Tag Archives: finacial crisis

Let Greece go bust

No one wished for the current crisis in Europe, but that it happens is still an expression of conscious politics. The EU’s four freedoms and the introduction of the euro is the basis for the crisis we see today. The EU-system changes power conditions in the labor market, high unemployment reduces the unions power – that is why we have both the crisis and the constant attacks on the rights of working people.

When Greece adopted the euro, two very important things happened. First of all, interest rates fell dramatically, money was cheap. Investors the world over decided that all euro countries suddenly was equally safe payers and that it therefore was logical to demand the same rate from Greece as from Germany. It meant that Greece could borrow money and for whatever they wanted. They imported German interest rates without importing the German budget discipline.

The second thing that happened was that Greece no longer had the ability to devalue to make their debts bearable. A country like the U.S. can never go bankrupt. We hear a lot about the large U.S. government debt, but unless the United States wants to,it cannot go bankrupt. Their borrowing is in U.S. dollars. If the debt becomes too large, it is easy for the U.S. to start the printing press and make more than enough dollars to pay all they have loaned. This opportunity does not exist for Greece, nor any of the other euro countries.

When the “normal” form of devaluations no longer exists the alternative is what is called internal devaluation. Now, what is an internal devaluation?

It is to reduce wages of ordinary working people in a country. This makes production cheaper, exports improves and the debt may be possible to pay. Many countries have tried this cure, Argentina, CFA area, the Baltic countries. For most it went very badly. Argentina finally had to break the peg with the dollar and devalue, the Baltic countries ended up with a sharp decline in GDP and very much lower wages for most people.

An internal devaluation leads (almost) always fall in GDP, which means that the debt is more difficult to bear. Furthermore, many people point out that the internal devaluation in Greece, means that the debt will rise from today’s impossible level to almost 200% of GDP.

The failure is almost inevitable.

But in today’s discussion is the major focus on banks, government debt, bonds, and investors. It is much less focus on those who must bear the burden of an internal devaluation.

In Greece, wages has declined by around 30 percent, both in private and public sectors. 100 000 public employees have been dismissed, pensions have gone down considerably and taxes are rising sharply. To use a random example,  a clerk in a municipality in Greece has seen their pay fall from 2000 dollar a month to 1300 dollars a month. At the same time VAT has increase from 13 to 23 percent, all have received additional incometaxes of between one and four per cent and a significant property tax has been instituted.

It should be mentioned, of course, the Greeks might not have always been the most observant at paying their taxes, either with joy or grief, especially rich Greeks have failed to pay. But it is ordinary people who get the burden.

In short, if a country devalues ​​the banks and the investors must carry most of the loss, while with an internal devaluation (at least initially working people most of the burden. Now the EU must allow Greece to go “bankrupt”, the debt must be hammered down.

Afterwards let us handle a possible bankcrisis. It is better to let the banks be nationalized than to let ordinary people bear the burden of the crisis.

 

PS. I know this is simplified, a banking crisis will have serious consequences for ordinary people, but I think the consequences will be much less.

Norway must aid Iceland

Iceland has major financial problems. The currency is in free fall, and interest rates rises sharply. Iceland has already nationalised the third largest bank in the country.

This has triggered a debate in Iceland about EU membership and adoption of the euro as currency. I do not not have strong opinions about how Island should arrange themselves in relation to the EU, but I think that it’s time for that Norway do what we can to help Iceland in this situation. Norway is in a very strong financial position. We can make sure that the icelandic government and central bankhave to money and credibility to back up it’s currency and contribute to get the Icelandic economy back up.

The BBC writes today:

The country’s credit rating was slashed after the Glitnir nationalisation. The Icelandic krona, which had lost more than half its value since last summer, lost a further 14% this week.

The government is openly divided on whether to keep the currency or ditch it – and adopt the euro.

There’s a growing sense that this country, with just 300,000 people, is too small to cope. Sigurdur Kristjanson, an MP from the prime minister’s party, disagrees.

I’m no economist, but I’m sure that Norway has the ability to back up a neighbour in need. The Norwegian primeminister and minister of finance should let the Icelandic government know that we are ready to help if they need it.

It’s the least we should do.

The Icelandic economy is in uproar, picture borrowed from Wikipedia
The Icelandic economy is in uproar, picture borrowed from Wikipedia

Updated:
I found an interesting blog here