The Modest Proposal featured in UBS Client Magazine (Wealth Management Research) and in Basler Zeitung (Swiss Financial Newspaper)

 

 

 

That these are turbulent times I need not remind you of. But when ‘radical’ views (like our Modest Proposal) are (A)  endorsed by, on the one hand, demonstrators on the streets of Athens (whom I addressed in past weeks) and (B) promoted by banking colossus UBS in its recent Wearlth Management Research publication (intended for circulation amongst UBS clients), then we know that this Crisis is deep, wide and far-reaching. Add to this an endorsement (via a sympathetic interview) of Swiss financial newspaper Basler Zeitung and the plot thickens further.

 

 

 

 

 

 

 

47 Comments

  • Some figures from the OECD. So what does this tell us?

    Tax revenues 2009 in % of GDP

    Ireland 27,8%
    Greece 29,4%
    Switzerland 30,3% (for reference, this is considered a tax paradise)
    Spain 30,7%
    Portugal 35,2% (2008)
    Germany 37,0%
    Netherlands 39,1% (2008)
    Austria 42,8%
    Finland 43,1%

    Source. http://www.oecd-ilibrary.org/taxation/total-tax-revenue_20758510-table2

    Most likely many of you conclude that taxes in the countries that already have a percentage higher than 35% need to be increased in order to send money to countries that have a percentage as low as 28%.

    • Dear Knut, I hope you are not counting me amongst those. The whole point of our Modest Proposal is that we should stop taxing German taxpayers to bailout the French-German banks via loans to the Greek state (and other peripheral public sectors). If our Proposal is adopted, the need for tax transfers to the South will be eliminated while Germany’s industry will be protected from a massively revalued new DM. (I very much fear that, in your eagerness to return to the DM) you are neglecting the change in the global economic game after 2008. Pre-2008 German industry did well even under an expensive DM because the US guaranteed sufficient aggregate demand globally. Post-2008 these guarantees will be absent and German industry will struggle to maintain its export markets once the new DM goes through the roof.

    • @Knut
      Most likely many of you conclude that taxes in the countries that already have a percentage higher than 35% need to be increased in order to send money to countries that have a percentage as low as 28%.

      Actually, NONE of us would conclude that.

      You seem very smart and I am certain you can find a myriad of ways to interpet this table. Without prejudice it might lead you to some interesting conclusions.

    • Yanis, at the end of the day if some countries are aided some others must pay. So the generic option space is relatively simple.

      Option A: Haircut
      Option B: Bailout of different types and a combination thereof
      B1: Direct transfers
      B2: Direct loans below market rate
      B3: Indirect enabling to borrow below market rate

      Option A means that investors pay. Option B means, that the taxpayers of other countries pay. B1 has the highest political conflict potential, B3 the lowest.

      Your modest proposal is a combination of A and B3. So it is modest, because the cost to me is well camouflaged ;-).

      What you and the Eurobond advocates underestimate is how expensive B3 is. Eurobonds mean EUR 20 billion higher interest payments for Germany. That equals 4% of total tax revenue.

      Regarding the US: the US accounts for about 10% of total exports from Germany. If I recall correctly that is the 2008 figure and the 2000 figure was 14%. BRIC has surpassed them, and is growing.

    • Dear Knut, In game theory there are two types of games: Zero sum games (in which one player’s gain is another’s loss; e.g. poker, chess) and variable sum games (games in which all players may lose or gain at once). Your mindset mistakes the current game in the Eurozone as a zero sum game when, in reality, it is a variable sum game. This pushes you into the embrace of the simplistic view that Germany’s best option is an exit from the euro, a strategy that will guarantee mutual losses. The fact that the current bailouts also contribute to mutual losses does not mean that there can be no mutual gains within the Eurozone, nor that the disintegration of the eurozone will lead to gains for Germany. The trick is to find room for mutual gains. To do so we need a Gestalt Shift within the common currency area.

    • You are right I assumed a zero sum game for simplification. From my perspective this is OK, since Germany´s share of the mutual gain will be lower than the cost.

      The cost is likely to come and can be easily quantified. If you take the ESM contribution it is about 50% of yearly tax revenues. The gain is less likely and can only be quantified imprecisely

      The acid test is very simple: You need to check what kind of countries want to join the Euro and guarantee debt for others.:
      Are Norway Switzerland, Lichtenstein, Denmark and the UK running to Brussles shouting “please let me in”? No .

    • Knut34 you say:

      “Most likely many of you conclude that taxes in the countries that already have a percentage higher than 35% need to be increased in order to send money to countries that have a percentage as low as 28%.”

      I know of no educated person in Greece who wants to tax the German’s so that their extra tax money is given with almost usurious terms to put off the seemingly inevitable Greek default. Please note that the money is not given as a gift. It comes with interest that is being paid and at the moment not defaulted.

      Secondly, the German government certainly invests in bonds etc with part of the existing tax revenues, so no new taxes need be demanded.

