Second Bailout as Europe Picks Aid Over Default Bloomberg, James G. Neuger and Jonathan Stearns (21/2/12)
Eurozone agrees second Greek bail-out Financial Times, Peter Spiegel and Alex Barker (21/2/12)
Greece secures bailout to avoid debt default Independent, Gabriele Steinhauser and Sarah DiLorenzo (21/2/12)
EU tells Greece to cut more jobs, sees 2014 growth Reuters, Gabriele Robin Emmott and Nicholas Vinocur (21/2/12)
Eurozone agrees €130bn bailout for Greece The Telegraph, Bruno Waterfield (21/2/12)
Greece averted nightmare scenario – finance minister BBC News (21/2/12)
Greece: Dangerous precedent? BBC News, Robert Peston (21/2/12)
The end of the marathon? The Economist, Charlemagne’s notebook (21/2/12)
What Analysts Think of the Greek Deal The Wall Street Journal, Alexandra Fletcher (21/2/12)
Three steps to a strong eurozone Guardian, Henning Meyer (21/2/12)
Opinion: the eurozone is just buying time Deutsche Welle, Henrik Böhme (21/2/12)
Greece must default if it wants democracy Financial Times, Wolfgang Münchau (19/2/12)
Eurozone’s Greece deal: debt and delusions at dawn Guardian. Editorial (21/2/12)
€130bn plaster leaves Greece independent in name only Guardian, Larry Elliott (22/2/12)
The Greek debt deal: Thumbs down The Economist, Buttonwood’s notebook (21/2/12)
Webcasts and podcasts
Are Greeks’ euro days numbered? Channel 4 News (21/2/12)
Wolf and Authers on Greece Financial Times, John Authers and Martin Wolf, (21/2/12)
Greece ‘unlikely to meet targets’ BBC Today Programme, Ngaire Woods, Guntram Wolff and Alistair Darling (21/2/12)
Austerity-hit Greeks scorn bailout deal Euronews (21/2/12)
Greek Bail Out Could Lead To More Violence Sky News (21/2/12)
Official Press Release
Eurogroup statement Europa Press Release (21/2/12)
Questions
- Outline the features of the bailout on offer to Greece. What is Greece expected to do in return for the bailout?
- To what extent has the deal lightened Greece’s macroeconomic problems?
- Why does granting a bailout create a moral hazard? How has the ECB/IMF/EU Commission Troika attempted to minimise the moral hazard in this case?
- Has Greece’s financial problem been essentially one of liquidity or solvency?
- What supply-side measures is Greece being required to implement? Will they have any demand-side consequences?
- From where is Greek growth likely to emanate after 2014?
- What are the downside risks of the deal?
- How likely is it that there will have to be a third bailout?
Germany is the world’s fourth largest economy and Europe’s largest. Part of its strength has come from its exports, which last year increased by 11.4% to $1.3 trillion – the first time it had ever exceed the $1 trillion mark. Germany, however, is by no means the country with the largest export sector – that mantle was taken from them by China, whose exports rose 20.3% last year to reach $1.9 trillion.
At the same time as exports have been rising from Germany, imports have also increased, showing a recovery in domestic demand as well. Despite this, Germany’s foreign trade surplus increased slightly to €158.1 billion (from €154.9 billion).
However, in the last month of 2011, its export growth did slow – the fastest drop in nearly 3 years – and that is expected to signal the trend for 2012. As the eurozone debt crisis continues to cause problems, German exports have been forecast to grow by only 2% this year, with economic growth expected to be as low as 0.7%. This is a marked change from last year, where the Germany economy grew by some 3%. Help for the eurozone is unlikely to come form Europe’s second largest economy, France, where growth in the first 3 months of 2012 is expected to be zero and figures have shown a widening trade deficit, with issues of competitiveness at the forefront. The following articles look at Germany’s prowess in the export market and the likely developments over the coming year.
German exports drop is steepest in nearly 3 years Reuters (8/2/12)
German exports set record of a trillion euros in 2011 BBC News (8/2/12)
German exports broke euro1 trillion mark in 2011 The Associated Press (8/2/12)
Surprise drop in German industrial output Telegraph, Angela Monaghan (7/2/12)
French trade deficit hits high, competitiveness at issue Reuters (7/2/12)
French trade deficit casts shadow on campaign Financial Times, Hugh Carnegy (7/2/12)
German exports fall at fastest rate in three years, sparks fears over Europe’s bulwark economy Telegraph, Louise Armitstead (8/2/12)
Questions
- What is meant by a trade surplus?
- Briefly examine some of the factors that may have contributed to Germany’s rising exports throughout 2011.
