Impending disaster in Greece

Paul Krugman analyzes the debacle in Greece. Although Greeks voted barely a week ago to reject the bailout terms offered by the EU, which called for uninterrupted austerity, Prime Minister Alexis Tsipras proposed to the EU to accept almost all of the terms if there was some true financial relief. Instead, what the European Union, spurred by Germany, proposed today demanded all of the pain, and none of the gain that Tsipras sought. Indeed, Germany has essentially demanded regime change in Greece, even though Tsipras only came to office in January. As Krugman says, "It is, presumably, meant to be an offer Greece can’t accept."

The Germans, it would appear, have decided to push Greece from the eurozone. But demanding an end to Greek sovereignty and austerity as far as the eye can see is simply evil. Moreover, it negates the long-successful stand of European Central Bank (ECB) president Mario Draghi that the ECB would do "whatever it takes" to keep the eurozone intact. The ECB's reputation would be damaged greatly should crisis recur in Spain, Portugal, Ireland, etc., now that the world knows the ECB will not do "whatever it takes." This is a recipe for a new recession in Europe spreading from the EU periphery. The German demands are particularly "grotesque," as Krugman says, when you consider that Greece has already endured 25+% unemployment for three years (see chart). This is an unemployment rate that the United States never saw even at the height of the Great Depression in 1933, when it peaked at 24.9%.
source: tradingeconomics.com

However, I believe Krugman's argument actually overlooks an important point. He writes:

But still, let’s be clear: what we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line.

His point is that eurozone membership has removed Greece's ability to exercise monetary policy autonomy and respond to its specific conditions, including via currency devaluation. Indeed, there can be no doubt that monetary union was flawed from the start. But Krugman overestimates the ability of devaluation to fix an economic crisis. At the same time, he underestimates the ability of creditors to destroy a government whose economic policies they disapprove of.

 The mega-example of this, of course, is the Latin American debt crisis of the 1980s. Mexico, Brazil, and all the other victims of this crisis (caused primarily by the U.S. Federal Reserve cranking up interest rates to astronomical levels in the late 1970s and early 1980s, which in turn caused an unprecedented rise in the value of the U.S. dollar and a global recession) were "bailed out" by the International Monetary Fund (IMF) in order to prevent the collapse of creditor banks in the United States, but were subject to strict austerity, with the same results we've seen in the EU. Indeed, in virtually every Latin American country income per capita was lower in 1990 than at the start of the crisis in 1982, giving rise to the term "lost decade of development" to describe these events. Supposedly, the IMF learned its lesson after the Asian financial crisis that austerity packages didn't work. Krugman has argued this many times (one example here). Indeed, the IMF has seemed to be more of a voice of sanity in the current crisis than in either the Latin American or Asian crises. Yet, in the endgame of the Greek crisis, this seems to have fallen away, with the IMF going along with the EU on Greek austerity. Something is seriously wrong here.

But there is another important example to mention, where the IMF was not involved. This, too, was a result of the Fed-caused global recession, this time in France. After Francois Mitterrand and the Socialist Party swept to power in 1981, among the government's many policy changes was an attempt at Keynesian stimulus. However, this was met by massive capital flight. The problem was that the French franc was losing so much value that the government had to reverse its policies. For example, the franc was 4.6453 to the dollar in January 1981, but fell to 8.0442 by August 1983, 9.3041 by September 1984, and 10.0933 in February 1985. The takeaway is that even having floating exchange rates does not guarantee that you can maintain your policy independence.

Events are moving very rapidly; perhaps the EU will find a way to prevent this disaster. But at the moment, things look very grim.

Greece may be first head-on challenge to Eurozone austerity

Yesterday Greece elected a new anti-austerity party, Syriza, to lead its next government. New prime minister Alexis Tsipras has pledged to end the austerity measures forced on Greece in the wake of the world financial crisis. Syriza is two votes shy of a majority in the Greek parliament, and announced a coalition last night with a right-wing Euroskeptic party, the Independent Greeks.