      Thirdly there exists a proverb in Greece ” a soul that is to depart, the sooner it dies the better” and that is the view of most people who see the inevitable default looming. We do not understand why your government, and the rest of the EU governments, insist on loaning to us in almost usurious terms when there seems no exit solution from the default. Let the chips fall, is what the anger was about these past few days. As a country we have survived worse, we will survive this too. And do not forget that not too far back. after WWII Germany defaulted and its debt was cancelled by the allies ( call me US), not restructured, allowing the present prosperity of the country. It might have been the correct decision in order to put off WWIII , but it should not lead to arrogance on your part.

      When the Greece defaulted in 1890+ the debt was restructured and .paid off by 1930, the proverbial ” english loans”. Something like that would happen now.

      The way I see it Greece is kept on artificial support until the rest of the EU thinks it can absorb the shock of our default, not for the benefit of the greek tax payer, who will owe more and more the longer the restructuring of the debt takes.

  • I am probably among the ones you might label “conservatives” according to your definition in the UBS WM report. Meaning, I am still among the skeptics of your modest proposal, in terms of the ECB’s role in it.
    You keep saying that “The ECB, with its solid reputation,would be able to borrow at no more than 3%.”. It is still not clear to me what is your basis that constitutes the “solid reputation” of a central bank in a new role of debt issuer. The term “good reputation” of a name does not exist ex nihlo. A government might have this attached to it on the basis of its traditionally strong and sound economy and primarily because it can raise and collect taxes and thus be able to pay back its bondholders. A government can generate revenue. A central bank up until now, does not have any similar mechanism to generate revenue at least for the purposes of the new role you are asking it to play and in your proposal you do not suggest the creation of it. You are only asking it to play the role of an intermediary. Essentially the funds to pay back the supposed bondholders will be generated from the proceeds of the individual member states paying back the ECB on the bonds it is servicing on their behalf. Thus you will have a credit rating again attached to the collective weighted average of each state’s economy, you will have individual member states that might not be able to pay back the ECB if you let them still run their own fiscal policy alone etc. And the degree of reputation of the ECB for servicing this debt would be again the collective weighted average more or less of the reputation of each individual state. If you would want to start addressing those issues, now, together with the hypothetical need of a ECB revenue generating mechanism, wouldn’t you be essentially suggesting the creation of a new EU treasury dept?

    PS . I would still be very interested to read opinions of central bankers on this proposal.

  • I am expressing my self only and i am not going to respond in a moderate spirit.
    I was certain that people taking decisions , are based on statistics and numbers .
    Actually , political personnel are even worse . They dont even look at them . They are based on their convictions .

    So now , you are presenting a table with numbers , and based on that you suggest what? Increase taxes in Greece ? Are you nuts? You are completely evading reality . Dont even bother writing to your MP , telling Merkel to “convince” greek PM to increase taxes in Greece . She already has done that .

    Reality is far more complex than what you want to present . And if you are not clever enough to understand that you can not take decisions based on a table with numbers , dont expect the reality to downgrade to simple tables just to suit you .

    Mr Varoufakis suggests something which is counter-intuitive because he acknowledge three parts which are under pressure (Banks , investments and sovereign debt ) . Do you agree with his problem initial conditions ?

    And stop refering to Greek loans as “bail outs , aid , help or send money to Greece” as if it’s their choice to borrow . Many views in this blogspot have clearly substantiate that Germany and France are trying to help themselves not Greece .

    And another thing , Chinese tax payer is going to bail you out !!
    How proud can a German tax payer (37,5%) should feel about that? Oh i forgot , Americans have already did that twice for you and you didnt oppose to that .

  • hello all
    big fan of this blog, came to it from yanis’ interviews with doug henwood at behind the news,
    really hope that the modest proposal gains traction.
    I was wondering what everybody here thinks of this from l randal wray.
    One of his basic points (somewhere in there) is that the Greek austerity (and the austerity in the European periphery) will be used in a race to the bottom strategy that will attempt to drive down wages in Germany (and France?). I don’t know what his credentials are but this seems plausible and a whole lot more scary than yanis’ slightly more benign reading of European elites (that they don’t really have a strategy and don’t really know what to do), it also throws knut(r.i.p.)34’s comments into sharp relief.
    what does everybody think, does his US perspective skew his understanding.
    here’s the link.

    http://neweconomicperspectives.blogspot.com/2011/06/can-greece-survive.html

    here’s an excerpt

    …And this view is also common among working classes in the central countries—that share the view of periphery populations as lazy and over-rewarded. While untrue, what is most shocking about this attitude is that if the blood-letting and crushing of wages in the periphery actually does work, the factories will be moved out of Germany seeking lower cost workers. In other words, success in the periphery would shift the burden back to Germany’s workers, who would have to accept lower wages to compete. That will be fuelled by job losses if Germany cannot find sales outside the EU that will be lost as the periphery nations fall farther into depression. The result will be a nice little rush to the bottom, benefiting Europe’s elite. How nice…
    sorry for the long post
    keep up the good work.

  • An exceptionally candid, concise and illuminating interview with the UBS economist. Congratulations and many happy returns!

