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Monetary Union - Advantages and Disadvantages of Joining the Eurozone

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1) If you had to pick one chart that encapsulates Greece's crisis, it would be this one

The roots of Greece's crisis are simple. Before Greece joined the eurozone, investors treated it as a middle-income country with poor governance - which is to say, a credit risk. After Greece joined the eurozone, investors thought that Greece was no longer a credit risk - they figured if push came to shove, other eurozone members like Germany would bail out Greece. They were wrong.

As this chart, via the American Enterprise Institute's Desmond Lachman, shows, after Greece joined the eurozone, investors began lending to Greece at about the same rates as they lend to Germany. Faced with this sudden availability of cheap money, Greece began borrowing like crazy. And then when it couldn't pay back its debts, it turned out financial markets were wrong: Germany and other eurozone nations weren't willing to simply bail out Greece.

That led the market to panic around 2010, and you can see interest rates on Greek debt spike once again. Those high interest rates make it basically impossible for Greece to borrow, and that makes it impossible for Greece to pay its debts.

The result: Greece is insolvent, and the eurozone isn't as tight a union as the financial markets - and maybe the eurozone's member states - believed. That's the crisis.

2) Greece's debt-to-GDP ratio is an insane 172 percent

It's much higher than any other country in the eurozone. But making matters worse is the fact that the financial markets no longer see Greece as debt-worthy. No one wants to lend to Greece at reasonable rates, so Greece can't keep paying to service its current debts while carrying out basic government functions.

3) This is the most important chart if you live in Greece

Greece's problems are often framed as a financial crisis or a political crisis. But what they really are is a human crisis. Unemployment in Greece is over 25 percent now - higher than the United States during the Great Depression. And high unemployment is leading to political backlash.

The latest round of the Greek crisis began when Greece rejected its two main political parties in favor of the far-left Syriza. The main reason? Syriza promised to free Greece from the grinding austerity that was leading to such widespread human misery. The only problem? Syriza had no actual plan for freeing Greece from austerity; it tried to renegotiate the terms of the eurozone's support for Greece and came away basically empty-handed.

So Syriza is asking the Greek people to vote on whether to accept the eurozone's terms - and, by proxy, to remain in the eurozone. The vote is basically a final, desperate ploy for leverage, and one that's likely to fail. Either the Greek people endorse more of the same, which Syriza doesn't want, or they reject the eurozone's offer and basically have to leave the eurozone, which would also be a disaster.

This is perhaps the most important, and most depressing, reality of the Greek crisis: There are no good outcomes that are remotely plausible.

4) Greece's recession is worse than America's Great Depression

This chart also comes via the American Enterprise Institute's Desmond Lachman, who presented it in testimony before Congress. His summation is about as concise a description of the economic nightmare the country is living through that you'll find, so I'll quote it at length:

Over the past six years, Greece has experienced an economic depression on the scale of that experienced by the United States in the 1930s. Its economy has contracted by around 25 percent, its unemployment rate has exceeded 25 percent, and its youth unemployment has risen to over 50 percent.

At the same time, despite five years of budget austerity and a major write-down of its privately owned sovereign debt, Greece's public debt to GDP ratio has risen to 180 percent. At the heart of Greece's economic collapse has been the application of draconian budget austerity within a Euro straitjacket. That straitjacket has precluded exchange rate depreciation or the use of an independent monetary policy as a policy offset to the adverse impact of budget belt-tightening on aggregate demand.

In other words, the debt crisis destroyed Greece's economy, which in turn destroyed Greece's ability to pay back its creditors or employ its people, which in turn forced Greece to beg the eurozone and IMF for help, and the austerity measures they demanded destroyed Greece's economy even more.

5) The crisis isn't just hurting the unemployed

This chart, by Max Roser, shows how widespread the economic pain in Greece has been. It tracks Greek incomes since 1974, with different colored lines corresponding to different income groups.

But no matter which income group you look at, the story is the same: Incomes are plummeting, often to levels not seen since the 1970s or '80s. This is one reason the anger in Greek society is so widespread: No economic group is safe from the crisis.

6) Greeks are fleeing Greece

This is a particularly depressing chart about Greece's long-term prospects from Quartz. Before the crisis, Greece's population was growing. Since the crisis, it's shrinking. And it's a good bet that the people leaving Greece are some of the most economically productive. After all, it's a lot easier to emigrate if you have an engineering PhD and resources than if you lack in-demand skills and the money necessary to travel. But as rational as Greek emigration is, it means it will be that much harder for the Greek economy to recover.

7) Money is fleeing Greek banks

Greece is in the throes of a full-fledged bank run. You can see it in photos: The Greek people have been lining up at ATMs to pull their money out. But you can also see it in this chart, which shows Greek bank deposits falling to their lowest levels in a decade.

The reason? Greeks are worried that Greece is going to leave the euro, in whole or in part. They worry that Greece is either going to return to its own currency or, in order to keep paying its debts, revert to some kind of temporary government scrip. Either way, whatever replaces euros will be worth a whole lot less than the euro, so anyone who can get their money out is doing it as fast as they can.

Or, at least, they were doing it as fast as they can. Greece has shut down its banks and imposed limits on daily ATM withdrawals in order to end the run.

8) This is now a Greek crisis, not a eurozone crisis

A few years ago, Greece's crisis was the eurozone's crisis. After all, it wasn't just Greece sagging under the weight of debts it couldn't obviously pay back; it was Spain, Portugal, and Italy, to name just a few.

But no longer. This chart, using Bloomberg data, shows the price of 10-year government bonds from Greece (orange), Portugal (blue), Spain (red), and Italy (green) over the past five years. Focus on the right edge of the chart. You can see prices on Greek bonds rising amid the latest panic. But Spain, Portugal, and Italy are unperturbed. The eurozone has convinced the financial markets that this a Greek problem, not a eurozone problem.

While that may be good for the eurozone, it's bad for Greece, as it reduces the country's negotiating leverage. Four years ago, the eurozone believed it needed to save Greece to survive. Now it thinks it can survive a "Grexit" just fine.

9) Greece has done a lot of austerity

"#Greece has refused to take the tough steps that the other crisis-ridden countries have taken". Really? pic.twitter.com/5dO7za2Wmt
- Simon Tilford (@SimonTilford) June 29, 2015

As my colleague Matt Yglesias writes, the austerity question is a bit twisted when it comes to Greece. In America, austerity was a choice: markets were, and are, happy to lend us more money. In Greece, however, markets have no interest in lending to Greece, and so the alternative to accepting the austere conditions imposed by the Eurozone and the IMF is accepting the yet-more severe austerity that markets would force.

That said, there is a peculiar narrative that Greece has somehow been resisting the imposition of austerity. That narrative is dead wrong.

The unemployment numbers should put to rest any belief that the Greek people are somehow surviving this crisis unscathed, but if you want something more specific, then this chart, via the Center for European Reform's Simon Tilford, is useful. If you take 2007 as a baseline, Greece has cut government spending by much more than other eurozone countries.

Indeed, as Paul Krugman wrote, "If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus."

But Greece is in worse shape than ever. Why? Krugman again: "Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it."

The Greeks may not have had a choice other than austerity. But austerity has still been a disaster for them.

10) The value of the euro held against the dollar - and that's been a disaster for Greece

This chart shows the value of the euro against the dollar, and the basic takeaway is simple: It's held pretty steady through Greece's crisis.

That's been a disaster for Greece.

The normal way a country like Greece would deal with these kinds of problems is to sharply devalue their currency in order to boost tourism and exports. But because Greece is part of the euro, and because they don't control eurozone monetary policy, they haven't been able to devalue. (Eurozone monetary policy is controlled by the European Central Bank, which is more or less controlled by Germany, and so, unsurprisingly, eurozone monetary policy has been much better for Germany than for Greece.)

So membership in the eurozone has slammed Greece coming and going: It led to the crazy borrowing rates that fueled the crisis, and then it made the crisis much more painful for Greece.

For more on the failure of the euro in the crisis, see this great piece from Tim Lee.

11) Greece is crap at collecting taxes

Speaking of tax revenues, there's no real need to belabor this, but Greece is unusually bad at collecting taxes. These numbers come from the Organization for Economic Cooperation and Development, and they show what an outlier Greece is when it comes to tax collection. This isn't the cause of Greece's crisis, but it's definitely not helping the country get out of it.

12) Two views of Greece's economic boom - and crash

This chart, which my colleague Matt Yglesias made with World Bank data and the program Paintbrush, is a bit odd, but it makes an important point. I'll let him explain it.

The magenta line is more or less how things look to Greek people. Since 2008 or so, under the watchful eye of European Union elites (the central bank, the European Commission, the International Monetary Fund, the government of Germany, etc.), the Greek economy has completely collapsed. And the Greek population has been thrown into a state of dire immiseration.

