Thursday 29 September 2011

Does Germany actually want to solve the European crisis?

It is becoming increasingly clear that the German leadership may no longer be interested in seeing an orderly solution to the Greek debt crisis or to the wider crisis of confidence in the European banking sector. Alternatively, it may not be competent to do so.

Over the weekend, the IMF-World Bank annual meeting in Washington DC produced a temporary calm on the markets after European leaders reassured their G20 counterparts that they, and the ECB, would do everything possible to address European sovereign debt and banking capitalisation issues.

The markets rebounded on Monday and Tuesday, helped by the fact that the Greek parliament passed another round of austerity measures on Tuesday evening. Greek Prime Minister George Papandreou was not even in Greece at the time: he was meeting Angela Merkel in Berlin, where the German Chancellor declared that she wanted to see a “strong Greece in the Eurozone.”

The sentiment was reinforced by the announcement that the Troika “inspectors” would be returning to Greece this week, but also that Private Sector Involvement (PSI) had reached 90% in the second bail-out package.

Lo and behold, as if things were suddenly going too well, today the issue of re-opening the PSI agreement was suddenly broached by Wolfgang Schauble and, apparently, Angela Merkel. As the Financial Times reports:

While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt.

This has had a predictable dampening effect, with pushback led by German banks. As Reuters reports:

German banks are resisting political pressure for them to accept larger writedowns, or “haircuts,” on their holdings of Greek government debt, a person briefed on the talks said. German lawmakers have called on lenders in recent days to accept a larger writedown than the 21 percent proposed by the Institute of International Finance, an industry lobby group, said the person, who declined to be identified because the talks are private. Banks are concerned the IIF agreement may unravel if they are forced to accept further losses, the person said.

This new initiative, expressed just 24 hours before the German Parliament finally votes on extending the EFSF (which was initially proposed on July 21st, but has still not been enacted), follows a range of similar flip-flops:

·       Wolfgang Schauble initially declared, in July 2011, that Greece would receive the fifth bail-out tranche before the vote. Once the vote on the Mid-Term Fiscal Adjustment Programme was passed in the Greek parliament, Mr. Schauble reversed opinion, stating that the fifth tranche would only be released once the regular inspection took place.

·       The same official has been discussing a “Plan B” on Greek debt, which implies a haircut of at least 50%, notably last week. Among other factors, this has led to a massive decline in share prices as uncertainty over the Greek bail-out broke out again last week.

·       Most memorably, FDP leader Philipp Rossler had to be muzzled by Angela Merkel for suggesting that a Greek default and Eurozone exit were likely three weeks ago. It is ironic, to say the least, that this same person is supposed to be leading a delegation of German businessmen interested in investing in Greece at the beginning of October.

It should be a truism that in a financial crisis, abrupt changes in direction of this sort do not help to solve the situation. Timothy Geithner’s words last week remain as true then as they are today: 

“What is very damaging (in Europe) from the outside is not the divisiveness about the broader debate, about strategy, but about the ongoing conflict between governments and the central bank, and you need both to work together to do what is essential to the resolution of any crisis,” he said.

I do expect the Bundestag to vote through the EFSF expansion tomorrow. But the German policy response is as far behind the curve this week as it was last week. With Germany’s elected leadership changing their opinion every 2 days and creating incredible market uncertainty, it will be a miracle if the European economy survives unscathed.

Related Posts

Zero Hour Approaches. September 23, 2011 

Sleepwalking into Disaster. September 18, 2011

© Philip Ammerman, 2011

Sunday 25 September 2011

The European Consulting Network (ECN) launches in beta version.

Through ECN, consultancies, experts, universities, research institutes and other knowledge workers have access to a unique platform for cooperation on procurement, subcontracting, consortia and recruitment. Our intelligence system provides an innovative analytics package for evaluating consultancy expertise and project experience.

Friday 23 September 2011

Zero Hour Approaches

Things have gotten to the point where we may be reaching “zero hour”. My core risk assessment in place since March 1st and earlier is materialising fast.

On March 1st 2011 I wrote that we are seeing the first symptoms of a far more serious global situation, thanks to rising public debt, slowing economic growth, and a lack of political will.

