The air of crisis over Greece relates to that country’s inability to repay money owing to the IMF and the European Central Bank. Greece is already in default with the IMF anyway. As it will be the Euro area, ECB and IMF who lend new money to Greece, why is there still this air of crisis over the old money the IMF and ECB are owed? Greece cannot repay it unless they are lent it back again by the self same creditors! Greece remains a pawn in the hands of the IMF and the Euro area. Their economy continues to be damaged by the attitude of their creditors, who are helping undermine Greece’s ability to pay in the future.
Author: johnredwood
Who pays for the Euro transfer union?
Germany is hard set against a transfer union, yet that is exactly what circumstances are forcing on the Euro area. Any debt relief to Greece makes it a transfer union by the backdoor. Money is first lent to Greece because Greece needs financial assistance to compete alongside Germany in the same currency. The debt builds up. Greece cannot repay it. So some of it is cancelled, retired, rephased. To anyone other than the German government that is a transfer union.
Germany cavils on fine definitions. If, they say, we simply prolong the loan, the debt can still be honoured. If we allow Greece to pay little or no interest on the loan for a bit, the debt is still intact. As far as markets are concerned, a debt not paying interest is worth a lot less than a debt with interest on time, and a debt repayable tomorrow is a lot more valuable than one repayable in 50 years time. You can’t get away from the fact that any diminution in interest payments and any extension of the loan has a free gift element to Greece, which is a kind of transfer union.
The IMF’s intervention into the Greek debate is at once electrifying and very unhelpful from the German point of view. I have been a longstanding critic of the IMF lending anything to a Eurozone member state. I pointed out that the IMF should only lend to countries with full powers over money, interest rates and budgets. IMF austerity measures in the public sector have to go alongside easier money and private sector led expansion to enable economic recovery to take place. This cannot happen in Euro area countries with no currency, no independent interest rates and no independent commercial banking system. The result is mass unemployment, lower incomes and often long and deep recessions. The IMF’s statement that Greece needs a debt write off is an admission of IMF failure, acknowledging that the IMF has lent to a country that cannot repay it all, and accepting that the IMF has to take a hit.
Which leads me to ask, why would the IMF want the Europeans and the IMF itself to lend more on a similar basis to last time, when last time’s loans failed to promote recovery and have ended in disaster? Is the IMF proud of its work in Greece so far, or will it now accept some responsibility and realise its clumsy interventions delayed sorting out the underlying problems?
The IMF is at last more realistic in saying that the current plans leave Greece unlikely to recover and succeed. They are saying that there needs to be transfers of cash from the rest of the zone to Greece to help. That pits them directly against Germany, delays a settlement, and means yet more misery and recession for Greece.
It is a true tragedy. Not only do the creditors and the debtor still violently disagree, but now two of the leading creditors have fallen out. Who said there was now a solution to the Greek crisis? Why did people think there was an agreement that will work?
There are only two long term answers. Either Greece leaves the Euro and establishes her own banking and currency system, or she is fully absorbed into a Euro political union and receives large transfers of cash from the richer parts of the zone in return for being told what to do.
The European Protectorate of Greece
The Greek Parliament is now just a rubber stamp. A German led Euro area has dictated to the Greek government. A comprehensive remodelling of Greek administration and justice is demanded, alongside major policy changes, a new wave of large cuts in public spending and tax rises. The lengthy list of requirements from the EFSF, the nominal creditor of Greece, is to be implemented in a hurry, with some of the programme a prerequisite for sitting down to try to reach agreement on new loans. Behind the EFSF lies some angry creditor states.
Some have rushed to presume that this is all now a done deal, that Greece will receive Euro 86 billion of new money, and peace can return to the Euro area and German-Greek relations. It is difficult to form such a conclusion if you read the full text of the “agreement”. The amount of money to be lent remains in question. There appears to be no reliable estimate of how much extra the Greek state will need to borrow, as it is likely tax revenues have fallen as a result of the latest crisis. There is no informed assessment of how much new capital and how many write offs the Greek commercial banks will need. The ECB is to study the Greek banks over the summer and assess the damage. There is marked reluctance by the Greek administration to find assets worth Euro 50 billion that can be sold for that much money.
The creditors are aware of this forced vagueness and match it with language demanding that Greece does conform to tight controls on its budget. They say “The Euro summit takes note of the possible programme financing needs of between Euro 82 billion and Euro 86 billion, as assessed by the Institutions. It invites the Institutions to explore possibilities to reduce the financing envelope, through an alternative fiscal path or higher privatisation proceeds.” If you took this to its logical conclusion there would have to be more spending cuts, more tax rises and more privatisation sales, at a time when most sensible commentators call in question the abilities of Greece to meet the targets needed to limit the new money to Euro 86 billion.