The yellow line reflects more how things look to European officialdom. Greece is about on track for where you would expect it to be if you extrapolated forward from the pre-euro era. The prosperity of seven years ago was a bubble, driven by imprudent lending and dodgy government finances. Meanwhile, though Greece is a lot poorer than it was it's not actually a poor country in the global sense. As a supplicant looking for charity, Greece is a lot less compelling than India or Guatemala or any number of sub-Saharan African countries.

13) The Greek people don't think their voice counts in the eurozone (and they're right)

This 2014 poll by the European Commission offers a damning look at the resentments building within the eurozone. Only 23 percent of Greeks - they are, confusingly for Americans, abbreviated as "EL" on the above chart - believe their voice is listened to within the eurozone. But perhaps more tellingly, only 52 percent of Germans - abbreviated as "DE" - feel the same.

This speaks to the fact that while the Greeks feel completely oppressed by the eurozone, Germans, despite their strength, also feel like they're getting a raw deal because they've had to subsidize countries like Greece. Indeed, a March poll found that a majority of Germans wanted to see Greece leave the eurozone.

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Greece's debt crisis, explained in charts and maps

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The roots of Greece's crisis are simple. Before Greece joined the eurozone, investors treated it as a middle-income country with poor governance - which is to say, a credit risk. After Greece joined the eurozone, investors thought that Greece was no longer a credit risk - they figured if push came to shove, other eurozone members like Germany would bail out Greece.

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The ESM is the crisis resolution mechanism for euro area countries. Like its predecessor -- the temporary European Financial Stability Facility (EFSF) -- the ESM provides financial assistance to euro area Member States experiencing or threatened by financing difficulties.

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With the UK on the cusp of leaving the European Union and Greece increasingly facing the same fate, is it over for the beleaguered body?

An "epidemic" washing over other European countries may see the end of the EU, warns Yanis Varoufakis, Greece's former finance minister.

"The right question is: Is there going to be a eurozone and the European Union in one or two years' time?" asks Varoufakis, who served as finance minister for five months under the Syriza government.

Italy is already on the way out, Varoufakis tells UpFront.

"When you allow an epidemic to start spreading from a place like Greece to Spain ... to Ireland, then eventually it gets to a place like Italy," says Varoufakis. "As we speak, only one political party in Italy wants to keep Italy in the eurozone."

When asked about his failure to pull Greece out of its debt crisis during his tenure as finance minister, Varoufakis blamed the so-called troika - the IMF, the EU Commission and the European Central Bank - by intentionally sabotaging any debt-repayment agreement.

"They were only interested in crushing our government, making sure that there would be no such mutually advantageous agreement," says Varoufakis, who claims Greece was being used as a "morality tale" to scare voters in other European countries away from defying the troika.

"The only reason why we keep talking about Greece ... is because it is symptomatic of the architectural design faults and crisis of the eurozone."

For more from this interview, click here.

Follow UpFront on Twitter @AJUpFront and Facebook.

Source: Al Jazeera News

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Yanis Varoufakis: Grexit 'never went away'

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With the UK on the cusp of leaving the European Union and Greece increasingly facing the same fate, is it over for the beleaguered body? An "epidemic" washing over other European countries may see the end of the EU, warns Yanis Varoufakis, Greece's former finance minister.

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Everything you probably never thought you would need to know about the European Union and what it means for the UK to leave. Explore on your own! http://www.nytimes.com/2016/06/25/world/europe/britain-brexit-european-union-referendum.html?_r=0 http://europa.eu/about-eu/index_en.htm http://www.britannica.com/topic/European-Union ________ Tweet me your suggestions or follow me on Twitter: @ItsSamKelly Tumblr: thecuriouscatisalive.tumblr.com

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Britain will vote in a referendum on whether to remain in or leave the EU on June 23.

But if there is a British exit, what are some of the alternate options for our trade and political relationship with our neighbours?

Britain has a number of options if it decides to leave the EU

A Norwegian model could see the UK become a part of the European Economic Area (EEA), which would give it access to most of the single market.

It would allow for representatives in EU institutions but no vote over EU rules.

If Britain arranged a customs union with the EU, as in the case of Turkey, it would give the UK access to the free market in manufactured goods but not financial services.

What other models could the UK adopt if it votes to leave the EU? Watch the video above to find out.

What is the EU referendum / Brexit?

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What are the alternatives if Britain leaves the EU?

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Britain will vote in a referendum on whether to remain in or leave the EU on June 23. But if there is a British exit, what are some of the alternate options for our trade and political relationship with our neighbours?

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Peter Navarro, the closest thing Trump has to an economic guru, made some waves by accusing Germany of being a currency manipulator and suggesting that both the shadow Deutsche mark and the euro are undervalued. Leaving aside the dubious notion that this is a good target of US economic diplomacy, is he right?

Yes and no. Unfortunately, the "no" part is what's relevant to the US.

Yes, Germany in effect has an undervalued currency relative to what it would have without the euro. The figure shows German prices (GDP deflator) relative to Spain (which I take to represent Southern Europe in general) since the euro was created. There was a large real depreciation during the euro's good years, when Spain had massive capital inflows and an inflationary boom. This has only been partly reversed, despite an incredible depression in Spain. Why? Because wages are downward sticky, and Germany has refused to support the kind of monetary and fiscal stimulus that would raise overall euro area inflation, which remains stuck at far too low a level.

So the euro system has kept Germany undervalued, on a sustained basis, against its neighbors.

But does this mean that the euro as a whole is undervalued against the dollar? Probably not. The euro is weak because investors see poor investment opportunities in Europe, to an important extent because of bad demography, and better opportunities in the U.S.. The travails of the euro system may add to poor European perceptions. But there's no clear relationship between the problems of Germany's role within the euro and questions of the relationship between the euro and other currencies.

And may I say, what is the purpose of having someone connected to the U.S. government say this? Are we going to pressure the ECB to adopt tighter monetary policy? I sure hope not. Are we egging on a breakup of the euro? It sure sounds like it - but that is not, not, something the US government should be doing. What would we say if Chinese officials seemed to be talking up a US financial crisis? (It would, of course, be OK with Trump if the Russians did it.)

So yes, Navarro has a point about Germany's role within the euro. And if he were unconnected with the Bannon administration, he would be free to make it. But in the current context, this is grossly irresponsible.

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Germany, the Euro, and Currency Manipulation

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Peter Navarro, the closest thing Trump has to an economic guru, made some waves by accusing Germany of being a currency manipulator and suggesting that both the shadow Deutsche mark and the euro are undervalued. Leaving aside the dubious notion that this is a good target of US economic diplomacy, is he right?

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There's a bit of a lull in the news from Europe, but the underlying situation is as terrible as ever. Greece is experiencing a slump worse than the Great Depression, and nothing happening now offers hope of recovery. Spain has been hailed as a success story, because its economy is finally growing - but it still has 22 percent unemployment. And there is an arc of stagnation across the continent's top: Finland is experiencing a depression comparable to that in southern Europe, and Denmark and the Netherlands are also doing very badly.

How did things go so wrong? The answer is that this is what happens when self-indulgent politicians ignore arithmetic and the lessons of history. And no, I'm not talking about leftists in Greece or elsewhere; I'm talking about ultra-respectable men in Berlin, Paris, and Brussels, who have spent a quarter-century trying to run Europe on the basis of fantasy economics.

To someone who didn't know much economics, or chose to ignore awkward questions, establishing a unified European currency sounded like a great idea. It would make doing business across national borders easier, while serving as a powerful symbol of unity. Who could have foreseen the huge problems the euro would eventually cause?

Actually, lots of people. In January 2010 two European economists published an article titled "It Can't Happen, It's a Bad Idea, It Won't Last," mocking American economists who had warned that the euro would cause big problems. As it turned out, the article was an accidental classic: at the very moment it was being written, all those dire warnings were in the process of being vindicated. And the article's intended hall of shame - the long list of economists it cites for wrongheaded pessimism - has instead become a sort of honor roll, a who's who of those who got it more or less right.

The only big mistake of the euroskeptics was underestimating just how much damage the single currency would do.

The point is that it wasn't at all hard to see, right from the beginning, that currency union without political union was a very dubious project. So why did Europe go ahead with it?

Mainly, I'd say, because the idea of the euro sounded so good. That is, it sounded forward-looking, European-minded, exactly the kind of thing that appeals to the kind of people who give speeches at Davos. Such people didn't want nerdy economists telling them that their glamorous vision was a bad idea.

Indeed, within Europe's elite it quickly became very hard to raise objections to the currency project. I remember the atmosphere of the early 1990s very well: anyone who questioned the desirability of the euro was effectively shut out of the discussion. Furthermore, if you were an American expressing doubts you were invariably accused of ulterior motives - of being hostile to Europe, or wanting to preserve the dollar's " exorbitant privilege."