On July 13th 2011, I did a quick analysis of the US debt situation, and why the Eurozone had to find a quick resolution to the Greek crisis to prevent international contagion.

On August 22nd 2011 I wrote that the Greek situation was trending worse, and that core indicators were indicating a rapidly slowing economy, particularly in China, and that domestic political issues jeopardised the ratification of the EFSF. My forecast on premature elections materialised this week in Slovenia, of all places. I expect more to follow.

September has proven to be the worse month yet. On September 6th 2011 I wrote that we were entering Black September. On September 18th 2011 I reported on the disappointing failure of the Eurozone finance ministers’ summit and listed nine reasons why the situation was extremely alarming. Italy was downgraded on Tuesday, September 20th 2011. Thursday, internal PASOK opposition to the new austerity measures was vitriolic. It is not certain that these measures will pass, or that the government will survive. (I do believe there is a 60% chance they will rally and pass the measures, but it's impossible to be certain). 

There is now essentially one chance to get by this right: strong, coordinated action needs to be agreed upon and delivered by the G20 by Monday at the IMF/World Bank meeting in Washington. This mst include a public commitment to recapitalise European banks and defend the sovereigns with at least EUR 2 trillion in commitments, probably EUR 800 bln from the EFSF, EUR 1 trillion from the ECB, and hopefully EUR 200 bln from the US, Canada and BRICS. Absent this, the widely-expected sell-off may begin.

Yet even these actions do not offset the economic fundamentals: they merely buy time.

I would also like to warn once again on unseen risks: Toxic debt and derivatives contracts in the European banking system are ever-present. Austria and Denmark face major banking sector risks at present, the former from derivatives exposure, the latter from rising interest costs and refinancing needs. Spanish and Italian banking problems remain well-known; French banks have major exposure, which has been well-documented in the past 2 weeks. Switzerland, Luxembourg and Belgium are black holes. Several US banks, in turn, are exposed to European banks, particularly French ones. Commercial property requires re-financing and restructuring. The IMF has warned that European banks need about EUR 300 billion in capital support; I believe this may be higher. I still have not understood how some banks can have a loan and derivative book which can be, for one institution alone, more than 100% or even 300% the GDP of their home country.

Given these weaknesses, and given rising rates for Italian, Spanish and other bond spreads, as well as the opacity on Chinese and US public debt, it’s clear that the problem in public finance is accelerating.

It should be clear that the Greek tail that has been wagging the dog since the end of October is so preposterous a thesis as to be rejected. Eurozone leaders have been perfectly content to demonise Greece, but the problems in their respective countries are far, far higher, and far more substantial.

The “disappearance” of private sector involvement (PSI) in the second Greek bail-out, and the evaporating European support for EFSF recapitalisation, most likely means that European governments and banks are no longer willing to spend their firepower on Greece. They are probably reserving it for their own emergencies.

Apart from passing the new austerity law, which will intensify the recession/depression, the other hope is for a government of national unity. Elections in Greece would have nearly the same effect as not passing the new austerity law. It’s a massive Catch 22. The total failure of Greek politics, and the wider socio-economic system which supports them.

Some relevant reading from developments this week:

On Monday, Standard & Poor’s downgraded Italy. IMF chief economist Olivier Blanchard stated that "There is a wide perception that policy-makers are one step behind markets.” This came a lot sooner than I expected, but it will soon be followed by Moody’s.

On Wednesday, Fed Chairman Ben Bernanke announced a $ 400 bln debt “twist”, but announced that the US faced “significant downside risks”. The DJIA fell by 3%.

On Thursday, the Dow fell by another 400 points; Reuters attributes this to recession fears and European sovereign debt.

On Thursday, seven world leaders also demanded that Europe’s leaders get a handle on their sovereign debt crisis in a letter to France, which chairs the G20: "Euro zone governments and institutions must act swiftly to resolve the euro crisis and all European economies must confront the debt overhang to prevent contagion to the wider global economy

Mohammed El Erian, PIMCO MD, comments on the emerging crisis on Bloomberg: World on the Eve of the Next Financial Crisis.

