The Power and the Money

Dictatorship rising

In 2011, John Quiggin hypothesized that we were on the verge of eliminating old fashioned tyranny, “in the historical sense of absolute rule by an individual who has seized power, rather than acquiring it by inheritance or election.” 

I can understand his optimism. In the below photo, I am standing atop an abandoned monument to the absolute dictatorship of Enver Hoxha in Albania. There are a lot of former dictatorships in the world.  

But ...

In 2011, in response to a post by John Quiggin, Doug Muir pointed out that there were still quite a few dictatorships left. We defined dictators as (1) a solitary leader, who (2) wields tremendous personal power, and (3) rules in a generally illiberal manner, and (4) will not leave office or surrender power unless compelled by force majeure, and (5) is not a traditional monarch. So we do not include Arab monarchies (like Saudi Arabia), collective one-party states (like Vietnam), illiberal democracies (like Hungary), elected governments formally limited by unelected bodies (like Iran), or military juntas (of which there seem to be none at this moment.) 

Still, back in 2011, you could see a pattern. The New World was free of dictators outside Cuba. Every other dictatorship other than Syria was either in post-colonial Africa or the post-imperial Soviet space. And the Syrian dictatorship, many thought, was not going to be with us for much longer. 

Another but ...

Today that pattern no long exists. Dictatorship is everywhere. Consider the countries that were dictatorships in 2011 and are still dictatorships in 2018: Angola, Azerbaijan, Belarus, Cambodia, Cameroon, Chad, Congo Republic, D.R. Congo, Cuba, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Kazakhstan, North Korea, Rwanda, Sudan, Syria, Tajikistan, Turkmenistan, Uganda, and Uzbekistan.

The only two three countries to leave are Gambia, Zimbabwe and South Sudan ... the latter by dint of falling into prolonged civil war. (In comments, J.H. pointed out that Gambia is no longer a dictatorship.)

What about newcomers? Well, we have Fiji, Maldives, Nicaragua and Tanzania, and Togo ... plus Egypt, Russia, Turkey and Venezuela. It seems as though China has joined them and Honduras is making a play after the incumbent got the Supreme Court to nonsensically overrule the constitution and then blatantly stole an election. 

In total we have six small newcomers and five major ones. Only two are in sub-Saharan Africa. Two have nuclear weapons.

The world is still more peaceful than ever before. But inasmuch as you believe that said peace is due to the spread of democracy, we may have some frightening years ahead.

I would like to be wrong. Please tell me that I am wrong.

American aid and Greek economic growth

 Two years ago, I wondered about the importance of property rights in economic growth. The reason for my doubt was the example of Greece. The country has terrible property rights, yet managed to grow remarkably quickly between 1950 and 1980. As illustrated in the below figure (nicked from here), its annual output per worker rose from the level of Colombia to the level of France, before falling slightly behind. 

Well, what happened? One useful line of inquiry might be to dig deeper into history. In 1950, Greece had suffered greatly from World War 2 and the subsequent Greek Civil War. It is entirely plausible that the country possessed reserves of human capital far in excess of its contemporaneous Latin American counterparts. Maybe there is nothing miraculous about its catch-up economic growth in the subsequent decades.

But then I came across a recent paper by Carmen Reinhart and Christoph Trebesch. On page 11, I spotted this rather stunning figure:

Wow.

Now, the aid between 1946 and 1949 went to fight the war, but it meant that the opportunity cost of equipping the Greek National Army was essentially zero. It also meant that Greek civilians avoided much privation that might otherwise have been expected. In fact, the economy managed to grow during the war, albeit from the depressed levels at the end of the Axis occupation. (See page 30 here.) 

American aid continued after the war, however. In fact, it was not until 1961 that high levels of direct support metamorphosed into (rather soft) loans. 

To be frank, I do not think that American aid caused rapid Greek postwar growth. I am still not sure what caused that. But even had Greece avoided a Communist takeover without the aid, the chances are very high that the country would have slid into counterproductive redistributionist battles had American taxpayers not agreed to cover Greece’s continuing current account deficits. My prior would be that a counterfactual Greece without American aid would go the way of Argentina, at best. Some catch-up growth, rapidly petering out, followed by relative stagnation at the level of a wealthy Latin American country. 

Of course, we did it to keep the Communists at bay, not promote Greek economic growth. But it makes you wonder. Could foreign aid at the right time have kept Argentina, for example, from running off the rails in the postwar decade?

And what was it about Greece, anyway, that let it catch up so fast to the rest of Western Europe once aid covered the cracks? There had to be something else different about the place compared to Argentina or Mexico. No? 

Greece really has no comparison

 A commonsense definition of “austerity” is “cuts in government spending.” Now, that isn’t quite the correct macroeconomic definition: a cut in spending combined with a bigger cut in taxes is not contractionary. But it matches a good political definition: are countries imposing pain on their populations?

And so, I give you the level of nominal government spending in Greece and the Baltic States, plus Slovakia, because the Slovaks have been incredibly annoying. The figures have been normalized so that 2008 = 100.

Whaddaya know? Greeks have endured austerity beyond anything imagined in the Baltics. Yes, the Baltics are poorer than Greece. But that is not how people feel pain: we are far more averse to losses than to unrealized gains. The pain among, say, Greek pensioners or government employees has been beyond anything the Baltics have seen since the Soviet Union fell apart.

Now let’s look at the other side of the ledger: taxes. How much pain have the Greeks imposed upon themselves in order to pay for their state? As a % of GDP:

My. Puts things in perspective. I really do wish the Balts would just pipe down already. Their countries would be in chaos were things as bad as they are in Greece. 

Greece has no comparison

 Some smug folks recently insisted to me that if the Baltic states could muscle through the current crisis, than so can Greece. Why are the Greeks so upset about more austerity?

Uh ... well, here is the real GDP of Greece and the Baltic countries, indexed to 2007:

 

There really is no comparison.

This applies even if we look outside the universe of countries that either are in the Eurozone or peg their currencies to the euro. According to Gabriel Sterne at Oxford Economics:

The decline in Greek GDP has precedents, but only in wars, commodity collapses, and Argentina. Even without exit, it is likely to have been in the bottom 4% of crisis recoveries seven years on if IMF projections for 2015 prove correct. Greece’s $-GDP will likely have declined at least 42% between 2008 and 2015. Below Greece are five extreme cases:

• Ghana (1982), whose $-GDP never recovered for years after plummeting 80% in two post-crisis years, partly related to a commodities slump;
• War-torn DR Congo, whose $-GDP fell 48% in the seven years after 1991;
• War-torn Ukraine, whose $-GDP has fallen by over 50% since the 2008 financial crisis;
• Guinea Bissau’s 1995 crisis was not so bad, but the civil war that followed meant $-GDP had fallen by over 50% five years later;
• Argentina (for crises in 1980 and 1995, not 2001)

Sterne goes on to argue that this implies that the situation really cannot get much worse in Greece should it be forced into Grexit. 

