The Euro Crisis, In Quotes

Includes: ERO, EWP, FXE, GREK, ULE
by: Shareholders Unite

The euro crisis is so awfully complex that it vexes even experienced policy makers. However, sometimes pundits hit the nail upon the head and provide such succinct quotes that really sum up the situation. We string together a few:

Here's Paul Krugman in lunch with Martin Wolf from the Financial Times:

What's interesting is that the euro itself created the asymmetric shocks that are now destroying it [via the capital flows it engendered]. Not only have they created something incapable of dealing with shocks, but the creation engendered the shocks that are destroying it.

This is about the shortest quote that sums up the Euro crisis. Basically, the euro itself has engendered the crisis by simultaneously:

  1. Eliminating adjustment mechanisms
  2. Creating more need for adjustment

The euro itself has created the shocks that impact different countries differently (so called 'asymmetric' shocks) and thereby increasing the need for adjustment of policy (which it has made near impossible). The creation of the euro eliminated the exchange risk for the periphery (which before used to periodically devalue their currencies).

This lowered the interest rates dramatically in the periphery, setting off (largely private) borrowing spree financed by a capital inflow. The result of that was booming economies and loose financial constraints, both for the private and public sector. Another result was these countries losing competitiveness versus core countries like Germany, as the credit financed boom sparked higher inflation in the periphery.

And now the capital flows the other way to such an extent that the money supply in much of the periphery is actually sinking. Investors and depositors are fleeing peripheral banks and sovereign debt, because they can park their money in safer assets and bank deposits in the euro zone center without incurring any currency risk, courtesy of the euro.

So, as a result of the euro, capital flows have been perverse before and after the crisis, creating credit bubbles and inflation before the crisis, and leaving the periphery dry after it when capital started to flee. The plight of the euro zone periphery is really dramatic.

Here's Evans-Pritchard from the Telegraph on the plight of Spanish Prime Minister Mariano Rajoy

He cannot devalue. He cannot cut rates or print money. He cannot mobilize a lender of last resort to eliminate all risk of sovereign default. He can only lament.

Indeed. What the creation of the euro zone has done is not only creating an asymmetric shock of unprecedented magnitude, it has also slashed away the instruments of individual countries to deal with such shocks.

The countries can't devalue to restore competitiveness, they can't print money (even if the ECB does, it is sucked in the center and away from the periphery as fast as it can be printed), they can't slash interest rates, and they can't embark on expansionary fiscal policy (they're obliged to do exactly the contrary). They have basically no adjustment mechanism besides drastically cutting wages and prices, the 'internal devaluation' route.

For those that believe that it's all uncontrollable 'socialist' public spending that produced the crisis, from the BBC:

The Spanish government's debts were a mere 36% of its gross domestic product (OTC:GDP) (the output of its economy) in 2007, while the German government's were 65%.

What's more, Madrid was in the process of paying its debts off - it earned more in tax revenues than its total spending. In contrast, Berlin regularly broke the maximum annual borrowing level laid down in the Maastricht Treaty of 3% of GDP.


Christine Lagarde, head of the IMF, on Greece:

Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax. [The Guardian]

Sometimes the truth is unpleasant, and there has been a lot of uproar about this statement, the timing of which might have been unfortunate, but there is a good deal of truth in it. Without trying to paint everybody with the same brush, it's undeniable that there was a very lax tax morale in Greece.

While many on salaries have their taxes automatically deducted from their wages, professionals have way more leeway, leading to widespread tax dodging. Add to that the rather shambolic record keeping, the clientele nature of Greek politics, and the low interest rates and inflow of capital as a result of the euro (pre-2008), and you have a recipe for disaster.

Here is another quote, from Michael Lewis:

In just the past decade, the wage bill of the Greek public sector has doubled, in real terms-and that number doesn't take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year.

Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece's rail passengers into taxicabs: it's still true. "We have a railroad company which is bankrupt beyond comprehension," Manos put it to me. "And yet there isn't a single private company in Greece with that kind of average pay."

The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland's.

Now, even if this is a bit sensationalist and exaggerated (it's Vanity Fair, not the American Economic Journal, after all), there is a core of truth at least. Which is why reform is so much more important than mere austerity. The public sector itself is rife with inefficiencies, red tape, shambolic record keeping, lax enforcement etc.. Austerity should be a means to drive more rationality and efficiency into this system, not just as a means to slash spending, which is dangerous in a financial crisis.

The private sector has its own inefficiencies (a host of barriers to competition, protected professions, etc.). But we also shouldn't lose sight of the fact that Greece is making progress:

Greece implemented a fiscal consolidation of about 6.5 percentage points of GDP since the beginning of the Program (2009-2011).

Primary deficit reduced from €24.7 billion in 2009 to €11.3 billion in 2010 and shrunk further in 2011 to €5.2 billion.

Greece achieved an annual rate of fiscal consolidation of 4.2% GDP on average, the highest in the developed world over the last few decades.

Greece ranks number two in terms of the degree of adjustment happening in its economy during 2009-2011, according to the Euro Plus Monitor.

Positive trade balance of goods and services (excluding oil and ships) for the first time since Greece's Eurozone entry.

But it's very difficult to make further progress as the austerity has sunk the economy into such a deep funk that it's difficult to stabilize debt/GDP.

Here's Evans Pritchard of the Telegraph again:

Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state, without any offsetting monetary stimulus or devaluation.

The political support for reform is waning, and the situation is now so dire that exit from the euro becomes a real option. The latter prospect has led to an investment strike, further endangering the progress that has been made to date.

If these quotes are not short and succinct enough, you can always revert to something shorter still that sums it all up, like the figure below:

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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