    However, I feel I must repeat what I’ve told the authors of the Modest Proposal many times in private and still received no satisfactory answer:

    There’s nothing modest in suggesting that an extremely conservative [nay, reactionary] central bank like the ECB change its Maastricht-circumscribed role so drastically as to become a hybrid debt issuer, bond clearing house and financial intermediary [while retaining all its currency circulation powers] at a time when it has already overstepped its sacrosanct Maastricht-compliant limits by purchasing some 90 billion euros of Greek, Irish and Portuguese bonds in the secondary market (at a haircut of at least 20% in the Greek case).

    This is the main – if not the sole – reason behind the ECB’s (Trichet, Stark, Draghi, Smaghi et al) hysterical reactions against Schaeuble’s proposal since March to restructure Greek debt here and now instead of waiting for the gruelling “orderly default” procedures envisioned for 2013 under the new ESM bailout regime.

    There is no way around this fact: The ECB has also broken the most elementary bank accounting rules by recording the purchase of 60-billion-euros worth of Greek bonds NOT at their face value at maturity but at their purchase price of 48 billion euros (60bn-20%=48bn) and still expecting to cash them in at face value – ie at a 20% profit.

    It is not difficult to understand that Schaeuble’s initial proposal for the immediate restructuring of Greek debt was directed at none other than her royal majesty, the ECB.

    Why?

    Because the ECB is the only Greek bondholder that has already restructured 60bn-euros of Greek debt with a 20% heircut at zero cost to the holy German taxpayer (via “quantitative easing” – or credit creation) and with no visible effect on the sacred cows of price stability or the value of the euro.

    And, of course, the ECB is the only Greek bondholder that can restructure, reprofile or rollover a substantial portion of Greek debt deep into the 23rd century (if need be) singlehandedly and at no extra cost to anybody either.
    You see, what the Modest Proposal authors insist on ignoring, is that the ECB presently controls MORE than the 133bn-euro tranche of Greek bonds which the Modest Proposal would wish to see “transferred” or “converted” into the ECB books, and then serviced or recycled into Eurobonds through a complicated, mind-boggling procedure.

    How so?
    Apart from the ECB-held 60 billion euros of Greek debt, the ECB is currently holding the Greek banks hostage to its emergency liquidity lending of some 95 billion euros against “collateral” of 140 billion euros (repeat: 140 billion euros).

    This collateral comprises: 55bn euros in Greek sovereign bonds owned by Greek private banks + 20bn euros in Greek sovereign bonds “collateralised” or “deposited” to the Greek banks by cash-strapped Greek pension funds + 70bn euros in private bank bonds and Greek state guaranteed paper underwritten by the ECB.

    In other words, the private Greek banks and public pension funds would happily forego their worthless bond holdings which the ECB retains as collateral in exchange for longer-term ECB liquidity with fewer strings attached and NO MORE BLACKMAIL to sell off their rapidly depreciating Balkan assets or face a further liquidity squeeze.

    Can we now understand why – upon Schaeuble’s insistence on “private bondholders’ participation” – rabid ECB stalwarts have mobilised the rating agencies to declare any sort of restructuring, reprofiling or rollover (except for that already carried out by the ECB) as a Greek “credit event” or “default”?

    Do we realise that this means the eurozone is now held at ransom by the speculators’ mouthpieces who have already wrecked the world economy in 2008 and will be happy to do it again if so instructed by their handlers?

    IMHO there is no modesty in trying to talk around the perennial Elephant in our Bedroom (the ECB) because this is by far the biggest obstacle to the implementation of any sort of comprehensive proposal for euro reform, let alone one as Modest as the one we cherish.

    • I do not understand a few things here but the most important one is the idea that the fact that the ECB (or any other institution for that matter) somehow broke accounting rules by marking the purchase of Greek bonds at market value rather than face value. If the bonds are trading in the open market at 20% discount why would the ECB (or anybody) pay and therefore record in its books, more than that?

      Additionally, I find the suggestion that the ECB could “mobilize” the rating agencies (American private companies) to declare any restructuring as default on ECBs terms, amusing to say the least.

  • There are two problems with Greece. One is common to all Europe and really to most countries. The underinvestment is a general problem. The reason is very simple. Why the investors should invest their money when there is no demand for goods and services. There are trillions of dollars around to be invested, the problem is simple there is no demand. In reality there is a demand, but there is not the ability, the affordability, the purchasing power. We are in the stage that the distribution of wealth is such that a very small minority owns the wealth of the world. This minority can consume, but let’s face it, there are too few of them to make any difference. This is a world time bomb; it can destroy the world if a solution will not be found soon. If history can be any guide, probably we will choose killing each other than doing anything else.
    The second problem is a Greek problem. The Greeks just don’t have the organization and know how to produce products and services in sufficient amount to sell for all Greeks to make a living. The Greeks can do it, but they have to use their own brains to do it. Is is not just in the cards that using the private initiative we can compete with Germans, the French, the British and others. As most of the other countries we have to do it through the military. Because the Greeks can’t really support the army, they have to do it as a tax in kind. Each Greek should serve 4 hours a week in some capacity starting from the age of 12 to 60. Part of it will be in military matters, but the majority will be in creating real wealth for the country. The Greeks should design and produce most of their military needs and they should design many products that they use like cars, bikes, boats etc. If thousands engineers as their tax duty will work as a team to design a product they will be able to do it. The Greeks can substantially decrease the bureaucracy by having lots of services provided as a tax duty. The tax collection will be increase also substantially by tax collectors being people who change all the time and not having the ability to create links where bribes are given and taken.
    There should be no Greek higher army officer drawing a salary except army officers who teach the military art. The new oplites should be every citizen who can.