And the euro came. For a decade after its introduction a huge financial bubble masked its underlying problems. But now, as I said, all of the skeptics' fears have been vindicated.

Furthermore, the story doesn't end there. When the predicted and predictable strains on the euro began, Europe's policy response was to impose draconian austerity on debtor nations - and to deny the simple logic and historical evidence indicating that such policies would inflict terrible economic damage while failing to achieve the promised debt reduction.

It's astonishing even now how blithely top European officials dismissed warnings that slashing government spending and raising taxes would cause deep recessions, how they insisted that all would be well because fiscal discipline would inspire confidence. (It didn't.) The truth is that trying to deal with large debts through austerity alone - in particular, while simultaneously pursuing a hard-money policy - has never worked. It didn't work for Britain after World War I, despite immense sacrifices; why would anyone expect it to work for Greece?

What should Europe do now? There are no good answers - but the reason there are no good answers is because the euro has turned into a Roach Motel, a trap that's hard to escape. If Greece still had its own currency, the case for devaluing that currency, improving Greek competitiveness and ending deflation, would be overwhelming.

The fact that Greece no longer has a currency, that it would have to create one from scratch, vastly raises the stakes. My guess is that euro exit will still prove necessary. And in any case it will be essential to write down much of Greece's debt.

But we're not having a clear discussion of these options, because European discourse is still dominated by ideas the continent's elite would like to be true, but aren't. And Europe is paying a terrible price for this monstrous self-indulgence.

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There's a bit of a lull in the news from Europe, but the underlying situation is as terrible as ever. Greece is experiencing a slump worse than the Great Depression, and nothing happening now offers hope of recovery. Spain has been hailed as a success story, because its economy is finally growing - but it still has 22 percent unemployment.

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That Joe Stiglitz insists that the euro, that European currency, was a disastrous mistake is well known. He's just published an entire book on the subject after all. That Paul Krugman is less than keen on it is also well known - he's been pointing out why it won't work without a great deal more fiscal integration for some time now. Completists will know that Milton Friedman was against it too as this piece from 1997 shows:

If one country is affected by negative shocks that call for, say, lower wages relative to other countries, that can be achieved by a change in one price, the exchange rate, rather than by requiring changes in thousands on thousands of separate wage rates, or the emigration of labor. The hardships imposed on France by its "franc fort" policy illustrate the cost of a politically inspired determination not to use the exchange rate to adjust to the impact of German unification. Britain's economic growth after it abandoned the European Exchange Rate Mechanism a few years ago to refloat the pound illustrates the effectiveness of the exchange rate as an adjustment mechanism.

A single currency removes one of your tools to deal with asymmetrical shocks across the currency zone. You cannot vary the exchange rate to aid in dealing with such shocks. In fact, given the single currency, the single monetary policy, and the straightjacket insisted upon about fiscal policy, there is only one policy left. Those changes in thousands upon thousands of separate wage rates or, as we also call it, internal devaluation.

Anyone who has been reading these pages for any length of time will know that I make this point often enough. What is being added today is that Paul Krugman has been quoting James Tobin on the point:

the empirically questionable implication of the usual natural rate hypothesis that unemployment rates only slightly higher than the critical rate will trigger ever-accelerating deflation. Phillips curves seem to be pretty flat at high rates of unemployment. During the great contraction of 1930-33, wage rates were slow to give way even in the face of massive unemployment and substantial deflation in consumer prices. Finally in 1932 and 1933 money wage rates fell more sharply, in response to prolonged unemployment, layoffs, shutdowns, and to threats and fears of more of the same.

Friedman and Tobin were often thought as the antithesis of each other. But there's a lot more agreement among seemingly very different economists than people might generally think. There might be certain issues where people are trying to work something out for the first time where there is disagreement. But the general foundations of the subject are agreed across those divisions.

As here, with Friedman laying out the basic point about how internal devaluation will be the only policy left and Tobin pointing out just how damn difficult it will be to do. Another way of reading Tobin there is the amount of economic pain that will have to be inflicted to get those wage rates to fall. He and Friedman would have agreed that varying the exchange rate was going to cause a great deal less grief. At which point Krugman:

Sure enough, the return of mass unemployment after 2008 didn't produce much in the way of wage decline, except, finally, after years of Depression-level unemployment in Greece.

The structure of the euro insists upon the most difficult, the method with the greatest human suffering, way of adapting economies to such asymmetric shocks. Which is, of course, why it is a disaster. For inflicting human misery isn't notably thought of as being a desirable object of public policy - rather the opposite in fact, alleviating it is.

Yep, it's a disaster. And it doesn't in fact need four Nobel Laureates to tell us either. It's as plain as the nose on my face that it is - and thus the sooner it collapses the better. Hopefully along with that system that brought it into being, the EU itself.

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The Euro Is A Disaster - Stiglitz, Krugman, Milton Friedman And James Tobin Agree

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That Joe Stiglitz insists that the euro, that European currency, was a disastrous mistake is well known. He's just published an entire book on the subject after all. That Paul Krugman is less than keen on it is also well known - he's been pointing out why it won't work [...]

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Eurozone and interest rates - article & Q's

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The Euro is a bold experiment to create the largest currency area in the World. However, the current Euro crisis have revealed deep flaws in the structure of the single currency

The Euro involves:

1. A single currency within the Eurozone area.

2. A common monetary policy. Interest Rates are set by the ECB for the whole Eurozone area.

3. Growth and Stability Pact. In theory there are limits on government borrowing, national debt and fiscal policy. However, in practice member countries have often violated the strict limits on government borrowing.

Problems of the Euro

Interest rates not suitable for whole Eurozone. A common monetary policy involves a common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be inappropriate for regions which are growing much faster or much slower than the Eurozone average. For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany. However, in 2011, southern Eurozone members were heading for recession due to austerity packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal, Greece and Italy.

The Euro is not an optimal currency area. If a state in the US, such as New York ,was in recession, workers in New York could move to New England and get a job. However, in the Eurozone this is much more difficult; it involves moving country and possibly learning a new language. There are more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an unemployed Greek can't easily relocate to Germany. see: Two Speed Europe

Limits Fiscal Policy. With a common monetary policy it is important to have similar levels of national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a growing problem for many Mediterranean countries like Italy, Greece and Spain who have large national debts and rising bond yields.

Lack of Incentives. It is argued that being a member of the Euro protects a country from a currency crisis. Therefore, there is less incentive for countries to implement structural reform and fiscal responsibility. For example, in good years Greece was able to benefit from very low bond yields on its debt because people felt Greek debt would be secured by rest of Europe. But, this wasn't the case, and Greece were lulled into a fall sense of security.

No scope for Devaluation. Since the start of the Euro, several countries have experienced rising labour costs. This has made their exports uncompetitive. Usually, their currency would devalue to restore competitiveness. However, in the Euro, you can't devalue and you are stuck with uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece.

This shows the effects of Eurozone members becoming uncompetitive. Very high current account deficits.

No Lender of Last Resort. The ECB is unwilling to buy government bonds if there is a temporary liquidity shortage. This makes markets more nervous about holding debt from eurozone economies and precipitates fiscal crisis. See: Problems of Italy - why Italian bonds increased despite having a much lower budget deficit than UK.

Italy bond yields rose despite a primary budget surplus

Eurozone members have seen a rise in unemployment

Divergence in bank rates. In theory, the Eurzone creates a common interest rate. However, in the credit crisis of 2010-13, we see rising bank rates for peripheral Eurozone countries, like Italy and Spain. Small and medium sized firms faced higher borrowing costs than in 2005, even though the ECB cut the main base rate. This suggests that the ECB was unable to loosen monetary policy when needed. See more on credit policy

Experience of EU Fiscal Crisis

The great recession of 2008-11 showed the vulnerability of Euro member countries to a common monetary policy. Because they can't devalue and also ask the Central Bank to buy government securities they are at much greater risk of a liquidity crisis.

Because of fears over liquidity crisis, bond yields rose from Ireland, Spain, Portugal and Greece. As a result these eurozone countries were forced into pursuing spending cuts, and accepting higher interest rates. But, this led to a vicious cycle of lower growth and lower tax revenues.

See: Why UK bond yields stayed low compared to Euro members

Problems for UK Economy

UK economy has additional problems which make joining the Euro a bad idea.

Housing market. Many in the UK have a mortgage which is a big % of their disposable income. This is related to the high cost of buying houses in the UK.

Variable Mortgages In the UK more homeowners have variable mortgages. These two factors means UK consumers are very sensitive to changes in the base rate. If the ECB kept interest rates higher than the UK needed it would create serious problems in the UK. Arguably to join the UK would need to reform its housing market and reliance on variable mortgages.

Related Posts on the Euro

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The Euro is a bold experiment to create the largest currency area in the World. However, the current Euro crisis have revealed deep flaws in the structure of the single currency The Euro involves: A single currency within the Eurozone area. A common monetary policy.