Syriza campaigned on a platform of ending the austerity measures and renegotiating its debt with the so-called "troika" of the International Monetary Fund, European Central Bank, and the European Union. The German government is strongly opposed to any debt forgiveness, but supporters of Syriza, such as the Jubilee Debt Campaign, are quick to point out that in 1953 it was Germany that received substantial debt forgiveness, with half its debt written off. And let's also not forget that despite Germany's self-image of economic virtue, a large part of its current world-topping trade surplus comes from the fact that the euro is undervalued for Germany.

As Paul Krugman points out, while critics inside and outside Greece routinely refer to Syriza as "hard left," "left-wing," etc., "it’s actually preaching fairly conventional economics, while the supposedly responsible officials of Brussels and Berlin have been relying on radical doctrines like expansionary austerity and a growth cliff at 90 percent." He quotes Francesco Saraceno: "On closer inspection, it seems far more radical the position of those who, despite having grossly underestimated the negative effects of austerity, ask for more of the same; of those who insist on advocating supply-side reforms to cope with a chronic lack of demand..."

 This lack of demand is reflected in Greece's unemployment rate, which has been above 25% since July 2012. It has retreated to 25.8% from a high of 28% in 2013, but because its gross domestic product has fallen so much, the country's debt/GDP has continued to increase despite its austerity policies. Indeed, the ratio has increased because of austerity.

It remains to be seen how successful Syriza will be. But it is already serving as an inspiration to other anti-austerity parties, notably Podemos in Spain, which still has an unemployment rate of 23.7%.

Austerity policies remain very much in play in the United States, with us today seeing an announcement of a bipartisan House committee on Social Security "reform" (read: cuts). It is good to finally see some hope that Europe is beginning to reject the politics of austerity.

Irish Austerity Exodus Continues

The Eurozone experiment in austerity continues to fail as the peripheral countries endure ongoing cuts. Following up on my post of August 15, it's time to look at the most recent Irish immigration data to update it through April 2013 (Ireland records population data from May 1 to April 30) and see how it affects the reported unemployment rate. The picture remains ugly, with emigration climbing once again, from 87,100 in 2011-2012 to 89,000 in 2012-13. Immigration increased by 3200, so net emigration fell by 1300, with net out-migration over the year declining by about 3% to 33,100. Here are the details:

	Year ending
		April 2012	April 2013
	Immigration	52,700	55,900
	Emigration	87,100	89,000
	Net migration	-34,400	-33,100
	of which Irish nationals	-25,900	-35,200

Source: Central Statistics Office Ireland


Take a good look at the last line: Net emigration by the Irish themselves increased by 35.9% and accounts for all net out-migration; there was net in-migration by non-Irish citizens of 2100 in 2012-13. Indeed, the Irish comprised 57.2% of all emigrants in the most recent report.

What was the effect of emigration on the unemployment rate? Once again in 2013, people in the age group closest to what we would consider prime-age workers (15-64, given how Ireland reports immigration by age groups; see Table 4 of the linked report) left the country at a higher rate than children and seniors, with total out-migration for those 15-64 of 35,300. That brings total out-migration for population years 2010-2013 to 126,000.

Since April 2013 data is a much better match for Ireland's official first-quarter 2013 unemployment data than April 2012 was, I am going to repeat my calculation from August, still using Q1 2013 unemployment of 13.7% as my base. Again, there were 292,000 officially unemployed in the first quarter; dividing by 0.137 gives an estimated workforce of 2,131,387. We now add 126,000 to numerator and denominator to get the maximum potential unemployment rate, which would exist if all 126,000 were in the labor force and unemployed: 418,000/2,257,387, or 18.5%.

Even if we add in only those in the most prime working-age group in the Irish statistics, those from 25 to 44 years old, we still find that the imputed unemployment rate exceeds the country's maximum during this crisis of 15.1%. 2013's 12,500 net out-migration in this age group brings the 2010-2013 total to 48,500; adding this to the numerator and denominator gives us 340,500/2,179,887 or 15.6%.

