NEW YORK – I have been helping countries to overcome financial crises for 30 years, and have studied the economic crises of the twentieth century as background to my advisory work. In all crises, there is an inherent imbalance of power between creditor and debtor. Successful crisis management therefore depends on the creditor’s wisdom. In this regard, I strongly urge Germany to rethink its approach to Greece.
A financial crisis is caused by a country’s excessive indebtedness, which generally reflects a combination of mismanagement by the debtor country, over-optimism, corruption, and the poor judgment and weak incentives of creditor banks. Greece fits that bill.
Greece was heavily indebted when it joined the eurozone in 2001, with government debt at around 99% of GDP. As a new member, however, Greece was able to borrow easily from 2000 to 2008, and the debt-to-GDP ratio rose to 109%.
When a country’s prosperity depends on the continued inflow of capital, a sudden stop or reversal of financial flows triggers a sharp contraction. In Greece, the easy lending stopped with the 2008 global financial crisis. The economy shrunk by 18% from 2008 to 2011, and unemployment soared from 8% to 18%.
The most obvious cause was lower government spending, which reduced aggregate demand. Public-sector workers lost their jobs, and construction projects ground to a halt. As incomes declined, other domestic sectors collapsed.
Another factor in Greece’s economic collapse is less obvious: the contraction of bank credit. As banks lost their access to interbank credit lines from abroad, they restricted lending and called in outstanding loans. Domestic savers also withdrew their deposits, fearing for the banks’ solvency and – thanks largely to German Finance Minister Wolfgang Schäuble – for their country’s continued eurozone membership. Like shrinking aggregate demand, the contraction of bank loans had a multiplier effect, with growing financial fragility inducing depositors and overseas financial institutions also to withdraw credits and deposits from Greek banks.
In normal circumstances, economies overcome a debt crisis by cutting government deficits, shifting production from domestic sales to exports, and recapitalizing banks. The budget surplus and export revenues allow the economy to service its foreign debt, while bank recapitalization permits renewed credit expansion.
If the export boost is large enough and rapid enough, the earnings it brings largely offset the decline in domestic demand, and overall output is stabilized or even returned to growth. Spain, Ireland, and Portugal were all able to cushion their post-2008 slumps with a surge in export earnings. Remarkably, Greece could not. In fact, Greek export earnings in 2013, at €53 billion, were actually €3 billion lower than in 2008, even after domestic demand collapsed.
That is not surprising, for three reasons. First, because the European rescue packages did not recapitalize the Greek banking sector (the focus was on bailing out German and French banks), potential exporters could not obtain the operating credit required to support their retooling needs. Second, Greece’s economic base is too narrow to support a significant short-term increase in exports. Third, administrative, regulatory, and tax obstacles hindered the export response, especially as the tax increases in the rescue packages made it even harder for small and medium-size enterprises to grow and establish new markets abroad.
In my view, the policy response by Greece’s partners, led by Germany, has been unwise and highly unprofessional. Their approach has been to extend new loans so that Greece can service its existing debts, without restoring Greece’s banking system or promoting its export competitiveness. Greece’s initial €110 billion bailout package, in 2010, went to pay government debts to German and French banks. As a result, Greece owes an ever-larger share of its debt to official creditors: the International Monetary Fund, the European Financial Stability Fund, and, increasingly, the European Central Bank. While Greece’s debts to private creditors have been partly cut, this was too little too late, because it cannot even service its debts to official creditors.
Year after year, Greece’s creditors have promised that the bailout packages would bring about a meaningful rebound in output, employment, and exports. Instead, the country has experienced a depression comparable to the decline in output and employment that Germany suffered from 1930 to 1932, the years that preceded Hitler’s rise. Many Germans may despise Greece’s current Syriza government, which pledged to end the policy of creditor-imposed austerity; but four consecutive governments – center-left, technocratic, center-right, and left – have implemented it.
All of these governments have failed. Perhaps Antonis Samaras’s center-right government from 2012 to 2015 came closest to succeeding, but it could not survive, politically, the severe austerity that it was being forced to impose. Nor did Greece’s creditors do anything to help Samaras’s government out of its political bind, even though it was a government they liked.
To overcome an economic crisis, the creditor must be smart and measured. It is right to demand strong reforms of a mismanaged debtor government; but if the debtor is pushed too hard, it is the society that breaks, leading to instability, violence, coups, and pervasive human suffering. While the debtor loses the most, the creditors also lose, as they are not repaid.
The formula for success is to match reforms with debt relief, in line with the real needs of the economy. A smart creditor of Greece would ask some serious and probing questions. How can we help Greece to get credit moving again within the banking system? How can we help Greece to spur exports? What is needed to promote the rapid growth of small and medium-size Greek enterprises?
For five years now, Germany has not asked these questions. Indeed, over time, questions have been replaced by German frustration at Greeks’ alleged indolence, corruption, and incorrigibility. It has become ugly and personal on both sides. And the creditors have failed to propose a realistic approach to Greece’s debts, perhaps out of Germany’s fear that Italy, Portugal, and Spain might ask for relief down the line.