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From an economic perspective, the EU can be criticised for various reasons including

Common agricultural policy (CAP)

Regulated labour markets - higher structural rates of unemployment

Deflationary bias of ECB

Problems of Euro

Problems of free movement of labour

Common Agricultural Policy CAP

The CAP was one of the most inefficient economic policies and a waste of money. At its peak, it took over 70% of the EU budget, even after decades of slow reform, it still accounts for 40% of the budget. The Common Agricultural Policy - in effect subsidised farmers to produce goods that nobody wanted (See CAP). The excess supply was often dumped on world markets creating falling prices and incomes for world farmers. After many years, the worst excesses of CAP have been reformed. But, it remains persistently difficult to end the culture of subsidising agriculture. A significant existing problem with CAP is that it has rewarded large land-owners, with little reflection of social benefit. See: Transfer of funds from poor to rich landowners ( Guardian) The taxpayer pays the burden of higher prices and cost to EU.

Regulated Labour Markets

Unemployment in the European Union has been persistently high for the past two decades. This is especially a problem in countries like France and Spain. One reason is the highly regulated labour markets that the EU social charter encourages. The EU has failed to deal with regional and occupational unemployment.

Deflationary Bias

The ECB has inherited the German Bundesbank's anti-inflationary stance. However, they often place too much emphasis on reducing and inflation - ignoring more pressing problems of unemployment and economic growth. This is especially a problem for countries in the southern Eurozone (Greece, Portugal, Spain and Ireland) who have struggled with a common monetary policy and interest rate.

Euro has created lower economic growth

The EU pushed the creation of the Euro. However, in practise, member countries have struggled to cope with the fixed exchange rate, and lack of independent monetary policy.

Countries in the Euro have been pushed into bond crisis because markets fear a lack of liquidity (ECB can't act as lender of last resort and print money to buy bonds). This has seen higher bond yields on the debt of Euro countries. As a result of the bond crisis, governments have been pushed into spending cuts and budget austerity. See - EU austerity

However, since 2013, EU bond yields have fallen as the ECB has proved more willing to intervene in the bond markets. However, whether this represents a 'papering over of cracks' or a fundamental solution remains to be seen.

Free movement of labour

Free movement of labour and capital is a founding principal of the European Union - designed to forge European harmony and a mixing of European nations. However, since the expansion into the East of Europe - the divergence in average incomes have created pressure for large-scale migration.

This migration has negative costs to both the Eastern European countries who lose their most skilled labour and also western economies, which have experienced a large inflow of labour.

A problem of large inflows of labour is pressure on housing and public services. Although migrants are often net contributors to tax revenues. Migration can be concentrated in certain areas, and there can easily be a perception migrants are to blame for queues in health care and housing. It was a factor behind the UK's vote to leave the EU in June 2016.

The Brain drain

This is the problem of countries losing their most skilled and mobile labour.

According to the Economist, the loss of skilled workers is a significant problem in many Eastern European economies ( Economist Jan 2017)

Polls of Bulgarian medical students show that 80-90% plan to emigrate after graduating.

The working population of Latvia has declined 25% since 2000

This outflow of migrants has led to lower economic growth. According to a report by the IMF:

"Empirical analysis suggests that in 2012, cumulative real GDP growth would have been 7 percentage points higher on average in CESEE in the absence of emigration during 1995-2012, with skilled emigration playing a key contributing factor." IMF 20 July 2016

Given large geographical inequality, the EU should do more to use EU funds to deal with issues of migration encourage investment in lower wage countries. This would be a better use of money than giving to wealthy landowners under CAP.
Related

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Criticisms of European Union - Economics Help

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From an economic perspective, the EU can be criticised for various reasons including Common agricultural policy (CAP) Regulated labour markets - higher structural rates of unemployment Deflationary bias of ECB Problems of Euro Problems of free movement of labour Common Agricultural Policy CAP The CAP was one of the most inefficient economic policies and a waste of money.

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Background to the EU

1957 Treaty Of Rome established the EEC between 6 original members
1960 EFTA between UK, Aus, Den, Nor, Port, Swis and Swe
1973 UK, Ireland and Denmark join EC
1999 Creating of Euro single currency.

Community Institutions

1. European Commission, this is the civil service of the EU

2. Council of Ministers from different countries make decisions on policy

3. European Council. Meets twice a year to make decisions which fundamentally alter EU policy

4. European Parliament directly elected body of 626 members

5. The Court OF Justice. Is based in Luxembourg

Single European Act 1986

This was an attempt to "relaunch" the EU by attempting to create a Single Market.
It was necessary to drop unanimous decision making with an increase in Qualified Majority Voting.
The SEA also committed the EU Economic and Monetary Union (EMU)

Treaty of Maastricht 1992

1. Economic, social and Political extensions to the EU

2. Common foreign and security policy

3. Intergovernmental cooperation on justice and home affairs

Economic Integration

Preference Areas. The Lome conference of 1975 gave preferential treatment to certain developing countries

Customs Union. This is s free trade area with a common external tariff

Single Market. - European Union

This occurs when the member countries act as a single economic area with the free movement of labour and capital

This involves:

1. No Tariffs on trade between member states

2. Elimination of border controls

3. Free movement of People

4. Mutual recognition of qualifications

5. Harmonization of taxes and other industrial and economic laws

Monetary Union is a single market plus

1. A common currency

2. N0 internal exchange Rates

3. Common monetary policy

Obstacles To Completing the Single Market in the EU

1. Customs Formalities

2. Different Tax Rates, especially on Alcohol and tobacco

3. State Subsidies to domestic industries, or tax breaks to encourage inward investment. This creates unfair competition within the EU

4. Different regulations added to the cost of business

5. Different currencies (until the Euro was launched)

6. Until 1994 there were restrictions on the movement of capital, but these controls have been abolished and gradual liberalization has been made on other aspects of financial services.

Benefits of a Single Market

Trade Creation. Exploitation of comparative adv allows lower prices and costs. Leading to higher output and more employment

Reduction in the direct costs of barriers

Economies of scale from specialization

Greater competition

Free movement of labour increases labour market flexibility and opportunities

Costs of a Single Market

Structural Change due to increased specialization

Adverse Regional multiplier effects. The creation of a single market tends to attract capital and jobs away from the periphery areas to the centre.

Development of Monopoly/ Oligopoly power

Trade Diversion. If external barriers remain high countries could lose out

EU Competition Policy

The EU competition has the power to examine mergers to see whether they are in the public interest. They are not always opposed to mergers because they can have benefits such as

1. Economies of scale

2. Greater international competition.

However the abuse of market power can cause problems such as higher prices, unfair competition.

A merger could be referred to the commission if

1. New Firm has greater than £3.6 billion

2. Less than 2/3 of the new firm comes from one member state (therefore there is still a role for national commissions)

Other unfair business practices include

1. Price fixing and market sharing Cartels. In 1994 the major steel manufacturers were fines 7% of their turnover for fixing prices

Social Aspects of the Single Market

The Social Charter

This aimed to give greater protection to workers in the EU it included the following:

Free movement of labour

Min wages

Max working week

Right to paid holidays

Freedom to join in trades union

Vocational training for all EU citizens

Equal treatment between men and women

Protection for elderly and disabled

Health and Safety at work

The creation of Eur ES, this is a European information network for job vacancies

Criticisms of the EU
Should the UK stay in the European Union?

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Background to the EU 1957 Treaty Of Rome established the EEC between 6 original members 1960 EFTA between UK, Aus, Den, Nor, Port, Swis and Swe 1973 UK, Ireland and Denmark join EC 1999 Creating of Euro single currency. European Commission, this is the civil service of the EU Council of Ministers from different countries make decisions on policy European Council.

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Greece's financial crisis is so severe that it should turn to the World Bank for help rather than the International Monetary Fund, its former finance minister has claimed.

George Papaconstantinou, who was finance minister from 2009 to 2011, said Greece's finances were so weak and its institutions so immature that it needed support of the type that the World Bank offers to the least developed countries.

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Greece is a case for the poverty-solving World Bank, not the IMF says ex-minister

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Greece's financial crisis is so severe that it should turn to the World Bank for help rather than the International Monetary Fund, its former finance minister has claimed. George Papaconstantinou, who was finance minister from 2009 to 2011, said Greece's finances were so weak and its institutions so immature that it needed support of the type that the World Bank offers to the least developed countries.

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In normal times, in a normal country, court proceedings over mortgage arrears would not be the stuff of headline news.

But these are not normal times in Greece and such cases have been making national television bulletins.

In a soulless white concrete court building, leaders of the I Won't Pay movement have been turning routine eviction proceedings into the frontline in a popular fight-back against austerity.

The protesters - noisy and feisty but non-violent when we saw them - turn out in force to block the progress of cases where banks seek to repossess houses where loans have fallen into arrears.

