One year ago Greece were awarded a bailout of 110 billion euros on condition they met austerity demands and controlled their fiscal position adequately. Now it seems this 110 billion isn't enough. The Greek government still can't meet their commitments to their creditors and certainly can't borrow at the bond rates they face on the open market (c. 20%).
And so what is to be done? Should they default? Restructure the debt further into the future? Take a haircut as it is called and snip 30% off of all bond maturities? Or should they be given more money by the ECB/EU/IMF?
My guess is they are going to be given more money. Here's why.
A Greek default (by that I mean any haircut, debt repayment extension etc dressed up as restructuring) will be too disastrous for the EU. Never mind the effect on Greece, where Greek banks hold Government bonds; it will hurt other Euro-based holders of the bonds like German banks. Also, it will set the way for the Irish and Portuguese to not have to meet their creditors. A default would undoubtedly weaken the euro, but the Germans don't need a weaker euro given their exports already have reached record quantities this month.
11 May 2011
is there anybody out there?
Hi. Okay, it's been a while. Sorry. I've been busy.
Ah, come on. I said sorry didn't I?
Ah, come on. I said sorry didn't I?
10 Feb 2010
Greece
I have lived in Greece for 14 years and have always loved life here which is at turn exhilerating, opportunist, infuriating and never dull. But now, with the current sovereign debt crisis it is an especially exciting place to be as an economist. Everyone is discussing the financial crisis the goverment has found itself in and everyone has a view on the policies the government is passing in an attempt to control the debt.
The Greek state has no money and has been forced to borrow (sale of bonds) at a crushing 6%+ interest rate. In 2009 the budget deficit (how much that year's government spending exceeded tax revenue) was equal to 12.7% of GDP. This essentially is added to previous years' debts to produce a whopping National Debt of 115% and rising. Greece has an overstaffed civil service none of which can be made redundant. There is a pension crisis looming, as Greece has the 9th largest median age among 189 countries and a large proportion of its population have retired or will retire soon. Many retire on full pension at 58 years of age. Tax receipts are low. A recent study estimated that 900 million (yes - 900 million!) transactions occur every year 'under' the tax radar in the hidden economy - that is 3 per day for every man woman and child in Greece! This involves doctors not giving receipts, teachers giving private tuition and buiding work done for cash etc.
If Greece still had the drachma, the currency would be devalued, and a default on the debt would occur. Greek goods would regain price competitiveness and energy would be breathed into the economy. But with the euro, this can't happen. If Greece is allowed to sink into default, unable to pay its debts, this corner of the eurozone would cause a massive stink for the single currency. Much of the Greek debt is held by fellow Europeans. But if it is bailed out by the EU, it gives a green light to other economies that they too can continue to overspend (Portugal, Spain and even Italy).
That the budget deficit will fall from 12.7% of GDP in 2009 to 8.7% in 2010, then 2% by 2012 seems possible. But the government needs to address the fundamentals that took Greece into this mess. There has to be an easier way for small businesses to set up and pay tax. There cannot be a job-for-life mentality in the public sector. Does any other country offer that for their civil servants? Immunity from job loss? And workers must be prepared to work to a reasonable age if they are to qualify for a full pension.
I have always admired the healthy scepticism and frequent outright resistance to authority in Greece. From driving the wrong way up a one way street, to smoking in restaurants, to shops giving a discount for cash (no receipt) seemed welcome compared to the nanny state emerging in the UK and other countries. I can't quite believe that the laudible efforts of the new government will change Greeks.
A British banker working in Athens once said to me, "there is no one better than the Greeks for entrepreneurial spirit in the private sector - and no one worse than the Greeks for inefficiency in the public sector". This comic/tragic view was epitomised in the recent street riots in Athens when demonstrations against the state descended into battles in the streets. Instant young businessmen found a market selling handy-sized stones to demonstrators - 3 for a euro. Do you think they gave a receipt?
The Greek state has no money and has been forced to borrow (sale of bonds) at a crushing 6%+ interest rate. In 2009 the budget deficit (how much that year's government spending exceeded tax revenue) was equal to 12.7% of GDP. This essentially is added to previous years' debts to produce a whopping National Debt of 115% and rising. Greece has an overstaffed civil service none of which can be made redundant. There is a pension crisis looming, as Greece has the 9th largest median age among 189 countries and a large proportion of its population have retired or will retire soon. Many retire on full pension at 58 years of age. Tax receipts are low. A recent study estimated that 900 million (yes - 900 million!) transactions occur every year 'under' the tax radar in the hidden economy - that is 3 per day for every man woman and child in Greece! This involves doctors not giving receipts, teachers giving private tuition and buiding work done for cash etc.
If Greece still had the drachma, the currency would be devalued, and a default on the debt would occur. Greek goods would regain price competitiveness and energy would be breathed into the economy. But with the euro, this can't happen. If Greece is allowed to sink into default, unable to pay its debts, this corner of the eurozone would cause a massive stink for the single currency. Much of the Greek debt is held by fellow Europeans. But if it is bailed out by the EU, it gives a green light to other economies that they too can continue to overspend (Portugal, Spain and even Italy).