  • @Ilias. I know that the tax rate in Greece has increased. Trust me I would be happier if the German rate would have decreased.

    If you use the link and only look at the Greek numbers over time you will see that tax revenues in % of GDP has declined steadily over time. I do not assume that the rates have declined the last 10 years, so it must be something else.

    @Estrangeiro: I am not prejudice. I just want to keep my money. I do not want to give it to Mrs. Merkel or any other politician, nationailty does not matter.

    Todays Europe is on its way into political centralism and monetary planned economy. I love to live in Europe. But the place is becoming too risky to have all eggs in this basket. Personally, I am working on to set up 2 more “legs”, one to make money and one to retire in case Europe will be a non democratic and/or non capitalistic place one day. The trigger to this was the breach of the non bailout clause. Mrs. Merkel will see much less of my money soon!

    • @Knut34

      The whole situation is a mess .
      The tables you showed us indeed present a fact . The fact itself though is not sufficient data to provide a solution . Decline of Tax revenues in % of GDP for instance , is a direct result of the lowering of tax rate in greek corporations during the last two decades . If you look through tables showing the companies with the higher profits the last ten years , you will find many greek companies which payed almost nothing in taxes to the greek state . In other words , only a part of society is paying taxes in Greece . In contrast , the part of society forced to burden the deficit are the ones that have been paying taxes so far . That’s why i am telling you that , greeks will not tolerate any more austerity measures and an uprising is a possibility . This explain the paradox that many foreigners face when they see this table . Greeks are not paying taxes (% of GDP) but on the other hand they protest too much . How is this possible ? This paradox is explained as i told you above . A part of people dont pay tax and the rest is forced to pay for the whole .

      BUT again this is not your fault …

      In conclusion , if your argument is whether it’s fair or moral for the german citizen to be more productive and pay more taxes to subsidize greek who produce less and dont pay as much taxes , there is absolutely no-one to tell you otherwise .

      If your argument is according to this table , the solution to the problem is tax greek people more , i think you are absolutely wrong . For two reasons :
      There is a paneuropean crisis which is far more serious than greek crisis . Why are you still talking about Greece ?!!!
      Secondly , Greece is not in a position to pay its debt unless it has significantly higher growth rate . And taxing more isnt the way to go . Let alone , tax the poor ones once more .
      Then again , if the question is whether to stay in Eurozone or not , this is another subject . But if you want to stay in Eurozone , unfortunately for us and unfortunately for you , we must find another solution than expensive loans .

    • @Ilias:

      I am not n favor of higher tax rates. A has had a brain drain and capital leaving the area due to current high taxes already.

      In respect to greece, the collection has to become more efficient. But this is not really for me to say. On the other hand I do not want to pay for other peoples mess, but I let them do what they want to do. If the portuguese electe the socialists, that is fine with me. If they starve due to that do not ask me for help.

      I think it would be best for Greece to default, but again this is Greece´s desicion not mine. If I have a government that sends money to Greece (yes also to rescue Germnan, but mainly french banks) this is what I can act upon. (1) I will never elect any pro Europe party again. (2) I have 50% of my net worth outside Europe (3) I reduced my personal income, so I do not have to pay close to 50% tax anymore, but 25% which is a reasonabkle figure. (4) I am happy that we all have the passport of a non EU country.

      What I really find strange is that as soon as one presents numbers that show that not only the Greek government was at fault, but an entire society emotions really heat up. This is why I just show the number and I do not interpret them here.

    • @Ilias: The worst thing is that the EU commission is using th crisis to grab more power. Europe is losing its democracy(ies) and has done so for a while.

      The funny thing is that Eastern Europeans havenoted this early, since they very well remember: Václav Klaus stands up for Freedom:

      I started to write my opinion about the debt crisis situation & the “bail outs” on German newspapers blogs. They cencored me and no just me, but anyone else who opposed what the EU is doing.

    • Sorry the youtube link did not work. Please search youtube for “Václav Klaus stands up for Freedom”

    • @Ilias: Trust me, you are not the only one tha has worked & lived on several countries.

      You seem to have a complex about size. Size does not matter when it comes to standar of living of a country. Look at gross domestic product at purchasing power parity of countries per capita: If you take out countries that mainly live off oil the ranking is:

      Luxembourg, Singapore, United States, Hong Kong, Switzerland, Netherlands, Australia, Austria, Canada, Ireland, Sweden, Iceland, Denmark, Belgium, Germany

      The smaller countries dominate the group!