It can be a short, dramatic and effective piece of direct action.

People vs 'machine'

On the afternoon we went to court, the demonstrators, chanting and cheering, crowded onto the judicial benches and spilled over into the witness box.

A lawyer representing one bank found himself hemmed in and surrounded, unable to make his case because he was unable to make himself heard.

The case was adjourned and the housing activists cheered and whistled what they saw as a rare victory for ordinary Greek people over a kind of international machinery of austerity.

One of the leaders, Ilias Papadopoulous, said: "More than half of the Greek people live in poverty below the level where they have any dignity. The government won't protect them so we are here to protect them."

The victory, of course, isn't final - it's hard to believe that the bank will give up on its money and its reasonable to assume that its lawyer will be back in court one day soon.

But the case provided an insight into the popular mood in a country worn down by years of austerity.

Even the European Commissioner for Finance Pierre Moscovici has spoken of the need to provide the Greek people with some kind of light at the end of the austerity tunnel. He's even pronounced himself "hopeful" on the issue.

But it is hard to find many Greek people who share in his share of optimism.

In a week in Athens I met a couple planning to emigrate in search of work immediately after their wedding next month, the manager of a TV station whose staff have not been paid for months and a young man with an MBA working as a taxi-driver, who told us he saw "absolutely no hope" for the future.

So the mood could hardly be bleaker as the Greek government prepares for another round in its apparently never-ending dance with its main international creditors - the eurozone and the IMF.

Greece is hoping that the previous formula whereby it signed up to painful economic reforms in return for phased bailouts might now be relaxed.
Why is Greece back in the headlines? Greece: EU and IMF in 'common position'
In big picture terms, the Greek position remains dauntingly bad.

Its ratio of debt to GDP - how much it owes compares to how much it earns - stands at an eye-watering 180% and its long term hope has to be that at some point at least some of that debt will be written off.

In the short term though that's highly unlikely. The leaders of the eurozone face elections this year in the Netherlands, France and Germany - not a good moment to tell their taxpayers that they will not be getting their money back from Greece.

And the IMF, which is sympathetic to a write-off, would only want to see it happen in the context of further structural reforms which would try the patience of the Greek voters to breaking point.

"The idea of reform has become toxic in Greece," says Nick Malkoutzis, editor of the influential economic intelligence website MacroPolis, "because when the other side says, 'This is what you need to do in order to put your economy on a better footing', what the average Greek hears is that 'I'm going to take another hit in my pocket'".

Elite caution?

The Greek government, though, senses a moment of opportunity in a world where its debt crisis has been overshadowed at least for now by the dramas of Brexit and the election of US President Donald Trump.

They intend to push for a different framework for negotiations with their creditors where in future on direct concessions on pension reform would be balanced out by, for example, a possible tax cut.

Greek Deputy Foreign Minister Georgios Katrougalos calculates that what he calls a global elite which has already suffered a series of shocks in recent months won't want to resist provoking the anger of the Greek people.

"There is a general disenchantment in Europe," he told me, "especially in Greece because we have been hit harder by austerity.

"So the real question now is how to reverse austerity and I think there is hope in that because I think that the elite know they can't govern as they did before - the election of Trump shows that and shows the people won't consent to be governed as they were before."

We will not know if the minister's calculation is correct until Greece begins formal negotiations with its creditors again.

If he's right then perhaps the pervasive mood of gloom in Greece might begin to lift - but for now when Greeks hear talk about "light at the end of the tunnel" they feel the tunnel remains dauntingly long and the light remains frustratingly dim.

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Greeks bridle against 'never-ending' austerity

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In normal times, in a normal country, court proceedings over mortgage arrears would not be the stuff of headline news. But these are not normal times in Greece and such cases have been making national television bulletins.

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Whilst the debate over UK membership of the single currency is - by and large - decided, there is an ongoing economic discussion about whether membership of the Euro Zone is right for some of Europe's smaller and newer member nations. The Baltic States are all now members but countries such as Poland and the Czech Republic remain outside.

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This is the 4th in a series of 5 short revision videos on the Greek economy. Greece is struggling inside the Euro Zone; her growth potential is held back by a number of important supply-side economic weaknesses.

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This is the 1st of 5 short revision videos on the Greek economy. We start with a quick quiz - 5 questions to test your general knowledge!

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Real output (GDP) has fallen by 25% since 2008

Per capita incomes were Euro 18.6K in 2011, now 16K

Real consumption is 40% lower than pre-crisis

Unemployment has been above 20% for six years

Economy remains on the edge of price deflation

Private sector wages have fallen by more than 40%

Investment fell to 10% of GDP in 2014 v 27% in 2007

Tourism is recovering strongly - having the Euro helps!

But economy has number of supply-side weaknesses

Interest rate on 10 year government debt = 7.4%

In the years following Greece's accession to the euro zone, economic growth relied mainly on credit-driven private consumption and debt-financed public expenditure rather than on saving and investment. All of this came to a halt in 2008 and by 2009, Greece was at the start of what was to prove a persistent and deep depression in real output.

During the period 2008-13, the Greek economy went through a dramatic contraction. Output fell by approximately one-quarter during this period, and unemployment rose to more than 25 per cent of the labour force.

The fall in capital investment spending dwarfs the contraction in real GDP - strong evidence of a negative accelerator effect. Real investment has declined by more than 60 per cent since 2007 and capital investment is only 10-11% of GDP, easily the lowest investment rate of any country inside the EU. Greece's capital stock is shrinking and ageing, a major factor hindering progress in lifting productivity and improving competitiveness.
IMF Report on Greece, February 2017
Greece has not managed to return to sustainable growth, with output having contracted by more than 25 percent since 2008, investment down by more than 60 percent, and unemployment at the highest level in the euro-zone.
Social costs of the Greek depression

Steep rise in relative poverty - more than a 3rd of households now fall below the poverty line of <50% of median income

NEETs - 30 per cent of young people in Greece are not in employment, education or training, this is one of the highest rates in Europe. Graduate employment rates are only 49%.

Sharp decline in measured life satisfaction / happiness

A third of marriages in Greece are ending in divorce compared to 2 in 10 before the recession

The informal economy of Greece is one of the largest in Europe, exceeding 20 per cent of the country's GDP

Greece ranked 29th on HDI outcomes - below the average score for high income advanced countries

"Thirty-six per cent of the population are at risk of poverty or social exclusion and almost 30 per cent of young people not in employment, education or training, one of the highest rates in Europe." (Source: EBRD)
Weak manufacturing
Greece's economy is dominated by services. The share of industry in GDP is the third lowest in the EU. Presently, manufacturing in Greece is mainly related to labour-intensive food processing. Real estate and tourism are key sectors for the Greek economy. Shipping does well but it is capital intensive and is often said to take advantage of tax-holidays (avoidance).
Essentials on the Greek Debt Crisis

Over the last 6 years, Greece has had 7 governments

Public debt has continued to rise, reaching 180% of GDP by end-2015 (65% higher than its pre- crisis level.

Greek pension system is in crisis - deficit of 11% of GDP

Greece has a very narrow tax base - taxpayers in the highest income decile pay about 60 percent of personal income tax revenue, while 53 percent of wage earners and 85 percent of farmers are exempt from tax

Rates for all major taxes in Greece are higher than the euro-area average (e.g. VAT is 24%) this encourages tax evasion and also reduces labour market participation.

Imposed Fiscal Austerity

The TROIKA has imposed fiscal austerity on Greece

TROIKA comprises the European Commission, ECB and IMF

Fiscal austerity has included:

1. Cuts in public sector pay and pensions

2. Rise in the retirement age

3. Large scale privatizations

4. Increases in VAT (to 24%)

5. Deep cuts in public sector employment

Does fiscal austerity work in a country in semi-permanent recession and with a shrinking ability to raise the tax revenues needed to pay off the debt and provide basic public services?

Greece's Internal Devaluation

"In Greece economic policies of austerity, in conjunction with internal devaluation, have been adopted in an attempt to improve competitiveness, correct external deficits and promote export-led growth."

Source: https://dspace.lib.cranfield.ac.uk/bitstream/1826/11158/1/A_post-mortem_of_austerity-2016.pdf

Internal devaluation is when a country attempts to improve competitiveness through lower wage costs and prices

This is an alternative to a currency depreciation / devaluation

In Greece there has been a significant reduction in labour costs - with private sector wages falling by 40%

A key evaluation point is that prices have not fallen much - because of sheltered oligopolistic sectors and high VAT
Potential benefits to Greece from Grexit
And Greece does not have a sufficiently large export sector that sells price-sensitive products to other countries.
Risks to Greece from Grexit

Chance of export-led growth from a devaluation

Higher import prices will help domestic producers

Greece able to inflate away some of their debts

Greece able to run an independent monetary policy

Negative real interest rates can provide a monetary stimulus to help Greece out of a deflationary trap

End to imposed fiscal austerity allowing the Greek government to increase their spending

Some countries such as Iceland have recovered well since their own financial crisis / currency devaluation

Spike in inflation - affecting the poorest most

Risk that Greece will turn printing presses on - hyper-inflation?