Personally, I still do not understand why an agreement is proving so hard. Greece should not cut pensions or agree to a big primary surplus. The Europeans should agree to roll over debts that will otherwise inevitably go into default. Everyone should then use the breathing room to think about how to reform Greek tax collection and cut Greek debts. Voila.

But no. I really do not understand it. The only logic I can imagine is that they want to scare the bejeebus out of Spanish voters or anyone thinking of voting for a radical new party. What am I missing?

Not a Greek tragedy, really

 The Greek situation is near incomprehensible. These posts are just me thinking out loud, sometimes in the hope that somebody wiser will chime in. (In this case, someone did! But where is the old SHWI crew? Insights wanted.)

To start, let me make my previous post clearer. It is not about the money: even a full default would net the Greeks only 0.7% of GDP per year in additional spending. This is the same number that Tom Warner calculated for the Greek primary surplus. (Go read the link.) 

So the imbroglio is not about enabling a spending spree in 2015. There is no money for that. What then is it about?

I think of it this way: (1) What do the Greeks want? (2) Why do they need European cooperation to get it? 

What do the Greeks want? Simple: they do not want to have to hit an impossible fiscal target in 2015 and beyond. Their economy has been absolutely crushed, much harder than Ireland or Portugal. And the Greeks have implemented more austerity. It is entirely reasonable for them to want to avoid sucking an additional 1.5% of GDP out of their economy over the rest of 2015. 

Why can’t they get it without European cooperation? Two reasons. First, Greece doesn’t just owe interest this year. It has to make a whole lot of principal repayments. That debt needs to be rolled over or refinanced. Some of it is due the IMF, which might be cooperative; it was with Argentina in 2003. Some of it is due private creditors. That debt would be need to be restructured unless official finance was forthcoming. Mitu Gulati is the expert, and I have every intention of asking him his thoughts on the matter, but I think that should be doable. 

And if neither refinance nor legal restructuring for private debt is an option, then Greece can just default. What are they the private holders of Greek bonds gonna do? Sue? Good luck with that.

But the IMF and private parties are not the main creditors: most of that money Greece’s public debt is owed to the European Union in one way or another. So Greece would need to get the Europeans (read: Germany) to agree to a rollover. 

Why not just default on the Europeans? Well, here is the second reason the Greeks need European cooperation: Greek banks depend on special finance from the ECB. Pull that, and the Greek banking system collapses. 

The question seems to be, then, would the Europeans actually send Greece spiraling into another depression, even before the country emerged from the last one? I was extremely doubtful a month ago. My opinion is changing, however. Not because the  Germans are proving more intransigent than I expected. Rather, the center-right governments of Portugal, Ireland and Spain are proving more intransigent than I expected. In the words of Noel Whelan: “Centre-right governments have no interest in seeing this new left-wing Greek government succeed.” 

Whelan argues mostly for Ireland (it is worth reading) but the logic applies to Portugal and certainly to Spain, where both the People’s Party and the Socialists have an interest in heading off the rise of Podemos.

That said, I still think this will be resolved with a haircut and without Grexit. Here is the French finance minister, Michel Sapin: “It is a problem of wording, although the legal tool cannot be anything else than an extension of the program. What [Greek finance Minister Yanis] Varoufakis has told us, what I have understood, is that he agrees in principle with the extension of the program. Everyone agrees on this: you have a 1.5 percent primary surplus, you cannot do anything in this period that worsens that surplus.” There are also some pro-Greek noises coming from the Italian finance minister, Pier Carlo Padoan. 

If the Europeans can agree to call a violation of the bailout program a new program, rather than insisting that it be called an extension, then everyone should be able to strike a deal.

Unless J.H. is right.

Tyler Cowen is a very smart guy but ...

 ... this is just crazy hyperventilation. 

For the last few weeks there have been three models in the running:

1. The Greek government is calling the Germans Nazis because they figure Grexit is coming no matter what and they want to get the populace riled up as a distraction from the disasters, or

2. The Greek government will cave so cravenly on the substance that they want to have it on the record books that they supplied some expressive goods for a few weeks’ time, namely insulting the Germans and claiming that the Troika is dead and buried, or

3. The Greek government is simply full of out-of-control, ideological maniacs.

Right now it is looking like #2 — however unlikely it may sound as a model of retrospective voting and intertemporal substitution — is closest to reality.  What the relevant legislatures will go along with, however, still remains to be seen.  Arguably the insults and posturing have narrowed the possible bargaining space by hurting feelings all around.

Seriously, Professor Cowen? There are several other options, you know. I really would like you to explain your logic. I still don’t understand why a Greek default would lead the ECB to sink their banking system. And if that’s what you think will happen, I still don’t understand why I shouldn’t consider that to be an expression of out-of-control ideology from a bunch of maniacs in Frankfurt and Berlin.

Help! I am honestly confused.

Here is a rather more sedate look at the same events.

The Greek problem for dummies

 Since I am really not well versed on Greek finances, I’ve been looking at the numbers. The bottom line is that debt forgiveness will help the Greeks, but not by a whole lot this year. They just do not have a lot of money to spend.

The Greek state ran a primary surplus of 1.2%, according to the Ministry of Finance. This is rather less than the 4.5% target for 2016. It is even less than the 1.5% that the IMF projected for 2014.

Greece needs to make interest payments of 2.9% of GDP in 2015, assuming zero growth. It also needs to make principal payments worth 8.6% of GDP. Greece will receive payments from the ECB via the Outright Monetary Transactions program (formerly the Securities Market Programme) worth 2.2% of GDP.

Upshot: unless there is growth in tax revenues (good luck) the country will have only 0.5% of GDP to use for stimulus. (1.2% primary surplus + 2.2% from the ECB − 2.9% interest = 0.5% total balance.) That assumes that all of its principal due is rolled over or refinanced.

On the other hand, the Greeks still do not have a whole lot of room for manuever. A full default would net them only 1.2% of GDP and even that would depend on default being orderly. Moreover, their primary surplus jumps around a lot, so they will still need a lot of short term borrowing to keep the lights on.

In numerical terms, the whole battle is over 0.7% of Greece’s GDP.

Of course, that isn’t really the battle. The Greeks want two things (1) independence from Brussels/Frankfurt/Berlin and (2) avoiding the further spending cuts and tax hikes that the troika wants for this year. Much more austerity would be needed to hit the 3.0% primary surplus the troika demands for 2015. 

It would seem to me that it would not be terribly hard for the Germans Europeans to relax the austerity targets for this year and next. No need for write-downs or anything that would disturb a cranky German voter. In fact, it would seem to be easy to concede 0.7% of GDP to the Greeks in a way designed to avoid offending German sensibilities. But instead we are in full fire drill mode. Why? Is the answer really only that the Greeks have been too loud about asking?