El Erian also published a must-read in the Financial Times: French Banks could tip Europe into a Full-Blown Crisis.

© Philip Ammerman

Thursday 22 September 2011

Will PASOK survive next week?

The new tax measures proposed by the Greek government as a condition for meeting its 2011 fiscal targets and receiving the 6th tranche of the first bail-out were published yesterday. These include:

1.   A reduction of the tax-free income bracket from EUR 8,000 per year to EUR 5,000 per year.

2.  Implementation of a new wage structure which minimises costs between the central government and the semi-governmental organisations. In practise, this means a reduction in labour costs for employees of semi-governmental organisations.

3.   Reduction of all pensions above EUR 1,200 / month. For those above EUR 1,200 per month, reduction by 20% (though presumably not below EUR 1,200/month). For retirees of 55 years or below, reduction of the pension benefit above EUR 1,000 per month by 40%.

4.    The transfer of 30,000 public sector employees to a “labour reserve” in 2011, with a further 30,000 per year to 2015 (theoretically up to 150,000 total). This labour reserve status lasts for 12 months, and includes a salary of 60% basic wage (probably between EUR 700-800 per month). At the end of the 12 months, the employee is fired.

5.  Additional structural measures, including labour market deregulation, deregulation of closed professions, privatisations and public sector agency restructuring.

6.     The implementation of a new tax system, eliminating loopholes.

The good news in this package is that the equalisation of tax on heating oil and driving fuel has been delayed to 2012.

The new measures were supposed to be voted today, but the absence of four PASOK deputies with health problems has delayed the vote until Tuesday. Given the rapid deterioration in public confidence in the government, and the evidently harsh nature of these measures, I have to ask one simple question: what happens if PASOK loses the vote?

PASOK has a majority of only 6 votes in Parliament at present. The level of rage is such that it would not be unlikely for 7-10 MPs to be absent for health reasons, or to vote against, or to resign between now and then.

This would set off a crisis, as it would mean a vote of no confidence might have to be held, unless the parliamentary majority shows it can pass an additional measure without such a vote. Should PASOK lose the vote of confidence, it means elections. It also means further massive contagion in Europe.

The Financial Times included a rather glib editorial on September 20th: Greece’s Tragedy is Made at Home. It contains this rather ridiculous assertion:

The troika can credibly threaten to withhold aid for three months. Unless Athens makes good on its promises, that is what it should do. If the Greek state stops paying salaries and pensions, that is a tragedy – but one of Athens’ own making, which others should not take it upon themselves to prevent. Not just because they can afford to – Greek middle class penury will not trigger a financial market meltdown – but because it could finally force the Greek political class to face the truth.

This argument totally ignores the major reforms made to date which, whatever your opinion of them, required real political courage. It also totally ignores the fact that any such event would lead to the downfall of the government. And the PASOK government, whatever its faults, is the only entity in Greece that is still fighting for this mess of conflicting policy goals pressed upon it by the Troika. Should the government fall, the Troika can forget any hopes of a smooth landing.

Next week, the Financial Times may receive just what it’s asking for.

Related Posts:

Sleepwalking into Disaster September 18, 2011

© Philip Ammerman, 2011

Wednesday 21 September 2011

Public Sector Employment in Greece – Myths and Realities

The debate over Greek public sector employment is characterised by a lack of real data and much stereotyping. In 2011, Greece’s public sector employment is 8% of the population and 18% of the active labour force. In the United States, public employment accounts for 7% of the total population and 15% of the labour force. Greece, however, has an extensive public provision of education and healthcare, whereas in the United States these functions are largely provide by the private sector. The OECD confirms this: "Greece has one of the lowest rates of public employment among OECD countries, with general government employing just 7.9% of the total labour force in 2008."
The latest Troika demands on Greece require—according to media reports last night--an immediate dismissal of up to 25,000 staff, hired since PASOK took power in 2009, as well as the placement into a labour reserve of a much larger number of staff, possibly up to 100,000 by 2015. It is impossible to confirm this as of Wednesday morning, since no official communiqué has been issued.