Whatever the reason, Germany has treated Greece badly, failing to offer the empathy, analysis, and debt relief that are required. And if it did so to scare Italy and Spain, it should be reminded of Kant’s categorical imperative: Countries, like individuals, should be treated as ends, not means.
Creditors are sometimes wise and sometimes incredibly stupid. America, Britain, and France were incredibly stupid in the 1920s to impose excessive reparations payments on Germany after World War I. In the 1940s and 1950s, the United States was a wise creditor, giving Germany new funds under the Marshall Plan, followed by debt relief in 1953.
In the 1980s, the US was a bad creditor when it demanded excessive debt payments from Latin America and Africa; in the 1990s and later, it smartened up, putting debt relief on the table. In 1989, the US was smart to give Poland debt relief (and Germany went along, albeit grudgingly). In 1992, its stupid insistence on strict Russian debt servicing of Soviet-era debts sowed the seeds for today’s bitter relations.
Germany’s demands have brought Greece to the point of near-collapse, with potentially disastrous consequences for Greece, Europe, and Germany’s global reputation. This is a time for wisdom, not rigidity. And wisdom is not softness. Maintaining a peaceful and prosperous Europe is Germany’s most vital responsibility; but it is surely its most vital national interest as well. More
Already, American corporations are poised to rush into a country only 90 miles from Florida’s shores.In March, a delegation from the U.S. Agriculture Coalition for Cuba, an agribusiness group that includes Cargill, the National Grain and Feed Association, the National Chicken Council and other companies and organizations, flew to Havana to meet with Cuban officials.
And cruise ship companies and hotel chains like Marriott and Hilton have indicated their enthusiasm. “I can’t stop thinking about it,” Frank Del Rio, chief executive officer of Norwegian Cruise Line Holdings, said in an interview. “Cuba and the cruise industry are just a match made in heaven, waiting to happen. More
The question for the Cayman Islands, who is considering constructing a new cruise ship dock, is how will the opening of Cuba affect cruise traffic to George Town?
I argue that an Economic Study is needed, in addition to the Environmental Impact Assesment (EIA), to analyse the economics of the cruise business to the Cayman Islands as a whole. This study should compare the financial benefits of stay-over tourism, with the extension of Owen Roberts International Airport (ORIA) to 10.000' feet allowing the handling of long-haul direct flights from Europe, East Asia (China, Japan, South Korea) and the Persian Gulf. It may be possible to turn ORIA into the air-hub of the Western Caribbean with Cayman Airways actually turning a profit as a regional carrier. Editor
It’s a truly incredible time we live in. Think back to all the amazing revolutions we’ve learned about in history.
There’s been some amazing changes that have taken place and the implications of people standing up and doing something different has been huge. After all it led us to where we are today. As destructive and close to extinction as we are, we’ve done some amazing things at the same time and the power of human creativity and love has shown itself.
To hear a young girl speak about facts of our world like Victoria does in the video below is amazing. It not only shows that younger generations simply won’t stand for the current world we live in, but that we can look to people other than the so-called “experts” for creative answers to our current challenges.
Victoria speaks about how our world financial system really works and how it was specifically designed to enslave the population.
Deep Secrets Kept From Us
Most people in the world, young or old, have little idea that our world is so incredibly corrupt and coldly calculated to create an enslaved population. Luckily, this is changing with each passing day as a switch seems to be turning on in people that allows them to see and realize that something isn’t quite right here.
This triggers us to search for answers and with the bevy of information in books, films and on the internet about the true workings of our world, people have the ability to go beyond limited institutions, such as the educational system, to find out what’s really going on. This is likely how Victoria found this information as it’s doubtful she learned it in school.
Check out her powerful message in the video below. Regardless of the fact that the solution she presents may not be complete nor the most advanced, it would undoubtedly be a positive step in the right direction.
Please use this as a tool to pass on to others so they can understand what type of system they really live in. More
NAROBI, Kenya, Monday November 3, 2014, CMC – A top United Nations official has warned that the small islands of the Caribbean will be the first territories in the region to suffer the effects of rising sea levels due to climate change.
Executive Director of the United Nations Environment Program, Achim Steiner, said here on Saturday that the effects of climate change threaten the Caribbean’s tourism industries and, eventually, their “very existence”.
Speaking ahead of Sunday’s release of the Fifth Assessment Report from the Intergovernmental Panel on Climate Change, Steiner said sea-level rise will have an “immediate impact in economic terms” on the Caribbean Small Island Developing States (SIDS), stating that the Caribbean’s tourism infrastructure is 99 per cent along the coastline.
“Many small island nations are in a far more exposed situation simply because their territory is sometimes only two, three, four meters (6.5-13 ft.) above sea level,” he said, adding “therefore their very existence is being threatened.
“The changes also in, for instance, coral reefs and mangroves that are natural barriers and help strengthen the resilience of these countries, if coral reefs are dying then clearly countries become more vulnerable,” he added.