That the budget deficit will fall from 12.7% of GDP in 2009 to 8.7% in 2010, then 2% by 2012 seems possible. But the government needs to address the fundamentals that took Greece into this mess. There has to be an easier way for small businesses to set up and pay tax. There cannot be a job-for-life mentality in the public sector. Does any other country offer that for their civil servants? Immunity from job loss? And workers must be prepared to work to a reasonable age if they are to qualify for a full pension.
I have always admired the healthy scepticism and frequent outright resistance to authority in Greece. From driving the wrong way up a one way street, to smoking in restaurants, to shops giving a discount for cash (no receipt) seemed welcome compared to the nanny state emerging in the UK and other countries. I can't quite believe that the laudible efforts of the new government will change Greeks.
A British banker working in Athens once said to me, "there is no one better than the Greeks for entrepreneurial spirit in the private sector - and no one worse than the Greeks for inefficiency in the public sector". This comic/tragic view was epitomised in the recent street riots in Athens when demonstrations against the state descended into battles in the streets. Instant young businessmen found a market selling handy-sized stones to demonstrators - 3 for a euro. Do you think they gave a receipt?
26 Dec 2009
A-Level Economics at Christmas
I am very much looking forward to meeting the A-Level class of Hove College on the 28th December. If you are in the area come down and say hello. We are meeting at The Prince Albert pub in Brighton at 12.30 to discuss A-Level Economics and current issues in the economy from a VI form pupil perspective - all over a couple of drinks. See you there perhaps?
24 Dec 2009
Merry Christmas
They say there are four stages to life:
1. You believe in Father Christmas
2. You don't believe in Father Christmas
3. You are Father Christmas
4. You look like Father Christmas
I am in stage three and my youngest daughter is still in stage one, though I fear by this time next year she might well be in stage two. When that happens I will begin the transition into stage four.
Thank you for following this occasional blog this year. I hope, like me, you are looking forward to a restful few days and some nice food and drink, perhaps with close friends and relatives around you. I am looking forward to settling down to two books that have been on my 'to read' list for some time now. One is "Too big to fail" by Andrew Ross Sorkin. It's the story of the collapse of Lehmans last year and I am told, reads like a thriller. The other is Richard Parker's biography of the late great J K Galbraith.
Finally, if you are still stuck, thinking about presents, can I suggest that this year you would do well to copy one of three wise men 2000 years ago and buy some gold. Merry Christmas!
1. You believe in Father Christmas
2. You don't believe in Father Christmas
3. You are Father Christmas
4. You look like Father Christmas
I am in stage three and my youngest daughter is still in stage one, though I fear by this time next year she might well be in stage two. When that happens I will begin the transition into stage four.
Thank you for following this occasional blog this year. I hope, like me, you are looking forward to a restful few days and some nice food and drink, perhaps with close friends and relatives around you. I am looking forward to settling down to two books that have been on my 'to read' list for some time now. One is "Too big to fail" by Andrew Ross Sorkin. It's the story of the collapse of Lehmans last year and I am told, reads like a thriller. The other is Richard Parker's biography of the late great J K Galbraith.
Finally, if you are still stuck, thinking about presents, can I suggest that this year you would do well to copy one of three wise men 2000 years ago and buy some gold. Merry Christmas!
11 Dec 2009
A Christmas Test
This was the test I set my Economics students today - could you answer any of the questions?
Christmas Test
Answer any five of the following questions. All questions are worth 10 marks.
1. Assess the view that reindeer flying fast over urban areas generate considerable negative externalities and evaluate one method to reduce the external cost created.
2. In the elf labour market, is the wage elasticity of demand for elves likely to be elastic or inelastic?
3. If new EU legislation forbids the keeping of turkeys in small cages but insists farmers give turkeys more room, what is like to happen in the cranberry sauce market, given that cranberry sauce is a complement for turkey? Use diagrams in your answer.
4. “Uuuuuurrrgghhhh, I feel awful. Why did I eat that 5th slice of Christmas cake?” groaned Mr. Courts as he collapsed onto the sofa on Christmas afternoon. Using the concept of falling marginal private benefit, explain Mr. Courts's dilemma.
5. “I am only going to run 20km this morning - after all, it is Christmas!” announced Mr. Holden to his family at 7.00am on Christmas morning, wearing his new tracksuit and Nike Air training shoes and eating a piece of wholemeal toast with low-fat spread on it. “Then we'll go for a long walk before eating the all-organic Christmas dinner!” Distinguish between the private and social benefits Mr. Holden's actions create.