I am still confused about the Grexit talk

 It appears that the recent attempt at Greek financial diplomacy did not go well. The link is to Wolfgang Münchau writing that the crisis is coming to a head. Münchau lists four options for Greece:

1. Cave in to European demands. Everyone agrees that this will not happen.
2. Demand that the ECB release interest payments and profits from its purchases of Greek government bonds. The problem is that this money will not be “enough.” (Quotes explained below.)
3. Find the money elsewhere.
4. Issue a parallel currency to fund domestic spending.

This all made sense, until I went to the Greek ministry of finance and pulled up monthly data on revenues and expenditures, not including interest or debt repayments. Here you have it, for all levels of the Greek government, including municipalities:

When Münchau writes that the money will not be “enough,” what does he mean? It certainly won’t be enough to make the country’s debt repayments. But the figures graphed above indicate that it should be enough to cover its current spending. 

The solid line is the primary balance. It occasionally goes into the red, but it was positive for all of 2014, to the net tune of €2.2 billion. Greece has a smoothing problem, but unless these numbers are wrong it should be able to cover it easily through short-term borrowing. I have not been able to find data on the Greek government’s cash reserves. All I can tell you is that they went up by  €0.9 billion in 2013 and down by  €2.2 billion in 2014.

Now, the ECB may do what it can to prevent Greece from any short-term borrowing. And it may decide to deliberately wreck the Greek banking system. But from here it seems like Greece will only have to resort to option (4) if the European imperial authorities decide to take deliberate action to force it to do so. 

Even if the parties involved can’t compromise on debt, it would be relatively easy to just let the Greeks default while letting them still have banks that function and a government that can pay its current bills. If that default then crashes the Greek economy, fine. So why all this threatening of additional sanctions that will serve only to push Greece out of the eurozone while costing the European government central bank a boatload of money?

The weird thing is that Greece doesn’t even want more money. It just wants an extension on loans that certainly won’t repay if the Germans Europeans unload on them with both barrels. 

So WTF? 

My initial guess would be that this is just bad public diplomacy on the Greeks’ part. They could have tried to frame the issue in a way that Merkel could accept without enraging the more irrational parts of her electorate. 

But that guess assumes that the Germans would have been willing to make the obvious compromise that leaves everyone better off. I am not sure that assumption is correct. I therefore implore my co-blogger to write a post explaining what in the name of Mary is going on, because this all looks eminently super-easy to resolve to the satisfaction of all parties. Help?

ADDENDUM: One very perspicacious view can be found here. In this view, the Europeans won’t destroy the Greek banking system. Rather, they will inflict just enough pain to make the Greeks suffer for their inevitable default and debt write-down, but not so much that they leave the eurozone. The success of such a plan, of course, depends on Greece being able to pay its current expenditure. It also, if I understand it, involves the Greeks not paying their current debts. So I am still unclear as to what is gained, but it does seem like a plausible strategy. Go click the link. 

He also lays out the obvious compromise here.

So, once again I call upon our co-blogger to explain why the obvious compromise does not seem to have the backing of the imperial leader of Europe chancellor of Germany.

Confused about the Grexit talk

 I am late to the party here, but better late than never.

I am confused as to why there is so much talk of Grexit these days. For example, at the previous link, Tyler Cowen writes,  “So I think Germany will play brinksmanship with Syriza and, when the time comes, simply pull the plug and leave them high and dry.” 

But what does it mean to “pull the plug ”on the Republic of Greece? Let’s say Alexis Tsipras is elected Prime Minister and promptly proceeds to tell all foreign creditors (save the IMF) to get stuffed. He would certainly lose access to foreign credit ... but the Greek government is running a primary budget surplus, so why would he care? 

More concretely, according to the IMF (page 45), in 2015 will Greece run a budget deficit of €3.5 bilion, but it will have to make interest payments on its debts of €9.1 billion. Eliminate those interest payments, and the Greek government will not have to a borrow a dime, save for very-short term expenditure smoothing. Of that €9.1 billion, only €743 million is due the IMF, so as long as the IMF agrees to roll over its debt then Greece can remain in that organization’s good graces while stiffing everyone else, public or private.   

(Our hypothetical radical Tsipras  government, if it were smart, would issue special instruments to the banks to enable them to continue to collect interest on their holdings of government debt.)

So Angela Merkel cannot muscle Greece by threatening to deny new credit. What else? Well, Greek banks need support from the ECB. Well, if I understand these procedures correctly, the governing council of the ECB would need a ⅔rds supermajority to cut off the Greek banks from emergency liquidity assistance. Could the Germans muster a ⅔rds supermajority? I am having trouble seeing how.

Moreover, cutting off the Greek banks would generate huge losses for the ECB. It has lent about €44 billion to Greek banks and the Greek central bank owes the rest of the Eurosystem around €38 billion. Sure, as far as I can tell those losses would have no economic meaning ... but we’ve got ample evidence these days that European policymakers, elected and otherwise, put great stock in avoiding them. 

Add to that the systemic risk of letting the Greek financial system go down the tubes, and it is really hard to imagine that particular plug being pulled.

Note that the Greeks will almost certainly not default in the big bang described here. But even if they did, I do not see what the Germans could do to force them out of the eurozone. The Greek government might choose to leave, of course, but that is a different issue.

So what am I missing? Help! 

The meeting that wasn’t; the soccer match that was

 Last Tuesday I was in Boston to meet with Prime Minister Edi Rama of Albania about electricity theft. I met the Prime Minister, but not as expected. He was outside the meeting room, chatting into his cellphone. He gave me a hearty hello, but then went back to his conversation.

While waiting, I talked with one of the plainclothes security guards — sworn Massachusetts State Police officers working for Harvard, not Albanian secret service — and our conversation quickly segged from the NLCS (the Giants were going to play St. Louis around 6pm EST) to the ongoing Albania-Serbia match being played in Belgrade. A subminister joined our conversation; it seemed that the game had been stopped by a riot! Obviously the Serb fans started it, which under UEFA rules would mean an automatic 3-0 victory for Albania. (I that actually is the rule: Italy was awarded a 3-0 victory in 2010 when Serb fans broke up a Euro Cup qualifying match in Genoa.) 

The prime minister then disappeared, which I thought was odd. We had the meeting with the energy subminister, the finance minister, and the economy minister. (The latter has a good shot at being prime minister some day.) After that, I flew back home to D.C.

Well. It turns out that somebody flew a remote-controlled helicopter carrying an Albanian-nationalist flag over the pitch. And not just any flag; this one was emblazoned with a map of Greater Albania, encompassing not only Kosovo but big chunks of Serbia proper. It also had portraits of Ismail Qemali and Isa Boletini. (The latter was from Kosovo and fought against Serbia during WW1.) A Serbian player grabbed the banner, then some Albania players tried to take it back, and a riot erupted.