The issue of employment in the public sector is a difficult one to address, and not something which should normally be done as an immediate cost-cutting measure in a crisis of this magnitude. A primary factor for a rational debate on public sector employment is to understand and agree what Greece as a society expects from its public sector, and which tasks are consider it necessary.

This debate has largely been stifled by the growth in the public sector since PASOK first took power in 1981. This growth was characterised by introduction of left-wing unions into the civil service on a large scale, which had previously been banned by the military dictatorship which fell in 1974 and its precedents, dating back to the fears of a Communist take-over in 1944-1945. Together with this leftward shift in orientation came a large expansion in the role of the state, or at least in the financial expenditure the state was prepared to make. The history of Greece since then has been that of state expenditure expansion and contraction, of long periods of expansion followed by short periods of austerity.

Since Greece’s European Union entry, this process was heavily driven by EU funding and by the “convergence” philosophy. Greece was granted billions in structural and cohesion funds every year, intended to bring its infrastructure, institutions and private sector up to a competitive level so that it could achieve “convergence” with the existing EU member states. Part of this included the increase of wages in the public and private sectors. It is therefore ironic to hear today that Greek wages have increase more than German ones, and therefore must be cut. This increase in wages and in GDP/capita was precisely the point of convergence and the so-called “Objective 1“ regions.

This EU money was almost entirely channelled through ministries, which led in turn to the expansion of patronage and corruption in public contracts. No political party in Greece disputes this: most campaign on the premise that they will end corruption; then turn around and continue these practises once in power. Oddly enough, the EU never took real measures to prevent this, despite overwhelming evidence of common practise over time. I should add that neither occurrence is restricted to Greece.

The fact that EU funding was typically reimbursed after evidence of expenditure was made also contributed to Greece’s ballooning public debt: the government borrowed money to complete over-priced, inefficient projects, and ignored commercial reality. In many ways, EU funding played the same role as natural gas in Holland in the 1970s, or petroleum in Saudi Arabia today: a condition known as “Dutch disease.” This leads to the declining competitiveness of exports due to inflation, and in the case of Greece, a massive expansion of over-priced public sector projects financed through EU funds.

The end result of all this is a society and political system which finds itself in a struggle between what it views as public sector privilege and political spoils and the fact that the foreign money (loans or subsidies) to pay for this has run out. The focal point of this struggle is the public sector.

The debate as to what Greece wants from its public sector has never been held. There is no end of slogans, such as “free education for all”, or “permanent employment in the civil service” but these slogans do not reflect reality. We have not heard a debate or seen any analysis as to which sectors of the public sector deserve higher salaries and investments in productivity (and there are many such sectors), and which sectors require a down-sizing or restructuring. There is no global plan for liberalising state involvement in some sectors, such as education and healthcare, or for improving services to citizens through the use of egovernment.

And we are unlikely to hear this, as long as the public sector is associated with cost, and therefore costs which have to be cut as part of an austerity programme.

As with many things in Greece which emerge from the Troika or the government, there is a great deal of confusion and a lack of clear communication. But one of the “facts” being tossed about Greece lately is that there are more that 1 million people employed in the public sector, while others assert that Greece has one of the highest ratios of public sector employment in the world. One friend on Facebook made the assertion that Greece has more public employees than the United States.

I wanted to test these assertions to see if they were correct. As usual, data is fragmented, and several assumptions have been made. I will explain these in depth, comparing Greece to the United States. A comparison with France or Germany would be even more appropriate, finding data from these countries will take even more time. 

General government employees in Greece are numbered at 705,645 in the Mid-Term Fiscal Consolidation Plan approved by Greece in July 2011. The general government category includes national, regional and local (municipal) employees. The main problem is to understand how many employees are in the wider public sector, i.e. semi-governmental organisations (DEKO) and other state organisations with have the status of private sector legal registration. This number is impossible to access with any reliability: although the government has completed a census on this, I have not been able to find the final number.

I’ve taken the number of 175,000 as representing employment in this sector. Although this may seem low to most people, we have to remember that the government ownership share in many DEKO is actually quite low. It would be a mistake, in my opinion, to count OTE, the National Bank of Greece, and equivalent organisations in the wider public sector. However, it is also true that the government’s role as a shareholder in these DEKO affects labour law, pension spending and general productivity in these companies. The result seen, in any case, is my best estimate. If anyone can provide a better one, I would be pleased to re-run the numbers.