      Source:
      http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

      “to be so short sighted about ‘not losing your money” – Sorry, that is my job. I have a consulting company and I make companies more profitable.

      “Your brutal and unhuman rationalism.” I take this as a compliment. I really do. My non German wife hates this too, but I am proud of it.

      I do not know why you assume that I think Germany is big and strong. And I oppose (see above) that size matters. From my perspective Germany is close to bankruptcy. There are huge off balance sheet obligations that dwarf the official numbers (sound familiar)?

      Regarding swallowing: I don´t and more and more people are not. The day the first bank guarantee will be pulled the company I have in Germany will stop writing invoices.

      I can only advise you to take precautions. So if you can get out of the public pension, reduce your Riester-Rente to the lowest contribution and move your stock holdings to companies that have a high share non Euro, non USD revenue or at least well balanced revenues.

      By the way, most Geeeks seem to forget that there are countries in the EU that do nothave the Euro and they are doing very well! Sweden & Denmark had referendums nd they said no – AND they are both before Germany in the list above!

    • I could not agree more when you talk about Eurocrats and lack of Democracy and accountability in Europe .

      I am not pro euro . A lot of people in Greece today understood the hard way why entering Eurozone was a bad choice . Unfortunately , the situation at least in Greece is more complex than say : we are going to fix this mistake by exiting Eurozone. We dont even have a government!

      I agree with you that it’s not a matter of size . It’s surely a matter of mentality . But you cant deny the influence Germany has in making the rules and enforcing them within the Eurozone .

      The modest proposal is a pro Europe , acknowledging some design faults . It would certainly help Greece to pay its debt over a period of 20 years . It ensures that some investments will be made . I am not a big fan of it . But if you compare it to the current reality (destructive reforms, recession , unemployment and sell out) , at least it’s a way out .

      I am honestly embracing your doubts and worries against a further integration of Europe . But for Greece , it’s not a matter of optimal solution but survival .

  • No chance for eurobonds.
    Germany is placed under the obligation to reduce its regular debt to 0.35% of annual gdp by constitunial law from 2016 on.
    So german supreme court wouldnt allow it, end of story.

    • Do you honestly believe that German politicians will not violate the constitution again?

      The Germans constitution and European treaties have been violated constantly in context with the Euro and the EU. There is a no bail out clause. The ECB should be autonomous from politics. etc.

      There will be a hearing at the Supreme Court next Tuesday regarding the Greek bailout and the permanent bailout mechanism. You know what? I do not even believe that our judges will stick to the constitution.

      The only thing I believe in is the infinitely stupidity of Angela Merkel and Mr. Schäuble and 98% of all other politicians. Based on this, I make decisions.

    • Dear Knut, I have a small quiz for you.

      At Monday morning, a company’s stock costs 100 euros. Some really bad news come out about that company during the day and the stock loses 99% of it’s value. Next day, most of the bad news turn out to be false and the stock has an 100% rise. How much does the stock cost on Wednesday morning?

    • @Christos: EUR 2 but why Wednesday morning? Does the bad news turn out to be false Tuesday night?

      Waht is the point of your trivial quiz?

    • A small question on the plot you link. It is percentage increases since 2000, no?

      Is there a plot in euro?

      It is evident that if the countries of Europe were to become homogenized economically, the ones who start low in 2000 will have a higher percentage increase, otherwise what does homogenization mean?

      I find in this sort of arguments the problems that climate discussions have. People do not understand the concept of necessary and sufficient. This plot is not sufficient to show that there exists economic/debt mismanagement. It could easily be a plot of the success of the euro.

    • that’s because you were paid better then the average european before… so naturally you raised slower. Plus I don’t know if all of DDR was already paid for in 2000.

      really, that’s the whole issue with euro. Some folks scratched their heads(obviously, insufficiently) and decided that by making a currency union and… praying alot(I presume, since there never was an actual plan) convergence will actually happen. And it did; wages converged – which canceled out the advantage of the less developed countries. Which will now have to…. converge even harder. So, folks, pray harder, since there’s still no plan!

      Really, convergence of economies won’t happen just because it’d be nice or because folk wish it to happen. There has to be a reason too, there must be a plan, some measures, etc..

    • @Anna: The plot is an index with the starting point = 100, so it is easy to see the percentage change. Unit labor cost measure the average cost of labour per unit of output.

      –> If you belive in convergence both numerator and denominator increase. To say it explicitly: Wages and productivity increase. Without productivity increase there is no room for wage increases. If you increase wages and do not become more productive in a company or country you will be less competitive. Evenutally as company you go out of busienss and as country …

      Of course the plot is not sufficient, but is necessary to understand why Greece and Ireland lost their cometitveness. And by the way it shows nicely how Ireland has started to correct this development.

      In order to get back to the relative competiveness of 2000 Greece would have three options (1) a cost cutting program of about 30% (2) productivity increase of about 30% (3) go back to the Drachme and devalue around 30%

      There is one thing the graph does not show: The world outside Europe. This is also what Mrs Lagarde is not getting when coming up with recommendations that Germany should increase its unit labor cost. If the convergence is to adopt to worst demonstrated practices Europe will go under in competing against the US, China & India.