- How has the eurozone debt crisis impacted the Germany economy and in particular the export sector?
- The articles that look at France refer to a growing trade deficit, with competitiveness being a key issue. What is meant by competitiveness and why is the French economy suffering from a lack of it?
- Does France’s membership of a single currency reduce its ability to tackle its competitiveness issues?
- Why is German growth expected to remain sluggish throughout 2012? Given that Germany is a member of the eurozone, what government policies are open to the government to boost economic growth?
- China has overtaken Germany as the largest exporter, with growth of 20.3% in 2011. What factors have allowed Chinese exports to grow so quickly?
Last October (2011) we considered the case for a Tobin tax: also known as a financial transactions tax (FTT) or a ‘Robin Hood tax’. Since then there have been increased calls for the world to adopt such a tax.
It was promoted by President Sarkozy and supported by many other leaders at the G20 conference in Cannes on 3 and 4 November 2011. It has also been publicly supported by Bill Gates, the Archbishop of Canterbury and the Vatican, as you can see from the video clips and articles below. It is also one of the demands of protesters at St Pauls in London and at other places around the world.
However, the introduction of such a tax is vehemently opposed by many banks and by the US, UK, Canadian and Australian governments, amongst others. In the articles below, we consider the latest arguments that are being used on both sides. With such strong feelings it looks as if the arguments are not going to go away.
Update
On 29 January 2012, French President, Nicolas Sarkozy, announced plans to introduce a 0.1% levy on financial transactions. Naturally, by taking the lead, he hopes that other EU countries will follow suit. The final set of articles consider his move.
What is a Tobin Tax? BBC News, Andrew Walker (2/11/11)
Rowan Williams: St Paul’s protest has ‘triggered awareness’ BBC News (2/11/11)
Bill Gates explains his support for a Tobin tax BBC News (2/11/11)
Robin Hood tax: What is the Tobin tax? BBC Newsnight, Andrew Verity (17/11/11)
Q&A: What is the Tobin Tax on financial trading BBC News (2/11/11)
Head-to-head: the Robin Hood tax BBC News, Gemma Godfrey and Prof Avinash Persaud (9/12/11)
Time for us to challenge the idols of high finance Financial Times, Rowan Williams, Archbishop of Canterbury (1/11/11)
Gates says ‘Robin Hood’ tax has part to play Financial Times, Chris Giles (3/11/11)
Sarkozy Pledges Fight for Transaction Tax Bloomberg, Rebecca Christie and Helene Fouque (4/11/11)
Financial Transaction or Speculation Taxes: Not Quite What They Seem Forbes, Tim Worstall (4/11/11)
Is a Robin Hood Tax the Answer? Forbes, Kelly Phillips Erb (3/11/11)
Bill Nighy takes Robin Hood tax to the G20 Guardian, Patrick Wintour and Larry Elliott (3/11/11)
G20 tax moves disappoint charities Press Association (4/11/11)
Jamaica should support the Robin Hood Tax Jamaica Observer (6/11/11)
World Leaders Need to Agree to the Robin Hood Tax at G20 Huffington Post, Bill Nighy (3/11/11)
Obama, the G20, and the 99 Percent Huffington Post, Jeffrey Sachs (1/11/11)
Now is the moment to bring banks to heel This is Money, Jeffrey Sachs (3/11/11)
Note on financial reform from the Pontifical Council for Justice and Peace The Vatican Today
Tobin Tax would cost £25.5bn and cause job losses says think-tank London loves Business, Rebecca Hobson (4/11/11)
The Spurious Case Against A Financial Transactions Tax – Analysis Eurasia Review, Dean Baker (2/11/11)
Update
Sarkozy Says France to Impose Transaction Tax From August Bloomberg Businessweek, Helene Fouquet and Mark Deen (30/1/12)
Struggling Sarkozy unveils financial transactions tax Sydney Morning Herald, AFP (30/1/12)
Sarkozy announces French financial transaction tax BBC News (30/1/12)
French president announces unilateral financial transaction tax Deutsche Welle Spencer Kimball, Andrew Bowen and Nicole Goebel (30/1/12)
Questions
- What are the main arguments in favour of a financial transactions tax?
- What are the main arguments against a financial transactions tax?
- To what extent is the debate a normative one and to what extent could evidence be used to support one side or the other?
- What would determine the extent to which the tax would be passed on to consumers?
- Would a financial transactions tax impede growth? Explain.
- Would financial intermediation be made more efficient by the imposition of such a tax?
The press is buzzing with talk of Greece leaving the euro. And if Greece leaves, what next? The press is also buzzing with talk of a possible, if not probable, breakup of the euro altogether – a Eurodämmerung as Paul Krugman calls it.