Rumors have since flown that the prime minister’s brother piloted the drone. The brother has denied it. But the kerfuffle forced the PM to miss his meeting with us. And since then it’s gotten worse: the PM has had to cancel his planned visit to Belgrade. Serb fans have set Albanian flags on fire and there have been reports of attacks on Albanian-owned bakeries. 

At the end of the day I am not particularly worried. The tensions are real, of course, but we are not about to see another round of Balkan wars. UEFA has not yet decided whether Albania or Serbia will be awarded a 3-0 victory; given the circumstances, it a good case could be made either way. 

But it did ruin my trip up to Boston. No props to whomever flew in the flag, the players on the field, or the Serbs in the stands. 

Fashion tips from a senior colleague

 I am advising the government of Albania, as you know. It involves private and public presentations. My presentation style can be a little gonzo, but it is effective. 

I received some much-appreciated (if unsolicited) advice on how to make it even more effective from a very senior (and very very smart) senior colleague. (Colleague in the broadest sense; the person does not work at HBS or GWU.)

“Your style would work even better, well, I understand that you are not as young as you appear, but you should look older.” 

“I was wearing a suit.”

“Yes, but on you it doesn’t look classy.”  

“I’ll die my hair gray?”

“Excellent.”

My working hypothesis is that suits don’t look classy on me because when I’m not playing with my children or in extremely hot weather I wear them all the time. (Albeit often with T-shirts.) They’re my leisure wear and I guess that shows.

Or maybe I just need to die my hair gray.

A win would have been better

 But it was still pretty cool to be watching the game in one of the few countries where Americans are popular. They have blocked off two blocks downtown for outside game viewing. I am here with a bunch of Danes that I met climbing the Pyramid of Tirana. They have all become USA fans based on my ability to spout trivia about the players and videos of my boy in a Team USA uniform.

 Still, a win would have been better. Now we have to watch Portugal and Ghana praying for a tie, which is almost as bad as watching Ghana and Germany knowing that a German win would be better for the USA. If my friend Gabe gives me permission, I will publish our texts. They show two Americans trying and failing egregiously to root against the Black Stars. (Playing somebody else, that is. We had no problem wishing them ill when they played the Yanks.) 

Anyway, it has been a helluva Cup so far. I am stunned and saddened at the rapid ejection of the Furia Roja. I am thrilled at the way the Yanks keep scrapping. (In that last match with Portugal, we simultaneously played crazy rough and mastered the art of the dive.) I love the way Italy might fall along with Portugal ... ¡Viva Chile, Colombia y Costa Rica! 

And seriously, you gotta love that Messi goal against Iran. Almost as much as you hate that last-second Portuguese goal against us. 

Why Albania will get no money from the Trans-Adriatic Pipeline

 The Trans-Adriatic Pipeline (TAP) is a project that will connect Azeri natural gas with Italian markets. The gas from the Shah Deniz field will pass through the Trans-Anatolian Pipeline (a different project) and then connect into the Trans-Adriatic at Kipoi, on the Greco-Turkish border. The pipeline will then go through Greece and Albania before plunging under the sea to end in Brindisi, Italy.

Press accounts have made much of the transit fees that will go to countries like Greece.* From the link: “With the economic crisis in Greece, TAP promises the added benefit of funneling billions of euros from transit fees into the Greek economy.” Moreover, Montenegro expects to earn €30 million per year from a possible northern extension of the pipeline.

We fully expected that Albania would be earning fees., although we had heard credible rumors that they would be paid in molecules of gas rather than currency. In fact, we came up with a business plan to attract investment into thermal generation based on the idea. 

So we were stunned when the CEO of the national generator, Kesh, told us that Albania was getting nothing but the option to buy some of the gas at market prices. He said that when the Albanian negotiators raised the issue, the pipeline consortium threatened to go through Greece. That seemed like an amazing failure of diplomacy. After all, Greece had nothing to gain by denying the Albanians their fees. Greece would not get them either; why screw over your poorer neighbor?

But then we learned that there was a wrinkle: Greece will get no transit fees either.

Why not? Well, a member of the European parliament asked that very question. The answer: European Union rules prohibit governments from charging transit fees. The reason for that makes sense: special transit fees above-and-beyond those charged commercially would be a restraint on trade.  

And that is why Albania won’t get any fees. It is true that the Greek government might stiff Albania out of spite. (The two governments are involved in a spat over their exclusive economic zones in the Adriatic. And place names. And the Chams. See here for more.)

But it is also true that Albania wants into the European Union. And that means complying with E.U. rules even if they don’t have to. So no transit fees, no free gas. Just a commercial operation on Albanian soil.

In other words, a nice thing for Albania, but not a panacea for its energy problems. Oh well. Back to work!

Samba goal?

 I have made a number of interesting trips lately, including Israel and Colombia, with no blogging. This trip to Albania will, I hope, be different, and perhaps even lead to retro-blogging the earlier ones. There will be no mention of Liam Neeson’s daughter beyond this point.

To begin: the weirdest thing that I have seen here, and there has been a lot, has to be the “Samba Goal” dance routine just shown between the Ghana-Germany game and the Nigeria-Bosnia one. Take three attractive Albanian women. Have them dance to what sounds like polka with a Latin melody. (I call on Carlos and Doug to explain what I just heard.) And dance well, with a very Latin sinuousness, except for the leg kicks. The Cossack-style leg kicks. What?

That said, I am learning that you can mix polka (or what sounds like it to a clueless American from the non-polka part of the nation) into a lot of pop music.

I have also learned the raki is awesome here. I’ve had it in Turkey and Lebanon and thought, meh. In Albania, though, it almost but-not-quite as good as tequila. I will add that Albanians share Mexican incomprehension at the idea of the shot, which is one of the many things wrong with America.

Penultimately, Albanians are weirdly laid-back World Cup viewers, at least in the upscale districts where I am watching. They have blocked off a street for viewing games, but the ambience is weirdly detached. I was the only one to leap up and yell when Messi scored against Iran. The test, however, will be tomorrow at midnight, when I show up to cheer the United States against the evil colonizer of Angola and Mozambique. 

Finally: a very highly-placed Socialist in the new administration is of mixed-feelings about the crackdown on marijuana in Lazarat. “How are they going to live? And it’s all going to be legalized within a decade anyway.” But it is what they need to do to join the European Union. Sadly, the Albanian government seems to be focussed on a number of silly things in order to join the European Union. Not that the goal is unworthy, even with the E.U.’s governance problems. But it is leading the government to put a lot of carts in front of its horses, which seems unwise. Thoughts?

Three observations about Albanian cabinet ministers

First, they know their portfolios. I am very impressed. And their English is incredible.

Second, they talk with their hands. In that, they are like the Americans in the room, who also talk with their hands. It is the other nationalities who refrain from waving and chopping and pointing with three fingers.