Higher inflation will bring about increased interest rates

Risk of huge capital flight from banks - big risks for depositors

Likely to be another deep short term slump in real output

Devaluation comes with debt default - creditors are unlikely to lend to Greece again at an affordable interest rate

Greek export capacity is limited - modest gains from devaluation

Tourism has boomed with Euros - no guarantee this will continue

May involve leaving the EU and loss of key EU structural funds

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Prospects for the Greek Economy | Economics | tutor2u

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Real output (GDP) has fallen by 25% since 2008 Per capita incomes were Euro 18.6K in 2011, now 16K Real consumption is 40% lower than pre-crisis Unemployment has been above 20% for six years Economy remains on the edge of price deflation Private sector wages have fallen by more than 40% Investment fell to 10% of GDP in 2014 v 27% in 2007 Tourism is recovering strongly - having the Euro helps!

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Greek Economy - Grexit Benefits and Costs

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In the 5th of our series of short videos on the Greek economy we consider some of the possible benefits and costs/risks of Grexit (a decision by Greece to leave the single currency).

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Greek Economy - Deficit, Debt and Austerity

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The 3rd in our series of 5 short videos on Greece looks at the scale of the public debt crisis facing Greece and the challenges faced by the imposed fiscal austerity from the Troika. The IMF argues that Greece cannot grow her way out of the debt problem and that some form of debt relief is now inevitable.

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This is the second in a series of five short revision videos on the Greek economy. We look at the state of play in 2017 with the Greek economy struggling to achieve the growth momentum that might help it to emerge from the economic, financial and political crisis.

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Does this mean Europe is essentially damned, I ask?

"The most likely scenario is a continued muddling through, which is what they have been doing to date. But neither Frankfurt nor Brussels controls events, as the Brexit referendum vote shows, so what you see - and this is not for sure but almost predictable - is growing alienation.

"This is already apparent in electoral outcomes. More than 60pc of people in Spain, Greece and Portugal voted against austerity parties. The same thing with Brexit, which was also a rebellion against the political centre.

"The only thing that saves the centre ground is that the anti-establishment movement is divided between left and right. So you get a stalemate which is also not at all good for anyone, and out of that who knows what happens.

"Getting a political coalition in any country large enough to leave the euro is therefore difficult. What's so troubling is that it is also proving impossible for Europe to agree on policies to fix the euro, so you have neither one thing or the other. Despite his apparent pessimism, Stiglitz is not short on suggested solutions.

"If you had a group of people sitting around a table rationally discussing the future of Europe, these are the sort of things they might come up with.

"One is to say let's finish the job. The US shares a common currency among 50 diverse states, so what are the institutions and rules needed to make the single currency work.

"As a bare minimum, you need common deposit insurance, a banking union, Eurobonds, maybe industrial policies to allow those at the bottom to catch up, you need to move away from just inflation targeting, and you need some way of adjusting real exchange rate that doesn't involve internal devaluation.

"Germany has to perform its role of allowing its economy to inflate relative to others. So those are the minimum to make a euro that works.

"But Germany takes the view that we are not a transfer union and we won't even take the risk of a banking union or of common deposit insurance. This is like New York saying we don't want to have federal deposit insurance because there is a bank in Alabama which might go bankrupt."

If completing the job proves impossible, says Stiglitz, that leaves the alternative of an "amicable divorce".

"In the book I use the example of marriage councillors. In the past, the job of the marriage councillor was to keep the marriage together, but modern ones sometimes say you should never have got married in the first place.

"Once you have accepted the marriage can't be made to work, then the only issue is how to make splitting up go as smoothly as possible.

"In the book, I describe some novel ways of doing this. The core of the idea is that you are going to have to allow redenomination of debt, and allow some form of bankruptcy.

"A third way is the flexible euro where you say lets try and consolidate the institutional advances we have made but recognise that we are not anywhere near a single currency yet. And then I describe some mechanisms that would allow the exchange rate to be operated flexibly and allow economic adjustment".

So what are the chances of any of these "solutions" being adopted, I ask.

"I'm hopeful", Stiglitz says with a grin, which somewhat suggests he's not.

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Joseph Stiglitz: 'The EU's monetary union was the mistake'

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Does this mean Europe is essentially damned, I ask? "The most likely scenario is a continued muddling through, which is what they have been doing to date. But neither Frankfurt nor Brussels controls events, as the Brexit referendum vote shows, so what you see - and this is not for sure but almost predictable - is growing alienation.

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In a side street in the heart of Athens, two siblings are hard at work. For the past year they have run their hairdressing business - an enterprise that was once located on a busy boulevard - out of a two-bedroom flat. The move was purely financial: last summer, as it became clear that Greeks would be hit by yet more austerity to foot the bill for saving their country from economic collapse, they realised their business would go bust if it continued operating legally.

"We did our sums and understood that staying put made no sense at all," says one sibling. "If we didn't [offer] receipts, if we avoided taxes and social security contributions, we could just about make ends meet."

They are far from being alone. A year after debt-stricken Greece received its third financial rescue in the form of international funding worth €86bn, such survival techniques have become commonplace. For a middle class eviscerated by relentless rounds of cuts and tax rises - the price of the country's ongoing struggle to avert bankruptcy - the draconian conditions attached to the latest bailout are invariably invoked in their defence. Measures ranging from the overhaul of the pension system to indirect duties - slapped on beer, fuel and almost everything in between - and a controversial increase in VAT are similarly cited by Greeks now reneging on loan repayments, property taxes and energy bills.

Against a backdrop of monumental debt - €320bn, or 180% of GDP, the accumulation of decades of profligacy - fatalism is fast replacing pessimism on the streets. "Our country is doomed," sighs Savvas Tzironis, summing up the mood. "Everything goes from bad to worse."

Close to half a million Greeks are believed to have migrated since the crisis begun, thanks to the searing effect of persistent unemployment (at just under 24%, the highest in Europe) and an economy that has shed more than a third of its total output over the past six years. The nation has been assigned some €326bn in bailout loans since May 2010 - the biggest rescue programme in global financial history. Yet the fear that it is locked in an economic death spiral was given further credence last week when Eurobank analysts announced that consumption and exports had also fallen, by 6.4% and 7.2%, in the second quarter of the year.

The duration and depth of the recession is such that the World Bank now compares it to the slumps seen in eastern European countries in the early 1990s. The poorest 20% of Greece's 11 million people have suffered a 42% drop in disposable income since 2009.

"If we continue down this road, a fourth, even a fifth, bailout should be expected," says Aristides Hatzis, associate professor of law and economics at Athens University. "I don't see any progress. The economy is stagnant, the private sector devastated, the public administration underfunded and ineffective. And there is always the spectre of Grexit at the end of the tunnel."

The 14 August bailout deal was meant to have put paid to that. Announcing the agreement after months of negotiations that not only brought Athens to the brink of euro exit but provoked the continent's biggest existential crisis in recent times, EU commission president Jean-Claude Juncker chirpily announced that Greece was "irreversibly" part of the euro area. The 19-member currency bloc had "looked into the abyss", but henceforth, he said, there was no looking back.

A year on, however, there are many who would argue otherwise.

In many ways, the Greek debt drama has disappeared in the folds of other crises now stalking Europe: in quick succession, fractious debate has moved from the influx of refugees through the Aegean islands to repeated terrorist attacks and Britain's shock referendum vote to leave the EU.

The runaway train that was carrying Greeks downhill at the height of the crisis has slowed down to the point where loss and sacrifice have almost been normalised. The gradual relaxation of capital controls - imposed to prevent a run on banks as fears grew that Greece might crash out of the eurozone - has helped reinforce the sense that the economy has returned to a path of stability. The global lack of appetite for any more Greek drama is such that eurozone finance ministers disbursed a whopping €10.3bn in emergency loans in June and made an unprecedented promise of debt relief when the current programme finishes in 2018, on condition that Athens presses ahead with yet more unpopular reforms. The country is predicted to see growth of 2.5% next year.

"No economy can withstand endless recession and stagnation," says George Pagoulatos, professor of European politics and economy at Athens University. "At some point there could be a change of preferences, with forces who would want to continue outside the euro," he adds. "It is anyone's bet what will happen if the economy doesn't [exhibit] a strong recovery in 2017."

But few believe it will get better before it gets worse. After promising to eradicate austerity, the once popular leftwing prime minister, Alexis Tsipras, is now a reviled figure.