      @Vlad: Why do we need a plan? A free market is plan enough.

    • @Knut34
      A comment of mine about free markets :

      Free markets can be a plan for the strongest player . But it is certainly not a plan for the weaker one (in zero sum games) . Would you accept playing a poker game with a player with plenty more chips than you , given that you are equal in intelligence and experience?
      I would NOT for sure .
      Do you think the two players will end up with the same amount of chips?

      How can you possibly believe that two countries will reach a convergence in a free market enviroment ? There is one exception i believe if the two countries become one !!! What’s your plan exactly ?

      The way i see it , free market is not economic theory , it’s theology . Or else explain a bit to us how free market will lead to convergence?

      Dont be too confident on the financial power of Germany . Just read a population biology book and find out why most of the big predators are endangered species . If jungle is not the most ideal free market , then what else can be?
      If i am not mistaken Free market ideology was influenced from Darwinism , is this right? Well Biology has progressed a lot since then . Read The Selfish Gene (R. Dawkins) or Critical Mass (Philip Ball) .

      Why dont we just take advantage of our common sense instead ?

    • Knut34 July 2, 2011 at 19:30 #

      You are wrong in this. You are projecting too many parameters in a function of one variable. Greece could have gotten the same increase in wages by increasing productivity and exports, instead of borrowing. The plot would be the same and it would really say nothing comparing it to Germany, if Greece had started with 30 euros a day wages and it became 40, whereas Germany started with 100 and it became 105. The reason for the differences is not in the plot and does not explain anything.

    • “@Vlad: Why do we need a plan? A free market is plan enough”

      why do you need free trade/free market? to enhance the overall wealth. That’s why you need convergence(to the strongest member, obviously) too – to enhance overall wealth…

      It’s mutually advantageous. The fact that the goal wasn’t reached and there was no plan to reach it, doesn’t make the goal less viable. In this aspect, a good recycling mechanism is important.

      What I don’t like in the modest proposal is the attempt to save investors from malinvestment. When I don’t have a speculation idea, guess what… I don’t speculate. Those had no speculation ideas, yet they wanted to speculate. Ugh, they should lose. By a greek default.

      In this aspect, the german fin. min. is more then correct – private involvement should be substantial. It’s wrong, because they accept the idea that private sector should get incentives. They should just be happy that someone is willing to do even a small effort to help them – the mess is all their own.

      But the rest – convergence, surplus recycling(which is vital at this size – it’s not like I save more then my neighbor and get a better car – here the imbalances are relevant and destabilize the system – thousands of years of various war are a good proof) are sound investments.

    • @Ilias:
      1. I do not believe there is a need for convergence. I do not belive that it is realistic. Eastern Germany and Greece have received money from the EU for decades, Result: Not much to write home about.

      2. I am not at all confidend in the finacial power of Germany. This is one of the reasons that I am so opposed of a transfer union.

    • @Anna: You inability to understand is shocking. If productivity would have increased the index would not have increased so much. The productivity is in the denominator.

      Maybe you are interpretating a wish into it: You want more money, but you do not want to work harder for it.

      I will have to stop to explain labor unit cost to you. Even the non number driven people at the big red-brick school up Chuck River would get this.

    • Knut34
      I should have made it a big question. As a physicist I am used to having the terms defined clearly and not thrown a random diagram for guessing, and that, in German titles.

      So I had to guess that “Lohngstuckkosten” means “unit labour cost” in addition to guessing what the y axis represents.

      I am now guessing that unit labour cost means the amount of labor needed to produce a unit of a product, since you say productivity is in the denominator.

      The plot becomes even more incomprehensible, since it does not say for what product, thus even more parameters enter. Ireland generates different products than Germany.

      So I correct my hypothetical interpretation of the plot: productivity is constant and maybe exports became higher than Germany’s and part of the money was paid to labour, that is why there is an increase in the “unit labour cost”.

      And still my argument holds that if in 2000 Greece and Ireland had a unit labour cost of 100 but their labour was 50% in euro of the labour cost in Germany, homogenization of the economy would show the same tendency the plot shows.

    • @Knut34
      Now you make more sense . But i always have the feeling that you dont complete your thinking . So what you mean is that after decades of funding , the expected result didnt show up . You oppose to tranfer union . So what you’re saying is (If i understand correctly) that you prefer Germany to drive its own way?

      According to Mr Varoufakis thinking , a surplus country like Germany always has the option to leave Eurozone . If his proposal is implemented , surplus countries will lose this advantage .

      Is there an alternative plan in your mind which includes Greece too? Am i missing something?
      Continuing the same plan as now is out of the question for greek people as i tried to explain you before (for several reasons) . The way it goes is that a growing number of greek people wants Greece to exit Europe . I believe in Germany , it’s about the same . That’s not good news for Eurozone .

      As you notice i didnt try to explain why Greece or Easter Germany didnt have the expected course . Or what is the best interest of greek or germans because it’s quite another topic . I just want to follow your logic.