The Summit did ask the Greek government and the negotiators of the loans to “take into account the strongly deteriorated (sic) economic and fiscal position of the country during the last year”. Again this is a requirement on Greece to cut more and raise more tax at exactly the time that the economy’s output is probably falling badly thanks to the banking crisis. The EU likes ripping out the fiscal stabilisers during a recession, the opposite of policy followed in countries like the USA and UK with their own currencies where public borrowing is allowed to increase in a downturn.
The wide ranging reforms are to be assisted by EU technocrats and supervised by EU Monitors. The Greek Parliament has to legislate for Sunday trading, sales periods, pharmacy ownership, milk and bakery reform and to open “macro critical closed professions”. They are to undertake a “major overhaul of procedures and arrangements for the civil justice system”. This is on top of the much discussed higher VAT, pensions cuts and creating a properly independent Statistics authority.
Most crucial of all is the pledge of the Greeks to accept “introducing quasi automatic spending cuts in case of deviations from ambitious primary surplus targets…subject to prior approval of the Institutions”.
It is extraordinary that they had to accept this when the most likely reason for failing to hit budget targets will be a further collapse of revenues from poor economic performance.
It is a tragedy. I do not see that either side have been sensible or done well. A provocative Greek government with no feasible plan for growth has collided with a vengeful EU with no credible plan for growth. Between them they have badly damaged the banking system that is needed to finance the recovery. I wrote without seeing the books they would need Euro 100 billion to get by, when the official figure was Euro 53 billion. The official figure is now up to Euro 86 billion, though reluctantly. I still fear that when they tot up the damage to output, tax receipts , banking capital and loan losses by commercial banks it will be Euro 100 billion and still no permanent fix. Meanwhile the challenge is now on the Euro area protectors of Greece to show how their policy can work if they do go ahead with this damaging programme and these large loans.
Getting around to be more productive
One of the biggest barriers to improved performance by all of us is the inability to get around the UK by road or rail. Thursday was a great example. Trying to get from central London to the busy Thames Valley, you had to run the gauntlet of the tube strike, the intrusive roadworks to replace general road with cycle lanes in central London, the strike on Great Western railway and a blocked M 25. If you wanted to go to Kent there was Operation Stack to contend with, closing one of the main motorways.
If I ever get a clear run from home to my London office it takes just under one hour. I allow twice that for the typical daytime or evening journey. If I go door to door by walking and train it takes more than two and a quarter hours if all works well. The usual impediments to traffic means a car journey typically takes more than 100 minutes.
My inconvenience is not important, but it illustrates the frustration and difficulty all workers face as they seek to do their jobs. I deliberately take on far fewer meetings, events and speeches than I would like to do if they entail travel, as experience has taught me that advertised times for the journey rarely work out. A typical speech and questions outside London lasting 45 minutes to one hour takes 5 hours for the home counties and more than 7 hours for further away when you add in the two way travel time.
Electricians, plumbers, delivery drivers, professional service advisers making home visits and many others who rely on vans, cars and lorries to get to work have to book in fewer income earning calls to allow for their wasted time in traffic jams. To many self employed time is money – you have to spend more time in the jam and less time in productive remunerated activity. To employers employee time is money – if your employees have to spend time in traffic jams when out and about trying to their jobs, you have to employ more people and spend more to achieve the same end results.
The UK suffered a 13 year hiatus in new road construction from 1997. The Coalition government tried to stimulate new by passes and extra capacity on main routes, but it is all taking time to work up viable schemes, consult on them, get planning permission and let the contracts. Roads account for 85% of the travel but have not enjoyed their fair share of the transport budget. It is time to welcome the Chancellor’s idea that VED revenue ought to spent on roads.
How much more damage is the Euro going to do?
So they lied again. There is no agreed deal or Grexit this morning, after all that briefing about the crucial summit and the final decision. No wonder fewer now believe them. How can you run a currency and a banking system when the authorities are so visibly unable to deliver what they promise? It’s time they asked themselves some more fundamental questions.
Is there any level of youth unemployment that might make the Euro area change policy? Apparently a majority of young people out of work in some countries is fine.
Is there any level of general unemployment that could cause a change of heart? Unemployment of 25% is acceptable in southern countries to the Euro leaders.