Anti-EU sentiment is on the rise. In October, 70% thought it better for Greece to remain in the single currency; by July those backing the euro had fallen to 50%. Real recovery can only come if the country's staggering debt burden is reduced. Without debt relief, the International Monetary Fund, which has yet to participate in the latest rescue, believes interest payments on the growing pile will account for 60% of the budget by 2060. In an excoriating review of its own role in the crisis, the IMF's internal watchdog recently admitted to a litany of mistakes, including the failure to foresee the recessionary impact of austerity on an economy curtailed by corruption and vested interests.

Almost all agree that last summer's bailout simply kicks the can down the road - an art EU mandarins have mastered since Greece's ordeal by financial collapse begun. Europe's weakest link will face further tumult when the latest measures kick in this autumn and the Syriza-led government is forced to enact contentious employment reforms to secure a further €2.8bn in loans.

"I wish I could say Greece has been on the mend over the last year," says George Papaconstantinou, who oversaw the country's first rescue package as finance minister. "Instead we are witnessing a double-dip recession that can be wholly ascribed to Syriza's first six months in office, which almost destroyed the country and certainly set it back many years."

More than ever, he says, Greece needs large-scale foreign investment to kickstart growth - investment that is unlikely to happen in the face of government hostility to investors, both domestic and foreign.

Papaconstantinou, who has chronicled the crisis in a memoir, Game Over, argues that last summer's lifeline was all the more tragic for being unnecessary. "What really differentiates the latest bailout from the previous ones is that this time around, it could have been avoided," he writes in the book. "It became necessary because of a mix of ideological blindness, lack of understanding of basic eurozone rules, unforgivable brinkmanship and plain incompetence during the first six months Syriza was in power."

A year on and Greece, though quiet, remains as febrile as ever on the frontline of the euro storm.

Coping with crisis
How other countries gripped by the eurozone's problems have fared
Italy In the wake of the British referendum, Italy is Europe's most pressing problem. The country has lost competitiveness since joining the euro and has experienced two lost economic decades during which growth has barely risen. The country's banks are awash with bad debts. Prime minister Matteo Renzi has called a referendum on constitutional reform for October. Defeat on this would spark a political crisis, and probably an economic crisis as well.

Spain Along with Italy, this was the country that looked to be in the most trouble in 2012, when interest rates on its bonds rose to dangerously high levels. Since then, Spain has performed the stronger, and in the second quarter of 2016, its economy grew by 0.7% compared with Italy's 0.1%. Spain has squeezed domestic costs and taken advantage of a weaker euro to boost its exports. Loose fiscal policy has also helped stimulate activity.

Portugal Like Spain, Portugal's fiscal policy contravenes eurozone rules; both countries face Brussels sanctions as a result. In most respects, though, Portugal is more akin to Italy than to its Iberian-peninsula neighbour, with a recent record of slow growth, weak productivity and a shaky banking system. As in Italy, the public debt ratio is too high for comfort, and rising.

Ireland Of all the countries to receive bailouts during the euro crisis, Ireland has done the best. Strong growth has resumed, albeit partly thanks to the activities of US-owned multinationals, and unemployment has come down. Two potential problems loom, however. First, the housing market - the source of Ireland's financial problems during the crisis - has started to exhibit bubble-like tendencies again. Second, Ireland is the country most exposed to Brexit.
Larry Elliott
Topics

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A year after the crisis was declared over, Greece is still spiralling down

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In a side street in the heart of Athens, two siblings are hard at work. For the past year they have run their hairdressing business - an enterprise that was once located on a busy boulevard - out of a two-bedroom flat.

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

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Stiglitz on Seven Reforms to Save the Euro | tutor2u Economics

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In his new book on the structural problems undermining the European single currency project, US economist and Nobel prize winner Joseph Stiglitz argues that a number of reforms are needed in order to make the euro a more flexible currency and address persistently slow growth and the risks from debt deflation.

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Can Europe Be Saved? | Joseph Stiglitz & Emily Maitlis | Full Video HD

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Nobel Prize-winning economist and bestselling author Joseph Stiglitz joins Emily Maitlis and the how to: Academy to examine the current crisis in the European Union - and explain why its survival may mean scrapping the euro. Subscribe to our Channel!

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Joseph Stiglitz: Euro Zone Was Flawed From The Start | CNBC

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Nobel Prize-winning economist Joseph Stiglitz talks to CNBC about whether the euro zone can be saved. " Subscribe to CNBC: http://cnb.cx/SubscribeCNBC About CNBC: From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more.

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But the problems of the Italian economy, along with the rest of the PIGS (Portugal, Greece and Spain), go much deeper. The long boom of the 1990s and 2000s in the Western economies ended in 2007. GDP began to fall in almost all Western economies during 2008. In the US output is now some 10 per cent higher than it was at its previous peak in 2007. In the UK it is around 9 per cent up, and in Germany the increase is 8 per cent.

In Italy, GDP is still 8 per cent below its level of 2007. In Spain, the fall is 3 per cent, in Portugal 5 per cent, and the Greek economy is a staggering 26 per cent smaller than it was in 2007.

This is an exceptionally long period for output to remain below its previous peak level. By the early 1950s, for example, West Germany, which had been heavily bombed and overrun by foreign armies, had surpassed its previous peak level of output of the mid-1940s. So, too, had Japan, which had been attacked with nuclear weapons.

Why have the PIGS performed so spectacularly badly? A conventional reason, and one which has considerable force, is membership of the Euro. The average growth rate since 2007 in the Euro zone member countries is negative, -1 per cent. In contrast, the average in Western economies which are not members of the Euro zone, such as Australia, the US and the UK, is a positive 10 per cent.

There is an even more fundamental reason for the failure of the PIGS to recover, which goes to the heart of why Renzi wanted a radical reform of the constitution. Their societies are corrupt. The problems this creates can be plastered over in good times. But a major shock like the financial crisis opens the cracks.

Transparency International rate all countries on a scale of 1 to 10, with 10 being the most transparent and least corrupt. In 2007, most Western countries scored 8 or more, the UK being 8.4. Spain was 6.7 and Portugal 6.5, which puts them at the level of Costa Rica. Italy registered 5.2 and Greece 4.6, down with the likes of Ghana.

Even after allowing for the effect of the Euro, there is a strong negative correlation between the Transparency International scores of the Western economies and their GDP growth over the 2007-2016 period. Full technical details are in a paper I published in Economic Affairs in October. The more corrupt a society, the less able it has been to recover from the crisis.

The reforms proposed by Renzi were just the first step in what is needed to modernise the structure of Italy's society and economy. Their failure means that Italy is doomed to stagnation.

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Is Italy doomed to stagnation? | tutor2u Economics

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So, farewell then, Matteo Renzi! The resignation of the Italian Prime Minister after his heavy defeat in the referendum on constitutional reform has created turmoil. Fears have been resurrected about the stability of the Italian banking system, and even the possibility of Italy leaving the Euro has been raised.

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The Office for National Statistics last week estimated that the UK economy grew at an annual rate of 2.4 per cent in the final quarter of last year. This is slightly above the long-term average growth of the past three decades.

But a Financial Times survey this month showed that the majority of economists remain just as pessimistic about Brexit's likely effect on Britain's economic prospects as they were a year ago.

Most have not changed their minds. But of those who have, the more pessimistic outweigh the more optimistic by three to one. Almost incredibly, economists do not generally feel they were proven wrong by events following the vote.

The reasons rest on two important underpinnings of the discipline. First is a belief in the benefits to society of free trade. There is substantial empirical evidence which backs up economists' views on this matter.

The majority opinion among economists, however, is that the UK leaving the EU will necessarily lead to our trade becoming less free. This is a judgement about political economy, on which standard economic theory is silent. Simply put, they agree with Remainers that we cannot negotiate better trade deals on our own than we can from within the European Union.

As the referendum showed, this is a contested issue. The Cambridge economist Bob Rowthorn has pointed out that "there has already been a sharp fall in the size of the Euro-area economy as a proportion of the world economy, and it is hard to see how this trend will not continue". The deals we need are with fast-growing countries like India and China, and with enormous and innovative markets like the United States. Whether we can get a better deal in or out of the EU is a matter of judgement, not theory.

But the more important reason is that economic theory is in essence about equilibrium. It is about how best to allocate a fixed amount of resources in a static world. Economics has relatively little to say about dynamic processes, about change, about disruption, evolution, innovation, about behaviour out of equilibrium.

This emphasis on a static world leaves many economists unable to see the serious failings of the EU, both actual and potential. In the 1970s and into the 1980s, before the impact of the Thatcher reforms had been felt, it was indeed sensible to look to Europe for inspiration. The UK was plagued by high inflation and low growth.

But now we have had nearly two decades of the euro, one of the most efficient job destruction machines ever created. The combined impact of the euro and their own internal corruption has led output in Italy, Portugal, Spain and Greece to be much lower now than it was 10 years ago. This is a recession without parallel in economic history in its length and severity.