    • @ Anna:

      I clearly wrote above the link “Development of unit labor cost from 2000 to 2011. Source: Eurostat”. So where is the missing information?

      What kind of product is irrelevant, if you do this for a country. You just integrate the equation over all pruducts.

      ULC = unit labor cost

      ULC = (hours worked * pay per hour) /GDP if you rewrite this you get

      ULC = pay per hour * hours worked / GDP = pay per hour / productivity

      –> This explains why labor cost increases without productvity increase will handicap an economy.

      So the plot can be interpretated for Greece:
      (1) pay per hour increased without productivity increase
      (2) pay per hour remained the same and productivity declined
      or a combination of the two.

      I hope you this helps, even if you will still will not like the facts that the graph shows.

      If Ireland, Greece etc. produce different products is not really significant, because someone in the world will. This is one problem of Greece, it competes on the product side with emerging countries but wants to have “convergence” with developed countries.

      This is not a strange concept I invented to piss you off. It is used widely for companies, industries or countries.

    • Knut34
      Thank you for the mini lecture.
      Still, there is no one to one correspondence in your interpretation with negative connotations.

      there is
      1a) Pay per hour increased because more markets opened abroad and the product could be sold with advantage, which was shared
      1b) The productivity was the same as with Germany at 2000 and badly paid so entering the euro the levels were equalized.
      1c)pay per hour increased because of borrowing and sharing with the workers

      1c) is the main reason, of course.

      I am just pointing out that the plot cannot demonstrate whether the relative rise is good or bad since it is consistent with 4 interpretations, two of which are not to bad.

    • [email protected]:
      The productivity was NOT the same as with Germany at 2000.

      The starting point was defined for everybody as 100. It is like you have a weight x1 and your neighbor has a weight y1. You set the starting point to 100 and every point thereafter to xn/ x1 for you and yn// y1 for your neighbor.

      Wgat the plot shows in not bad for everyone. For example if the curve goes up for Greece it could be that Greek employees are happy (they could get more salary) and also Chinese companies are happy, because their goods would replace Greek goods. If then in turn the Greek employyes loses his job, he might not be so happy anymore…

  • Christos:

    It sounds that 2 euros will be a nice answer to your quiz.

    1% of 100 = 1 euro

    a 100% rise the next day will make the 1 euro equal 2 at the end of the day.

    DDon’t you think it’s similar to Germany’s game?

  • Dear Knut

    I guess that you are German, but maybe I am wrong, so I will not address this directly to you, but to all the Germans who at least have the sensitivity to follow blogs like this one.I have been following this debate for days now and what really shocks me is to keep facing this German talking:about ‘what is fair’, punishments, responsibilities etc. I happen to live in Hannover the last 3 months and I can understand a little bit the German way of thinking, a lot a result of bad weather, a bureaucratic and oppressive system and no desire at all to enjoy life outside of work (and some perfectly planned holidays). But allow me to find this way of thinking/living extremely narrow…
    From my humble point of view, the main idea of the EU is that Europe has suffered 2 world wars,and a cold war and there has been a general effort to put all this aside and make something bigger and better. First because of our rich cultural heritage, civilization and common background and second because there are bigger nations outside our continent. For us people the EU was an amazing experience and a great idea. This is said by someone who left a permanent job in Greece in 2006 to work as an oceanographer in 5 different countries (just to give a point of reference)…
    Now coming back to what’s fair, I have to mention some cliches (sorry..). Germans orchestrated the biggest genocide and biggest war in the world. For me common sense was to split the country or just oppress it in case it would repeat its accomplishments, Instead Germany was given independence, it’s debt was cancelled (thanks Anna) and it kept receiving US investments for decades growing back to a strong economy.

    Everybody needs some help and an forgiveness, but if you ask it from a German you will never get it!!!

    Germany was one of the main architects of the EU and of course it planned it the way it would make profit …for Germany. No reason to argue about that, Germany benefited more than anybody else from the euro. Now the concept that had obvious faults is collapsing and Germans are doing maths again about whether ‘it is more profitable to stay or to go…’.
    In the meantime:
    – educated people from the south with MScs, and PhDs flood Germany to come to work, for a starting salary. A basic salary for highly skilled, young people trained with money from Greek, Spanish, Portuguese, Italian tax payers, (Not Germany’s fault of course, but aren’t you like vampires when you set stands in all the Universities of the crisis-stricken countries, looking for fresh, good blood?)
    – Germany is still making money from the loans and from buying for peanuts whatever good is left in the pigs. And this is only the beginning…
    – back to the pigs there is nothing left, no local markets, but only commercial centers and lost generations

    Nobody in Greece argues that we don’t deserve to be the first to fall and we are paying the high price with our lives (past, present and future). But I can’t stand reading German people still talking about what is right . I use the world ‘reading’ because I don’t ‘hear. anything. I don;t see anyone talking about politics in here, despite the obvious problems. I am sure that they are many people with dignity and most of all human feelings, in Germany. I am sorry to say that but what Germany is doing right now is worst than the Third Reich… No war, but economic aggression, and calculated exploitation of weaker/smaller countries, with all means (just to remind you also the bribing scandals with Siemens and the submarines). If Germans want justice they should look for it in their government first of all and not to poor fate of the poor, weaker countries….