Paul Krugman points out that we can also see this by looking at Ireland's employment rate. Over 2.1 million were employed in the third quarter of 2007; in the second quarter of 2013, the number is still far depressed at 1,869,900, which represents a 1.8% increase from a year earlier.

Finally, the overall picture for the EU and the eurozone has deteriorated over the previous year: EU unemployment rose from 10.6% in August 2012 to 10.9% in August 2013 (most recent month available), while eurozone unemployment rose from 11.5% in August 2012 to 12.0% in August 2013. Both figures were down a hair from several months earlier. But in Greece, new records continue to be set, with unemployment in June 2013 (most recent month available) hitting 27.9%. By contrast, as Eurostat shows, unemployment has steadily declined in the United States and Japan.

Unfortunately and unsurprisingly, the evidence that austerity has failed in Europe still is not affecting EU policy, nor has it stopped the cacophony of voices in the United States calling for more austerity. While Republicans supposedly "lost" the government shutdown crisis, they succeeded in locking in sequester-level government spending until the next crisis, and sequester II will be here soon. God help us.

Cross-posted at Angry Bear.

Annals of Austerity FAIL, Eurozone Redux

July 31 saw the latest release of European Union unemployment numbers, and Monday's gross domestic product figures brought no joy, especially for Greece. As Think Progress reports, Greek unemployment hit a new record of 27.6 % in May, while Spain's June unemployment figure was 26.3%, according to Eurostat. As the world's biggest experiment in austerity, the European Union continues to prove a failure. Below is the Eurostat figure for unemployment in member states for June, including new (as of July 1) member Croatia, designated HR (click for larger image).

Source: Eurostat

As reported at first at Reuters, Greece's gross domestic product has fallen by 23% since January 2008. Anyway you slice it, that's a depression, not a recession. Despite austerity, the Greek economy has gotten sicker and sicker.

But, wait! you say. What about Ireland? Its unemployment rate has dropped an estimated 1.5 percentage points from its January 2012 peak of 15.1% to just 13.6% in June 2013. Isn't austerity finally paying off there?

If only that were so. What actually is happening is that Ireland has returned to its historical solution of substantial out-migration to reduce the number of unemployed workers that show up in the official data. And yes, the numbers are way more than enough to wipe out the apparent 1.5 point drop.

According to the Central Statistics Office Ireland (Table 5), emigration has surged from 72,000 in 2009, the last year of net in-migration, to 87,100 in 2012, when net out-migration was 34,400. If you look at net emigration of those 15-64, the closest we can get with the data to prime working age, the situation is even somewhat worse. Over 2010-2012, net out-migration in that age group has totaled 90,700.

I calculate the potential effect on the unemployment rate as follows. Ireland only compiles official unemployment data quarterly, and makes monthly estimates in between. So the last official unemployment rate was 13.7% for the first quarter of this year. According to the CSO, there were 292,000 unemployed then. Dividing by 0.137, we get a labor force of 2,131,387, subject to rounding error. Now add 90,700 to both numerator and denominator, and the maximum potential unemployment rate, if all of those people were in the labor force and unemployed, is 382,700/2,222,087 or 17.2%.

Now, certainly some of the 15-24 year olds would not be in the labor force, though many will. Even if we restrict ourselves to the 25-44 age group, net out-migration for 2010-2012 comes to 36,000, which would bring the unemployment rate back to 15.1%, equal to the worst month since the recession began.

We can see, then, that austerity is sinking all boats. Greece has passed Spain in unemployment and is producing barely 3/4 what it did in 2008. Ireland's reduction in unemployment is a mirage based on emigration. The same is true in Latvia and Lithuania, by the way, which the Irish Times reports have lost 7.6% and 10.1% of their population between 2007 and 2012. As the paper notes, "If Spain and Italy had lost the same proportion, it would have been 11 million."

Yet the drumbeat for austerity continues. The sequester goes on. And millions suffer needlessly.

Cross-posted at Angry Bear as "Austerity Sinks All Boats."