The ability to innovate is the key to long-term growth, as America has shown with Microsoft, Google, Facebook and others. Economic theory has very little to say about innovation. And this blinds the economics profession to the failings of the EU.

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Are economists blind to the failings of the EU? | tutor2u Economics

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The Office for National Statistics last week estimated that the UK economy grew at an annual rate of 2.4 per cent in the final quarter of last year. This is slightly above the long-term average growth of the past three decades.

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We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.

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Update on the Greek Economic Crisis | tutor2u Economics

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Dear, oh dear. It seems that Greece is the issue that won't go away, unsurprisingly, since it was never really resolved in the first place. Greek bond yields are up, and there are fears about its capacity to meet current debt repayments.

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Stiglitz

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Joseph Stiglitz: The problem with Europe is the euro

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In this extract from his new book, the Nobel prize-winning economist argues that if the euro is not radically rethought, Europe could be condemned to decades of broken dreams

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The Euro and Its Threat to the Future of Europe by Joseph Stiglitz - review

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The economist exposes the flaws of the common currency, but his solutions for reform don't convince

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Is the Euro the main Reason for the main cause of the crisis in Greece and Italy?

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Is the Euro the main Reason for the main cause of the crisis in Greece and Italy?

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Essay plan

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Deep slump in real output, employment and living standards in Greece and Italy.

Persistently high unemployment bringing inevitable human costs / negative externalities

Continued membership of the Euro in question, fragility of democracy, loss of trust in governing institutions, rise of radical parties

Structural flaws in the Euro
Starting point is the work on optimal currency areas by Robert Mundell. An OCA requires:

1. Real economic convergence i.e. similar trend growth rates, trade patterns, productivity levels, structure of output

2. High levels of geographical mobility of labour / other measures of labour market flexibility

3. Symmetrical responses to external shocks such as changing commodity prices

4. Willingness to use fiscal transfers / active regional policies to helper poorer nations and regions

The Euro is flawed in the most basic sense - it is not an optimal currency area. There are 19 heterogeneous countries - contrast the economies of the Southern Med with nations in north-west Europe. So the risk factor of having a single currency has been amplified - this became readily apparent in the wake of the 2007-09 GFC and subsequent recession.

Not helped by policy inertia / handling of monetary policy by the ECB (late to cut interest rates after 2008 and well behind the curve with unconventional monetary policy such as QE only starting in 2015).

Structural trade surpluses in Germany/Netherlands helping to kept Euro relatively strong - whereas Greece / Spain need a sizeable depreciation of the exchange rate

Nominal interest rates are low in the Euro Area but Greece has suffered deflation so real interest rates remain positive and much higher than is needed to lift the Greek economy out of a state of semi-permanent recession. (The liquidity trap is applicable here).

Imposed fiscal austerity / unwillingness to consider significant debt relief has intensified the slump in output, jobs and real consumption. Greece effectively forced into an internal devaluation in order to correct their current account deficit; deep cuts in government spending and higher taxes (fiscal austerity) to meet the primary budget surplus target applied as part of the most recent ECB/EU bail-out.

Austerity has helped to close the external deficit but at what cost? Suggestions of zero or negative trend growth rates for Greece/Italy. Little realistic prospect of Greece being able to repay her debt, the IMF argues that significant debt relief will be essential.

Strong argument for saying that Club Med countries should not have been allowed into the Euro in 1999-2002. Monetary convergence criteria in the Maastricht Treaty were fudged.

But......

Design flaws of the Euro + policy inertia should not hide supply-side weaknesses in many of the Euro Zone's debt-ridden and recession-hit countries.

Low capital investment

Relatively poor productivity / a long tail of under-performing businesses

Imbalanced economies (e.g. heavy reliance on tourism, finance and construction)

Poor price and non-price competitiveness (see latest rankings from the World Economic Forum)

Endemic corruption / low tax base and high rates of tax avoidance/evasion

Low export complexity and capacity

Failure to implement structural economic reforms before the global financial crisis hit

Structural failings in domestic banking systems e.g. high non-performing loans in Italy pre-date the crisis, excessive speculative lending to the Spanish and Greek property market. Spain received a Euro 125n bail out of her banking system in 2012.

Interesting counter-factual - how would Greece, Spain and Italy done if they had been left out of the first group of Euro Area countries? Would they now be better off moving to a two-tier Euro with one group of countries operating with a lower exchange rate in a bid to restore some price competitiveness?

Economic and social risks from leaving the Euro are huge - not least the spike in inflation that would result and the prospect of higher not lower interest rates and another slump in the housing markets of countries affected. Will the Euro Zone change sufficiently quickly to keep the struggling economies inside? In particular will there be a successful growth strategy and a successful debt-relief policy?
Key economists to use in the discussion:

Stiglitz - policy failings in ECB

Krugman - critique of austerity

Mundell - basics of optimal currency area design

Hayek - risks from bail-outs and ultra-loose monetary policy Koo - challenges of escaping from a balance sheet recession

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Essay Plan: Is the Euro the main cause of the crisis in Greece and Italy? | Economics | tutor2u

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Early years of success for the Euro Zone have given way to persistent economic, financial and political stress in countries including Greece, Italy, Spain and Portugal. How much can we attribute their difficulties to structural flaws in the design of the Euro?

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The EU28 includes Belgium (BE), Bulgaria (BG), Croatia (CR), Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK).
Member nations of the Euro Zone
The Euro Area consists of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland and Estonia. Latvia joined in 2014 and Lithuania joined in 2015.
Size of the European Union

The EU accounts for around 30 per cent of the total value of global GDP

In 2010 - there was a total EU population of 503.6 million (compared to USA pop = 315million)

Largest population - Germany 81 million, Smallest - Malta 0.4 million, UK - 62 million

The EU, with 503 million inhabitants, accounts for 7% of the world population

Future Enlargement

Iceland + Former Yugoslav Republic of Macedonia and Turkey are candidate countries

EU leaders opened accession talks with Serbia in 2013

Albania, Bosnia and Herzegovina, Montenegro, and are potential applicants

Norway and Switzerland are outside of the EU. Norway is a member of the European Economic Area giving access to EU single market but freedom to pursue her own macroeconomic policies

UK and the EU - the current position

The UK joined the EU in January 1973. It is inside the single market but outside of the single European currency - it has an opt out negotiated as part of the 1993 Maastricht Treaty

The UK is opposed to further fiscal harmonisation between EU nations but broadly in favour of further enlargement of the single market to bring in more nations from Eastern Europe

Europe is a huge economic region - The EU (1090bn euro) was the largest exporter of goods in 2009, followed by China (860bn) and the United States (760bn). The EU (1 200bn) was also the largest importer of goods in 2009, followed by the United States (1 150bn) and China (720bn).

The development of the EU is a series of stages of economic and political integration between member nations and also an expansion of the size and scope of the single market.

Integration can take different forms: there is deeper integration as we go down the following list

1.Preferential Trading Area (PTA) e.g. trade agreements between EU and LDCs

2.Free Trade Area (FTA) - breaking down trade barriers within group of countries

3.Customs Union (CU) - free trade plus a common external tariff (CET)

4.Single Market (SM) - built around the four freedoms

5.Monetary Union (MU) - a common currency, one policy rate and central bank

6.Fiscal Union (FU) - the deepest form of integration, requires some political union

UK Trade with the European Union
Nearly 55% of UK exports and over half of our imports come from the EU. This figure has increased gradually over the years and one point of contrast is that only 7% of our exports go to the BRIC nations (Brazil, Russia, India and China). Europe is also an importance source of inward investment flows for example money invested in mergers and takeovers, portfolio investment in bonds and property and money flowing into commercial banks.

Overall we run a monthly trade deficit of approximately three billion pounds with the countries inside the Euro Area. This deficit has barely changed over recent years and is a structural feature of our trade patterns. The largest trade deficit is with Germany - Europe's biggest economy and one of the world's largest exports of manufactured products such as household appliances, audio-visual equipment and vehicles.

Research on the UK economy inside the EU

Vox EU (February 2015): Why did Britain join the EU? A new insight from economic history: http://www.voxeu.org/article/britain-s-eu-membersh...

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Economics of the European Union | tutor2u Economics

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The EU28 includes Belgium (BE), Bulgaria (BG), Croatia (CR), Czech Republic (CZ), Denmark (DK), Germany (DE), Estonia (EE), Ireland (IE), Greece (EL), Spain (ES), France (FR), Italy (IT), Cyprus (CY), Latvia (LV), Lithuania (LT), Luxembourg (LU), Hungary (HU), Malta (MT), the Netherlands (NL), Austria (AT), Poland (PL), Portugal (PT), Romania (RO), Slovenia (SI), Slovakia (SK), Finland (FI), Sweden (SE) and the United Kingdom (UK).