The total labour force in Greece is 4,967,200. This is defined as the segment of population over 15 years old which is not in education or training, and which is looking for work. (It therefore includes the unemployed). We should remember that one of the main problems with Greek economic competitiveness is the size of the active labour force: Greek women have one of the lowest employment rates in the European Union. Any future plan for improving the economy must focus on improving female employment and labour force participation.

The total population, according to the National Statistics Organisation (ELSTAT) was estimated at 11,257,290 in the first quarter of 2011. Thus, Greece’s public sector employment is 8% of the population, and 18% of the active labour force of the country. There was one public employee for every 13 citizens.

General Government
Wider Public Sector
Total Public Sector Employment
Total Labour Force
Total Population
Public Sector Employment as:

% Total Population
% Total Labour Force
Population per Public Employee

We can compare this with the United States, which has excellent labour statistics available on and the Bureau of Labour Statistics. US general government employment in December 2010 is calculated at 22,249,000 people. This includes:

·       2,852,000 Federal Employees
·       5,142,000 State Employees (full and part time)
·       14,255,000 Local Employees (full and part time)

Not included in this are certain government agencies, such as the US Postal Service. I’ve included this as a separate line under “Wider Public Sector” employment, but have not been able to find a complete count.

The Bureau of Labour Statistics records 153,560,000 people in the active labour force in the first quarter of 2011. The site records 312,257,855 total population on September 20th, 2011 (these dates do not match, but are presumably close enough and flatter the US results).

This yields a result of 7% public employment to the total population, and 15% of public employment in the total labour force. There are 14 people per public employ in the United States.

We should also remember that there is a big difference between the US and Greece in terms of public sector service provision. In Greece, for instance, healthcare and education are provided by the state; in the United States they are predominantly provided by the private sector. If “like-for-like” agencies were compared, it is highly likely that Greek and American public sector employment would be much more similar than we think.

My calculations are confirmed by the OECD, in its “Government at a Glance 2011 – Greece” publication, which quotes:

Greece has one of the lowest rates of public employment among OECD countries, with general government employing just 7.9% of the total labour force in 2008. This is a slight increase from 2000, when the rate was 6.8%. Across the OECD area, the share of government employment ranges from 6.7% to 29.3%, with an average of 15%. The Greek government has plans to further decrease this share, by replacing only 20% of staff leaving on retirement. Public employment is also highly centralised in Greece, with over 80% of staff working at the central government level.

So the question must be asked: will cutting the public sector, which has already suffered a massive decline in wages and headcount (there were a net 82,000 departures in 2010), yield results?

I have no doubt it will yield immediate financial results in the form of lower expenditure on salaries. However, I doubt it will render any further benefits beyond this, and the negative impacts will be far higher:

a.     Already, public sector workers are not working as effectively as possible in light of public sector cutbacks. This is particularly the case in the Revenue services, who are the tip to the spear in the current struggle to balance the budget.

b.     These public sector workers are all consumers. Once they are fired or “idled”, GDP and tax income fall through the elimination of this income.

c.     The loss of productivity for the remainder of the system will increase. Only if these workers are replaced with productivity enhancing processes, i.e. egovernment or elimination of authority-seeking processes, will there be a real impact on citizens and businesses.

d.     The unemployment rate will rise, creating further financial expenses (via unemployment payments) as well as a downward, long-term drag on GDP.

Perhaps most seriously, this step risks mobilising all public sector workers against the Troika and against the PASOK government. And if the government falls, there is no realistic political alternative for the Troika’s plan.

As I have written before: the financial shortfall so far in 2011 is minor and is attributed to rational policy choices. The negative economic impacts of the austerity programme as well as structural economic factors are going to increase as we go into the winter, creating a greater fall in GDP and a greater rise in unemployment.

By implementing these reported measures, the Troika risks fundamentally de-railing the Greek reform programme. They are unnecessary, and a high price to pay for a very small and short-term economic return. There are other alternatives available, and these should be explored first.

© Philip Ammerman, 2011