Third, for a coalition government of two parties called “Socialist,” the ministers are remarkably conservative. They are not happy about  “social tariffs” in electricity, high pension payments to peasants and openly castigate politicians for overpromising. There is absolutely nothing populist about them. Sometimes, in fact, it seems like the Americans, Venezuelans and South Africans in the room are trying to persuade them that a little populism is not always a terrible thing.

I have to thank Doug Muir for pushing me to take this assignment. More to come.

Does Albania expropriate?

I am getting involved with advising the Albanian government. This is ironic, because I know nothing about Albania! Fortunately, my co-blogger does. Unfortunately, he has a day job and therefore cannot do mine.

Albania has serious issues with its electricity network. Like many countries, they privatized transmission and distribution (T&D) hoping to mitigate those issues. Albania sold a 76% stake in its Shpërndarje distributor in 2009 to the Czech-owned ČEZ Group in 2006. ČEZ (pronounced “chezz”) failed to stem losses, despite significant help from the IFC branch of the World Bank. In January 2014, the Albanians revoked ČEZ’s license. ČEZ cried expropriation, and took Albania to arbitration under the Energy Charter. (ČEZ, it should be noted has a bit of a dodgy reputation.)

Anyway, whenever you talk to investors today (at least in energy) and mention Albania, they bring up the ČEZ dispute as a Very Bad Sign. That got me thinking: how many dispute has post-communist Albania gotten into and how were they resolved?

It turns out that the previous government got into a serious dispute with General Electric, refused to pay, and got slapped down hard.

The story began in 2003 when G.E. agreed to build a 28-mile rail line between the port of Durres and Tirana’s international airport. In the September 2005 election, the Democrats ousted the Socialists. They proceeded to follow through on their campaign promises and cancelled the project.

G.E. (with its partners) proceeded to sue Albania at the International Chamber of Commerce. The foreign contractors claimed $20 million in damages ($13 million for G.E.). In 2008, the ICC awarded them €14 million. Tirana politely told the ICC to go f--k itself. At that point, G.E. went to a Belgian court and in June 2008 it received an order seizing all of the fees normally due Albania for aircraft overflying its airspace. 

The Albanians still held out, although I have not yet been able to determine what happened to the overflight fees. (I think they got an Italian court to stay the order at least until the case was resolved, but I am not sure.) 

In March 2010, they lost in the D.C. Circuit court. In May, they lost again in Rome. At that point, it was all over. Albania paid up.

In short, G.E. had to pull out all the legal and political stops to get compensation for the broken contract, but it is not clear that Albania did anything that should adversely affect its reputation. (The initial contracts remain shrouded in doubts over their domestic legality.)

What this history means for the ČEZ dispute is something I am trying to figure out.

How important are property rights?

It is a bit of a truism that property rights are key to economic development. An efficient system, runs the logic, needs to be transparent, transferable, excludable, and enforceable. In a bit more detail:

1. Transparent means that it is cheap and easy to find out who owns what.
2. Transferable means that it is cheap and easy to sell or transfer property rights from one entity to another.
3. Excludable means that if you own the rights to a piece of property, then the law allows you to exclude others from enjoying those rights.
4. Enforceable means what it says.

Without those characteristics, runs the logic, you get underinvestment and confusion and commons-tragedies and all that. And the logic has some empirical backing. For example, in 1986 the Buenos Aires provincial government offered a group of landowners compensation for land that had been seized by a group of squatters. Some landowners took the offer, and the province then transferred title to the squatters. Others did not. On the assumption that the squatters had no way to know whether the landowner from whom they had seized the land would take the provincial offer, Sebastian Galiani and Ernesto Schargrodsky found that the squatters who received titles invested more in their homes and the education of their children.

Here comes the New York Times with an article about terrible land titles in Greece:

“In this age of satellite imagery, digital records and the instantaneous exchange of information, most of Greece’s land transaction records are still handwritten in ledgers, logged in by last names. No lot numbers. No clarity on boundaries or zoning. No obvious way to tell whether two people, or 10, have registered ownership of the same property.”

The article goes on to say that even the former Yugoslav states have better land rights.

One reasonable conclusion would be that bad property rights are a drag on economic recovery. “Many experts cite the lack of a proper land registry as one of the biggest impediments to progress. It scares off foreign investors; makes it hard for the state to privatize its assets, as it has promised to do in exchange for bailout money; and makes it virtually impossible to collect property taxes.”

But another reasonable conclusion would be that the evidence about the importance of clear property rights is wrong ... or at least oversimplified.

There is no getting around that fact that Greece became a rich country despite terrible property rights. The above chart tracks GDP per worker in 2005 dollars (adjusted for purchasing power) for four countries from 1950 to 2011. (The data through 2010 is from the Penn World Tables 7.1; the 2011 data comes from the OECD.) In 1950, Greek workers produced as much as Colombian ones; they were significantly less productive than in Mexico. Over the next three decades, Greece far outdistanced its Latin American counterparts. The current depression has not eliminated that gap.

Greece, of course, had many advantages that Colombia and Mexico did not, but poor property rights did not stop the country from taking advantage of them.

It has to make you wonder. Despite the micro evidence from places like Argentina, are efficient property rights really as important as we think they are?

Why Cyprus won’t leave the eurozone

If I were the president of Cyprus, knowing the little that I know right now, I would take the country out of the Eurozone. But that is not a no-brainer. There would be a lot of losers. Cyprus should leave the euro, but it won’t, because the losers outweigh the winners in the short run.

Who would be the losers from leaving the euro?

1. Savers with less than €100,000. Right now, their savings are untouched. True, they can’t move those savings off the island, but the chances are good that they will eventually. And the banks have reopened, even if cash withdrawals are limited.
2. Creditors. They would either be repaid in devalued Cypriot pounds or face the possibility of huge write-offs under a new super-lenient bankruptcy law.
3. The employed. “Say what?” you ask? Well, consider. My grandfather kept his job during the Great Depression. As a result, he made enough money to move from Crown Heights to the then suburban-paradise of Jamaica, Queens, plus a second house in Miami Beach. The reason was that deflation drove up the value of wages and assets for those who managed to hold on to them. I doubt that Cyprus is in for as punishing a deflation, but deflation it will be. Moreover, the Mexican and Argentine experience shows that one of the ways in which devaluation works its recovery magic is by falls in real wages. Argentine wages fell by almost a fifth in the two years after the devaluation. Cyprus imported 47% of its GDP in 2010, compared to only 12% in Argentina in 2000, the year before it left the American monetary union. It’s even higher than in Mexico, which imported 22% in 1994, before its big (and devastating) devaluation. Given the scale of imports, the fall in Cypriot real wages from devaluation is likely to be rather worse than in Argentina or Mexico.
4. Debtors to foreigners … possibly. There would be a legal nightmare if Cyprus reintroduced the pound. Locally-owed debts could be poundified, but foreign debts could not. Any attempt to do so would lead to a rash of lawsuits. I would not worry that reintroducing the pound would lead to Brussels throwing Cyprus out of the E.U. … but I would worry that forced poundification of foreign debts just might.