    • @Michalis:I never demanded punishments of other countries. I just want to keep my money. It is as simple as that. If you think Germany is such a bad place and the salary is so bad why are you here?

      If other countries after receiving 2-3 decades of EU “structurural fund” money do not manage to set up structures that are attractive for PhDs to work in it is not my problem.

      The German people were never asked, if they want to be part of the Euro. If they would have been asked, they would have said no. Maybe for you the EU was an amazing experience, If you look in German speaking social networks, you will see that the established pro EU parties will have a lot less power soon.

      It is the task of every country to compete for companies and labor. What annoys me is that due to the problems in the GIPS countries, Germany will be dragged down eventually and I will be going to Switzerland, Singapore or Norway. That is in case I still have to work then. Thank god we all have a non European passport as well.

    • @Knut

      Hi again. Some more replies below…

      If you think Germany is such a bad place and the salary is so bad why are you here?

      – This is the most predictable and cliche comment I could get, but I will reply. First of all I fully support my initial statement about life here, but still from a personal experience point of view, it is an experience! From a professional point of view, as a scientist I like to work at different places, meet people and expand my knowledge studying new environments. And as you write somewhere in this discussion there are many bright minds in this country worth to meet… It is a matter of curiosity.. It happens sometimes that people want to see what’s behind their nose…

      If other countries after receiving 2-3 decades of EU “structurural fund” money do not manage to set up structures that are attractive for PhDs to work in it is not my problem.

      – I am sorry but this is again predictable and cliche.. Somebody mentioned the example of the poker game with someone 10 times richer than you. Even without industry and just due to the climatic conditions, the operational costs for heating, maintaining the roads and airports clean, etc, generate an economy orders of magnitude larger than the one of a small country in the south. Don’t tell me that your policy makers didn’t know that you would swallow everything (anyway you did your best to swallow everything).

      The German people were never asked, if they want to be part of the Euro. If they would have been asked, they would have said no. Maybe for you the EU was an amazing experience, If you look in German speaking social networks, you will see that the established pro EU parties will have a lot less power soon.

      – Neither the Greeks where asked, and anyway we didn’t plan the EU. So who made the rules of the game, god?

      What annoys me is that due to the problems in the GIPS countries, Germany will be dragged down eventually and I will be going to Switzerland, Singapore or Norway. That is in case I still have to work then.

      – The only argument you have to be so short sighted about ‘not losing your money’, is that you are big and strong enough to do that. Here countries are raped and you keep looking only in you pocket. You really cannot accept that in this problematic situation where everybody has contributed, the problems of your neighbors can be yours. I don’t know why this is so beyond your culture and it will probably be the main problem of the EU.
      Germany has an advantage and this is that it can define it’s destiny to a certain extent, while small economies are very vulnerable and controllable. But you are not the biggest and strongest…. Now you can go a step further and show that you are really a big nation and drive Europe to a better, and more fair direction. Otherwise, history will make it’s circle and we are all going to be slaves of the Chinese, like we deserve. South Europeans for our corruption and lack of seriousness and North Europeans for your arrogance and allow me to say for your brutal and unhuman rationalism.

    • @Knut34

      no offense, but you’re grossly deluding yourself. Probably you’re doing the same(you, as a people) with the DDR case. We’re talking forming mentalities, economic base, functional bureaucracy with a decently low level of corruption, etc.

      do you question how long that takes?! it’s about generations – with a good plan, organization and streak of good leaders it’s 3 generations. Not 20 – 30 years…

      And the germans rightfully weren’t asked anything, because they’d pick the wrong answer. Look around, waste more then 5 mins looking at demographics.

      You might be bigger then Greece, but you’re nowhere near big enough to be hard to swallow. And globalization already has the problem of putting more or less all human eggs in the same basket – yet, a couple of blocks is preferable to uniformity – that way, when we’ll screw up(inevitable) it won’t be everything in the same place.

      That’s how W. Europe took over the Chinese 500 years ago; everything was against us data wise(population, resources, cultural advancement, etc.). Yet, when the inevitable bad streak of leaders(it’s inevitable, historically speaking, especially in a hereditary rule) came over them, due to unity, they sucked it up and stagnated, while over here there was another country to pick over.

      The same model hopefully will be implemented at a larger scale in the world nowdays; and Germany by itself is nowhere near large enough to make a block alone.

      n.b. – that doesn’t make the current crisis management less appalling…

    • @Vald: You seem to have a very high opinion about democracy to tell other countries what is right and wrong for them.

      I have a hard time to find evidence that size matters when it comes to living standards of a country. What war is concerned it does. For this we have NATO.

      In your idea to build a block you sound like you want to build the EUCCP. Given the high number of communist in the EU commission (e.g. Barroso) and the European paliament this migh be a likely case.