Steiner also cited the impact of more intense hurricanes and other extreme weather events on countries whose economies cannot bear the cost of reconstruction.
On a more hopeful note, he praised proactive efforts by some Caribbean countries, such as Barbados, where “energy efficiency efforts and renewable deployment are now on the agenda of investment and national development planning”.
The efforts of the Barbados government were one reason the United Nations decided to mark 2014 World Environment Day in Barbados, Steiner said. More
Any journalist should hesitate before saying this, but news can be bad for you. You don’t have to agree with the analyst who reckons “news is to the mind what sugar is to the body” to see that reading of horror and foreboding hour by hour, day after day, can sap the soul.
This week ended with a double dose, administered within the space of a few hours: Israel’s ground incursion into Gaza and, more shocking because entirely unexpected, the downing of Malaysia Airlines flight MH17 over Ukraine, killing all 298 on board.
So in Gaza we look at the wildly lopsided death tolls – nearly 300 Palestinians and two Israelis killed these past nine days.
It’s quite true that if the US truly decided that Israel’s 47-year occupation of Palestinian territory was no longer acceptable, that would bring change.
There is an interesting article by Chris Hedges entitled It's NOT going to be OK on the current economic disparity which, he believes could lead to a drastic decline in democracy as states respond to social protests. The question I ask is what can be done to slow or erradicate this process? Editor
This makes it more important than ever to take urgent and drastic action to curb climate change by reducing carbon emissions, he argues.
Lord Stern, who wrote a hugely influential review on the financial implications of climate change in 2006, says the economic models that have been used to calculate the fiscal fallout from climate change are woefully inadequate and severely underestimate the scale of the threat.
As a result, even the recent and hugely authoritative series of reports from the UN Intergovernmental Panel on Climate Change (IPCC) are significantly flawed, he said.
“It is extremely important to understand the severe limitations of standard economic models, such as those cited in the IPCC report, which have made assumptions that simply do not reflect current knowledge about climate change and its … impacts on the economy,” said Lord Stern, a professor at the Grantham Institute, a research centre at the London School of Economics.
Professor Stern and his colleague Dr Simon Dietz will today publish the peer-reviewed findings of their research into climate change economic modelling in the The Economic Journal.
Their review is highly critical of established economic models which, among other things, fail to acknowledge the full breadth of climate change’s likely impact on the economy and are predicated on assumptions about global warming’s effect on output that are “without scientific foundation”.
Professor Stern, whose earlier research said it is far cheaper to tackle climate change now than in the future, added: “I hope our paper will prompt … economists to strive for much better models [and] … help policy-makers and the public recognise the immensity of the potential risks of unmanaged climate change.”
“Models that assume catastrophic damages are not possible fail to take account of the magnitude of the issues and the implications of the science,” he said.
Professor Stern and Dr Dietz say their findings strengthen the case for strong cuts in greenhouse gas emissions and imply that, unless this happens, living standards could even start to decline later this century.
For the study, they modified key features of the “dynamic integrated climate-economy” (Dice) model, initially devised by William Nordhaus in the 1990s. The changes take into account the latest scientific findings and some of the uncertainties about the major risks of climate change that are usually omitted.
The standard Dice model has been used in a wide range of economic studies of the potential impacts of climate change, some of which have been cited in the most recent IPCC report which has been released in three parts over the past nine months.
Dr Dietz said: “While this standard economic model has been useful for economists who estimate the potential impacts of climate change, our paper shows some major improvements are needed before it can reflect the extent of the risks indicated by the science.”
Dr Dietz said his aim was to show how a new version of the model could produce a range of results that are much more representative of the science and economics of climate change, taking into account the uncertainties.
“The new version of this standard economic model, for instance, suggests that the risks from climate change are bigger than portrayed by previous economic models and therefore strengthens the case for strong cuts in emissions of greenhouse gases,” he said.
The new model differs in that it considers a wider temperature range when estimating the impact of doubling the atmospheric concentration of greenhouse gases – a measure of “climate sensitivity”.
Whereas the standard model usually assumes a single temperature for climate sensitivity of about 3C, the new model uses a range of 1.5C to 6C, which the authors say more accurately reflects the scientific consensus.
The standard model also “implausibly” suggests a loss of global output of 50 per cent would only result after a rise in global average temperature of 18C, even though such warming would likely render the Earth uninhabitable for most species, including humans, Dr Dietz contends.
The new model includes the possibility that such damage could occur at much lower levels of global warming. Standard economic models rule out the possibility that global warming of 5-6C above pre-industrial levels could cause catastrophic damages, even though such temperatures have not occurred on Earth for tens of millions of years. Such an assertion, he says, is without scientific foundation and embodies a false assumption that the risks are known, with great confidence, to be small.
The new model also takes into account that climate change can damage not just economic output, but productivity. The standard model assumes that rising levels of greenhouse gases in the atmosphere only affect economic growth in a very limited way, according to Dr Dietz. More