OK, so who wins?

1. The unemployed. Of course, the unemployed will have to grow to a rather large number for them to provide a big enough interest group to matter. There’s a reason Argentina didn’t devalue until 2001, despite three years of depression.
2. The soon-to-be-unemployed. OK … but the woman whose wages collapse and can no longer afford to send her daughter to the U.K. for university is not going to vote based on what would have happened. In a world like that, President Obama would have won re-election with LBJ-like margins. We do not live in that world.
3. Bankers. Yes, bankers! Both their debts and the liabilities will be poundified, at least if the Cypriots are a little bit smarter about it than the Argentines. (And even in Argentina, the courts plus politics eventually helped the banks out.) They will have a bigger problem with their non-deposit liabilities, but they are going to have that problem as the Cypriot economy collapses regardless. More importantly, the new Cypriot central bank will be able to print pounds in order to help the banks out.
4. The tourism industry. Cyprus has a population that’s barely twice that of Barbados; there’s no question that tourism could sustain a high-wage developed economy. The problem is that they would be betting on tourism in an environment in which the rest of Europe is either in or sliding into recession. The tourism boom could take rather longer to get going than the post-1994 manufacturing boom in Mexico or the post-2001 agricultural boom in Argentina.
5. Debtors to foreigners … possibly. If the Cypriot government is willing to protect them from creditors (all creditors, foreign and domestic, in order to remain in the E.U.) or bail them out via cheap pound loans, then they could do surprisingly well out of a situation that one would otherwise expect should be disastrous;
6. Other debtors: inflation is good for debtors.

How will this political logic look by the 2018 election? Well, I’m pretty sure that it will look like staying in the euro was a bad decision. In that sense, I would advise President Anastasiades to leave the euro now and bet on re-election on the wave of a giant economic boom by the time the next presidential election rolls around.

The problem is that it is not at all clear that such a move will look great by the time of the next legislative election in 2016. There are a lot of short-term losers, and they are politically powerful.

In fact, given the opposition, a new currency may be impossible. The president of Cyprus is powerful, but he cannot unilaterally introduce a new currency. There would have to be wide support for such a move. The problem is that most of the soon-to-be-unemployed won’t give it, the bankers are unlikely to act in their self-interest (this is oddly true of American bankers, I should add), and those who owe debts to foreigners can only be appeased by radical changes in Cypriot bankruptcy law. (It is currently very strict; e.g., creditor-friendly.)

While leaving the euro looks like a clear decision at first glance — two-thirds of Cypriots support it! — the politics rapidly gets blurry by the second and third look. Argentina left the American monetary union after a punishing depression had reduced the economy to barter; Mexico’s president could unilaterally devalue (and pretty much had no other option by that point). Leaving the euro would almost certainly lead to a richer and stabler Cyprus by 2018 … but the above analysis, superficial as it is, makes me think that you can’t get there from here.

Cyprus will have a long and grinding depression, but it will not (unlike Argentina) be reduced to barter because the ECB will provide just enough liquidity to insure that does not happen. Things will get awful, but probably never quite awful enough to get the government to take the logical step. It’s a tragedy for the Cypriot people, but an entirely understandable one.

Internal devaluation does not work very well

So I read in the New York Times that Greek private sector salaries fell a punishing 22.5% in 2011 in real terms.  That stunned me. So I went to Eurostat. Their figures for nominal labor costs were slightly less impressive, but still shocking. (2008 = 100.)

Internal devaluation at work! Sure, Greece is still working off earlier excessive wage gains, but that should presage an export boom, right? Cheaper workers, cheaper vacations for foreigners, more tourism, more exports.

Except ... well, according to OECD data, output is declining along with wages. (See below; 2005 = 100.) Unit labor costs are down, but not when seasonally adjusted, and really not relative to Germany or the rest of the Eurozone. Maybe that’s not relevant. After all, as long as output per worker in potential export sectors isn’t falling, then economy-wide unit labor costs should not matter ... but only for those industries. They will matter a lot in other industries, which are seeing demand (foreign and domestic, as proxied by the value of output) drop as fast as their wage bill.

Add to that (1) rising debt burdens for Greek workers, since debts aren’t indexed to wages; (2) rising taxes on Greek workers; (3) people’s desire to save in euros (outside Greece or in cash) in the face of a possible Grexit; and (4) the awful awful feeling that comes with people as they watch their nominal incomes plummet.

Put it together, and it isn’t clear to me that the rather surprising unstickiness of Greek wages is going to produce much of a quick recovery even if wages fall substantially more. (There have been a lot of reforms to Greek labor law in the last few years.) Of course, the Argentine experience implies that a Grexit won’t be better ... Argentine GDP plunged 15% in the year after the devaluation, and recovery took place in the context of strong external demand.

I am not optimistic.

Postscript: see “Is Increased Price Flexibility Destabilizing?” by Brad Delong and Larry Summers. (Also found here.) See also “The Barber of Buenos Aires.”

Greece steps closer to Eurozone exit

 I recommend the Sober Look blog. If you want something scary, go here. The short version is that the European Central Bank has completely lost control of the Greek money supply. It can print euros and buy loads of Greek assets, but all the liquidity drains right out of the country. Basically, nobody wants to hold deposits in Greece. On the flip side, nobody outside Greece wants to lend to a Greek company. In the words of a commentor, “The Greece analogy to a state in the U.S. no longer applies.”

A while ago, Doug Muir and I had a debate about Eurozone exit. We agreed that if the banking system collapsed and capital flight went out of control, then the costs of exit would no longer apply ... because the bad effects of exit would have already happened. The implication of a collapse in the Greek money supply is that absent more fiscal help from the rest of the Eurozone, there is no longer any reason for Greece to stay in.

Other than, of course, warm and charitable Greek feelings towards the rest of the Eurozone.

This would be a painful way to end European union

 Over the last two months, family business has kept me away from blogging. Before that, I was in the throes of finishing a first draft of a book manuscript. The family business is over and I’m now in the far more relaxed process of fixing the manuscript, so this time I think I think we’re really back!

In December of 2010, I made a bet with Doug Muir and Omar Serrano that the eurozone wouldn’t make it to March 25th, 2013. If any of the big eurozone economies leave the single currency, I win. The bet is structured so that I will lose even if Ireland, Portugal, and Greece all abandon the euro; it has to be Spain or Italy. The loser will either fly across the Atlantic to meet the winner, or pay for the winner to fly to meet them, and then buy them a steak dinner, with port and cigars.