6. Evaluate whether the imposition of an indirect tax on wrapping paper during December would help reduce waste paper.
7. There is a road with only two houses on it. One family, the Macklins, spends thousands of euros decorating the outside of their house and garden with Christmas lights and snowmen and a beautiful Christmas tree etc, all of which can only be seen from outside. The other family on the street, the Bellamys, make no effort with their own house, but have a lovely view of the Macklins across the road. Using the concept of free riders and excludability, discuss which household derives the most benefit from this arrangement.
8. Is Father Christmas more likely to exist in a free market or command economy? Explain your answer.
9. Explain how receiving many gifts on Christmas morning could result in diminishing returns of utility and consider whether 12 presents received over 12 days would engender greater total utility than 12 presents all received on Christmas morning.
10. Father Christmas and his little helpers act as a monopoly. To what extent is the market he operates in contestable according to Baumol’s definition of contestability?
11. “By sourcing raw materials, manufacturing, and finally distributing toys on Christmas morning, Father Christmas has established a fully vertically integrated business structure and as such will be able to maximise supernormal profits despite the existence of organisational slack in his cost structure”. To what extent do you agree?
12. Use game theory to show how rival TV channels compete to attract viewers at Christmas time.
13. Is it possible for the sellers of balloons, Christmas cards, wrapping paper and holly to price discriminate?
14. Would it be in the public interest if the Office of Fair Trading and the Competition Commission investigated alleged abuse of monopoly status by Father Christmas and acted to encourage competition? Justify your answer.
15. “Christmas is merely a massive non-price strategy to boost the abnormal profits of large corporations”. To what extent do you agree? Illustrate your answer with a diagram and examples.
Top marks can be gained from funny, yet economically viable answers. Some colourful Christmas doodling/decorations can win marks too.
Christmas Test
Answer any five of the following questions. All questions are worth 10 marks.
1. Assess the view that reindeer flying fast over urban areas generate considerable negative externalities and evaluate one method to reduce the external cost created.
2. In the elf labour market, is the wage elasticity of demand for elves likely to be elastic or inelastic?
3. If new EU legislation forbids the keeping of turkeys in small cages but insists farmers give turkeys more room, what is like to happen in the cranberry sauce market, given that cranberry sauce is a complement for turkey? Use diagrams in your answer.
4. “Uuuuuurrrgghhhh, I feel awful. Why did I eat that 5th slice of Christmas cake?” groaned Mr. Courts as he collapsed onto the sofa on Christmas afternoon. Using the concept of falling marginal private benefit, explain Mr. Courts's dilemma.
5. “I am only going to run 20km this morning - after all, it is Christmas!” announced Mr. Holden to his family at 7.00am on Christmas morning, wearing his new tracksuit and Nike Air training shoes and eating a piece of wholemeal toast with low-fat spread on it. “Then we'll go for a long walk before eating the all-organic Christmas dinner!” Distinguish between the private and social benefits Mr. Holden's actions create.
6. Evaluate whether the imposition of an indirect tax on wrapping paper during December would help reduce waste paper.
7. There is a road with only two houses on it. One family, the Macklins, spends thousands of euros decorating the outside of their house and garden with Christmas lights and snowmen and a beautiful Christmas tree etc, all of which can only be seen from outside. The other family on the street, the Bellamys, make no effort with their own house, but have a lovely view of the Macklins across the road. Using the concept of free riders and excludability, discuss which household derives the most benefit from this arrangement.
8. Is Father Christmas more likely to exist in a free market or command economy? Explain your answer.
9. Explain how receiving many gifts on Christmas morning could result in diminishing returns of utility and consider whether 12 presents received over 12 days would engender greater total utility than 12 presents all received on Christmas morning.
10. Father Christmas and his little helpers act as a monopoly. To what extent is the market he operates in contestable according to Baumol’s definition of contestability?
11. “By sourcing raw materials, manufacturing, and finally distributing toys on Christmas morning, Father Christmas has established a fully vertically integrated business structure and as such will be able to maximise supernormal profits despite the existence of organisational slack in his cost structure”. To what extent do you agree?
12. Use game theory to show how rival TV channels compete to attract viewers at Christmas time.
13. Is it possible for the sellers of balloons, Christmas cards, wrapping paper and holly to price discriminate?
14. Would it be in the public interest if the Office of Fair Trading and the Competition Commission investigated alleged abuse of monopoly status by Father Christmas and acted to encourage competition? Justify your answer.
15. “Christmas is merely a massive non-price strategy to boost the abnormal profits of large corporations”. To what extent do you agree? Illustrate your answer with a diagram and examples.
Top marks can be gained from funny, yet economically viable answers. Some colourful Christmas doodling/decorations can win marks too.
9 Dec 2009
US Debt
Try this website for a fascinating insight into the size of US debt.
www.usdebtclock.org
Note the different types of debt - and see how government debt is rising yet private sector debt is falling. Watch out though - I have found this site quite addictive - it's better than TV!
www.usdebtclock.org
Note the different types of debt - and see how government debt is rising yet private sector debt is falling. Watch out though - I have found this site quite addictive - it's better than TV!
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