The big question, of course, is how a government could leave the eurozone. Now, Nick Rowe has proposed a way. “Eurozone governments and banks that cannot pay their obligations in euros may end up paying their obligations in a scrip that is not pegged to the euro. A scrip issued by each national government that is worth whatever people think it is worth. And if people start using that scrip as a medium of exchange, and medium of account, it becomes a new money. Sure, Greek supermarkets might prefer payment in euros, but if their customers can only pay in New Drachmas, then it’s either accept New Drachmas or let the vegetables rot on the shelves. And the supermarkets’ suppliers might prefer payment in euros, but it’s either accept New Drachmas or let the vegetables rot in the fields. And the workers picking the vegetables might prefer payment in euros, but it’s either accept New Drachmas or nothing.”

Sounds almost painless! Matt Yglesias implied so. But it wouldn’t be! It would be a mess and cause the economy to cycle the drain until the government defaulted on its debts anyway. Moreover, it would not cause the scrip to drive euros out of circulation.

Consider, for a moment, what Spanish obligations consist of. In part, they are debt payments. Spain’s debts, however, are denominated in euros and will remain denominated in euros no matter how many nuevas pesetas are printed unless the Spanish government withdraws altogether from the European Union. Rather, the obligations which the Spanish government can insist on paying in nuevas pesetas are the obligations that it owes to its own citizenry: salaries, pensions, unemployment benefits, etcetera. The nueva peseta would trade at a discount against the euro, of course, but that is the idea.

Except ... the incomes of Spaniards would drop in terms of euros. They would be increasingly earning in discounted nuevas pesetas. The problem, of course, is that they would then be paying less taxes in terms of euros. But the Spanish government owes debts denominated in euros! The debt burden would rise. The more the debt burden rises, the more the government needs euros to pay it. The government would, of course, trade nuevas pesetas for those euros. That would increase the discount on nuevas pesetas, further driving up the size of the debt burden, further increasing the discount on nuevas pesetas. (While this is going on, the interest rate on Spain’s euro debt would skyrocket, of course, unless it is by then owed to the European Union rather than private investors. In that case, however, it is very unlikely that Spain would be going around issuing scrip to pay salaries.) At the end of the story Spain’s income in euros falls enough to force the government to default on its euro debts, but only after setting off an inflationary spiral.

There’s a second problem. Rowe wrote, “Greek supermarkets might prefer payment in euros, but if their customers can only pay in New Drachmas, then it’s either accept New Drachmas or let the vegetables rot on the shelves.” That, however, isn’t correct. Government employees might be paid in new drachma, or nuevas pesetas, but they can exchange those pesetas for euros. The supermarket cannot be required to accept those pesetas unless Spain leaves the eurozone. If the owner insists on being paid in euros, then the customers will swap their pesetas for euros in the market and he or she will be paid in euros. This is a process that has occurred in many high-inflation countries, where people abandoned the local currency for the dollar ... and in most of those countries, the dollar was not legal tender! In short, the logic breaks down at that point: it is not clear why the pesetas would replace the euro as a medium of exchange ... except, of course, to make tax payments.

Of course, it isn’t clear that Spanish government employees (or pensioners, or students, or the unemployed) would want to receive devalued nuevas pesetas in lieu of euros. They would, quite rationally, perceive it as a pay cut. Anyone who owed money would be doubly hit: their debts would still denominated in euros.

Finally, such an action would be perceived (correctly) as a prelude to formally leaving the eurozone, precipitating the mother of all capital flight. Without leaving the eurozone (in fact the country would have to leave the European Union altogether) the government would have no way of combating that flight.

In short, introducing scrip would be a terrible way to exit the eurozone. It would run a high risk of triggering a depression, and it would certainly worsen the country’s debt burden. Professor Rowe is, I think, incorrect. History bears this out: the issuance of patacones (or créditos) in Argentina around 2000 did not result in the creation of a new Argentine currency or stave off default. Rather, they contributed to the depression, and quickly inflated away.

There are many ways in which the eurozone could fail. The issuance of a parallel currency for any length of time strikes me as one of the worse ones. Is there a hole in my logic?

“What do the Greek rioters want?”

 Thanks to reader BPH for catching a major bonehead error in comments. The mistake is now fixed. Apologies!

The title of this post is a question asked me today yesterday by a Columbia student Guy Tower. The correct answer is probably, “to express an unfocused floating rage,” followed by “a miracle.” In fact, the last time Amma and I were in Greece, the place had just been hit by riots. That said, there are three possible concrete things that a tear-gas-dodging rock-throwing rioter might actually want the Greek government to do.

  

In order of reasonableness:

(1) Make sure that rich Greeks pay there fair share of the adjustment burden. Sure, taxes amount to only 32% of GDP ... and that assumes that GDP is properly measured ... but tax rates in Greece are not low.  Tax  collection is low. Considering how royally Greek governments have screwed up tax collection, anger at this would get me on the streets too. Raising VAT when you can’t collect a swimming pool tax? WTF? Bring in Crown Agents!

Don’t forget that Greeks are poor. (Albeit not as poor as in the first version of this post! Thanks again to BGH.) The below chart gives the bottom nine deciles of each country’s income distribution, in euros per year at PPP. The median Greek would fall below the Austrian, British, Danish, Dutch, and Swedish poverty lines. They would be in the bottom 30% of the income distribution in Belgium, Cyprus, Ireland, France, and Finland. The lowest tenth of the income distribution is poorer than anywhere else in the Eurozone except Italy, Slovenia, Spain, and a very few Cypriots. 

Source: Tárki European Social Report 2008, Chapter 3. Data from 2005. A larger version of this chart is available by clicking on it.

In short, Greeks have ample reason to suspect that rich people are getting away with murder, and ample reason to be angry about it. 

(2) Push back on the creditors. Yes, Greece has been irresponsible. Hell, it’s been malfeasant. But recent months show all the characteristics of a credit spiral, when bad things happen to good countries. (Or in this case, a badly-behaved one.) If were Greek, I’d want the Greek government to take a harder line with its creditors. Extend maturities, reduce interest payments, basically make ‘em take a haircut. Another way to think about this is that if Greece were a corporation it would be in bankruptcy protection right now. Greece would still need to make budget cuts (its interest payments are lower than its deficit) but they would be less painful and much more politically palatable.

(3) Get out of the euro.

Okay, that last one is crazy. What would Greece need to do to leave the euro? Well, it would have to freeze bank deposits, in order to prevent a flight of cash to the rest of Europe. The problem with that is that doing so would violate European law — Greece would need either a special mulligan from the European Commission (which would set an awful precedent) or quit the Union altogether.

Of course, it is possible that runs on Greek banks will happen anyway. Thing is, the ECB is moving to prevent that, by continuing to accept Greek bonds. Even if the ECB fails, rumors of euro-exit could produce something far worse than bank runs: consider what happened to Argentina in the run-up to its big devaluation. If Greece looked to be reintroducing drachma, nobody would want to spend euros. After all, they’d all be expecting the drachma-euro exchange rate to plummet the second the drachma became legal tender. The economy could go back to barter in the run-up. That happened in Argentina in 2001.

I’ll also add that a devaluation would almost certainly be connected to a default. I’m having trouble seeing Greece suddenly enjoy an Argentine-style export boom without a big drop in the nominal exchange rate. The problem with having a debt burden at 113% is that a big drop in the nominal exchange rate means a big rise in debt burdens, since Greek debts are denominated in euros. Either Greece redenominates its debts — a de facto default, unless the European Court decides doing so is illegal — or it will have to renegotiate them.

In other words, a Greek ejection from Euroland might be good for Greece ... in the sense of being terrible but better than some other possible outcomes ... but it seems to me that it would be rather bad for the rest of Europe. We have, in fact, seen a similar movie before.

Anyway, it seems to me that there are reasons to oppose the current government that go beyond simply wishing for a pony. The 1980s really weren’t really that great a decade. I would like to see more of (1) and (2), with a much more pro-active Brussels. Guarantees for Greek banks would help. (Make ‘em adopt Panamanian banking regulations, and I mean that quite seriously.) More quantitative easing from the ECB. An inflation target of 2%, not just a ceiling. Hell, a target of 3½ percent. British officials running around inside the Greek tax administration. Some of European version of the proposed Sovereign Debt Restructuring Mechanism; e.g., a bankruptcy procedure for E.U. countries.

None of which (except maybe implicit bank guarantees) is going to happen, thanks to Angela Merkel. So unless the Greeks want to flirt with depression and expulsion from the E.U., we are stuck with muddling through. And that means, at some point, a default. 

Good luck, madre patria.

A modest Greek proposal

 Greece may be facing a serious debt spiral. Governments of the Eurozone appears concerned for two reasons. The first and smaller reason is that many of their financial institutions may be exposed to Greek sovereign debt. A Greek default could therefore have repercussions across the Continent. In that sense, European governments are concerned for the same reason that the U.S. was concerned about Latin American defaults in the 1980s. This reason does not seem to be enough to account for all the concern.

The second reason is that they are terrified of contagion. We have a lot of evidence that investors panic and do bad things to good countries. (Consider the Argentine experience in 2001.) The Europeans might be terrified that a Greek default will drag down Portugal and Spain, possibly Italy and Ireland, countries that might muddle through in the absence of a panic-inducing shock. Large defaults would have two very bad effects. First, financial institutions in northern Europe are very exposed to their bonds; the risk of a super-1982 would be huge. Second, all of the PIGS right now are dependent on current borrowing to finance their government spending. If they defaulted, they would have no way to finance their deficits. Demand would collapse, plunging those countries into depression and dragging their trade partners down with them. (There may be a third reason to worry that I am missing.)

I will admit, however, that I am not entirely clear as to why these worries for northern Europe would be less in the absence of a currency union. Presumably the model is that (1) a country with a depreciating currency is less likely to default on its debt; (2) the loss in value from a default will be higher than the loss in value caused by depreciation; (3) foreigners would have held less sovereign debt in the first place in the absence of single currency; (4) the country would have been able to borrow in its own currency; and (5) the hit to the net exports of the other eurozone partners will be less in the case of a big depreciation followed (hopefully) by recovery than it would be in a depression caused by Hooverism. That seems reasonable to me, but I am not sure that I have it right.

So what to do?  Bail Greece out, obviously, with some sort of temporary low-cost finance. The problem, of course, is whether Greece’s fiscal problems can be solved. Well, it does seem as though tax evasion and inefficiency are a big part of the problem. Even without the crisis, these were bad things, as the linked paper demonstrates.

Well, there is an organization with expertise in managing tax-collection ... Crown Agents. They have an entire department dedicated to it. It would certainly be more palatable to Athens to have the Crown Agents denationalized (if somewhat British-heavy) workforce managing Greek tax collectors than it would be to bring in, say, Germans.

It is time for the E.U. to call them in.

Greece in recession

  The Greek economy is slowing, but it is not in recession.  Yet Athens looks like a city in the midst of a severe recession. 

Not in this picture, of course.  This picture is lovely.  Albeit not really because of Athens.

But on the drive in from the airport, you pass myriad empty storefronts, abandoned buildings, and what appear to be stopped construction sites.  

Downtown, you see much of the same.  Even brand-new construction looks empty.  When the storefronts are filled, you can spot tell-tale signs of empty offices.  And then there's the petty vandalism that haunts downtown:  graffiti on private structures, cracked windows, run-down buildings.  All the telltale signs of property owners who have decided for whatever reason that proper maintenance does not pay a sufficiently high return.  

If it had just been the central city, we would have concluded that Athens suffers from a European version of the American disease.  Or that it was just the after-effect of the December riots.  The thing is, the signs of economic distress are worse in the suburbs.  It honestly looks like someplace that suffered from a real estate bubble that has now collapsed. 

Of course, the central city doesn't look so good either.  It looks like someplace where rioters might indeed attack businesses with petrol bombs. 

That said, downtown Athens is not out-of-control the way much of New York City was in the 1970s and 1980s.  For example, when we got off the bus, the first thing that greeted us was a police raid against African street merchants selling counterfeit luggage.  Yet the prevalence of graffiti also suggests that the police (and the public) is fairly lax about enforcing standards; it's not something you see in Boston or London or Paris, not to the same extent, and not on private property.  (Although, once again, much of New York's outer boroughs looked like this back in the 1980s.) 

In other words, while the Greek economy might not yet officially be in recession, our careful powers of observation lead us to predict that the numbers are going to get much worse very quickly, as the statisticians catch up with reality.

So what's happening?  And what is to be done?

Sabiduría del occidente para los griegos

Doug recently wrote in A Fistful of Euros, “The Macedonia name issue is so stupid that it’s almost physically painful to write about it.” I have to agree. I made the mistake of scrolling down the comments thread. Jee-sus.

Viewed from the extranjero vecino, the whole thing is incomprehensible. Let me recap. A smaller weaker country on the northern border of another has the same name as a province of the latter. The larger stronger country fears that as long as its neighbor claims that name, it might also claim the province. How the whole smaller-weaker versus stronger-larger thing would be overcome is left unexplained.

Somebody from the Spanish-speaking part of this hemisphere needs to take a Greek minister aside at a U.N. meeting and say something like: “Listen, buddy, I understand your problem with northern neighbors and names. We have a larger stronger northern neighbor that claims our entire continent in its name. And, you know, periodically invades.  Like, recently, not umpty-scrump centuries ago. But you don’t see us making a public fuss about it, so will you get over yourself already?”

Conversely, they could just go with Alta and Baja Macedonia. Don’t even translate “Alta” and “Baja,” just transliterate ‘em. I’m sure they sound fine in Greek, exotic like. Be good for tourism. 

Doug, can it really be about the name?