Is there any degree of disruption of banks that is too high a price to pay? The Cypriot banks were closed down and offered limited withdrawal for weeks, and now the Greeks have had two weeks with no functioning banks. Is this satisfactory in a first world currency system?
Is there any limit to how much money people and companies can lose by depositing euros in a Euro area regulated bank? In Cyprus larger depositors lost half their money. In Greece depositors have been unable to withdraw their money for two weeks.
Is there any limit to the inequalities around the zone? Is it acceptable that benefit levels and wages are so much lower in the east and south than they are in the north?
Is there any limit to how large the German surplus has become? How can the zone function properly when its largest area amasses an ever larger surplus earned by exporting to the rest, but is unwilling to recycle the money?
Is there any concern amongst the zone’s leadership that it is throttling democracy? What is the point of a Greek referendum or an Italian or Spanish election, when economic policy is dictated from Brussels whatever voters might want?
Extend and pretend day?
If the Euro area decides after all to lend Greece another 53 Billion euros that they can’t pay back, we need to ask what was the crisis for? Why close the banks, undermine asset values, put Greek people into more misery and cut the output and tax revenues of the Greek economy? Why seek to change the Greek government and then lose a referendum when the Greeks called the Euro area’s bluff? And if Greece agrees to the austerity it rejected, why did they put themselves through the pain and cuts of the last few weeks, when they could have volunteered for austerity earlier to release more cash?
Extend more loans and pretend that you will get your money back has been acting as a policy for years. It has become a lazy habit which the markets and the borrowers like. Once again as Homer nods Mrs Merkel looks the other way. The aim may be to defer the continuing Greek crisis for 3 years to her successor.It will then be even more difficult and costly to resolve.
If by any chance Germany this time stands up for honest money and says No to those who want to give Greece a loan which will one day become a gift, then the remodelling of the Euro can begin. Fewer members with decent finances would be a more sensible proposition, doing less damage to the economies locked into it.
It is unlikely the cost of a further bail out for 3 years will be as little as Euro 53 billion. Some forecasts say there will be extra money from the IMF on top. They also need to factor in the costs of bringing the Greek banks back to life. I can’t see how they will get away with less than an extra Euro 100 billion to reopen, strengthen and make liquid the banks and offer Greece some spending money for the next three years. Then there would be presumably at least Euro 100 bn of debt cancellation or easier terms to a similar value on top of that.
If Germany is wavering and thinking of giving in again to Greek demands, at least they should offer far less money for a shorter time period, and expect to see progress on the Greek reforms before they offer yet more money and a longer period of support.The problem is, the medicine Germany thinks the Greeks need is still the opposite of what the Greeks believe they need. The underlying tensions remain. It is difficult to see how sacking more public sector employees can work unless the private sector economy has the cash, credit and exchange rate to allow it to grow and create more jobs than the public sector destroys.
The Greek economy must be weaker now than when the rows began earlier this year, making recovery more difficult. Kicking cans down the road is more problematic if the people kicking want to go in opposite directions.
Jam busting – let’s have safer junctions and better flows of traffic
ROAD ISSUES FOR WOKINGHAM BOROUGH
EAST/WEST ROUTES
The main traffic flows in our area are east/west. There are three main routes, the A329M/A3290, A329, and the national M4 . The A327 in conjunction with the B3349 also provides a Wokingham to Reading east/west link around Arborfield/Shinfield. To the north of my constituency lies the A4 and to the south the A 30 and the M3. The A4 has reduced capacity following de trunking and the imposition of traffic calming measures. Both the A 30 and the A 4 have short sections of dual capacity with pinch points elsewhere. There is insufficient capacity on all these roads individually and in combination.
The government has announced plans to increase capacity on the M4 by one third, but local roads also need extra capacity.
The A327 will benefit from the Shinfield and Arborfield by passes. It also needs flood prevention measures to the east of Shinfield, and resolution of the delays caused by aggressive traffic lights on the south Reading section.
The A 329 blocks regularly thanks to light controlled junctions in Wokingham and Winnersh. A Winnersh by pass might tackle the Winnersh issue but we need to see whether there is a sensible route. Shorter term and cheaper options are a roundabout at the Broad Street junction in Wokingham and remodelling of the Winnersh junction with changes to phasings of lights with traffic sensors. The double light sets for the foodstore and the junction create considerable difficulties and delays.
The A329M will need more capacity in each direction and better access from the Winnersh Triangle entry in due course. Immediately the traffic lights should be withdrawn from the two approach roundabouts to the motorway at the Winnersh exit and from the Winnersh Triangle approach roundabout or the lights made peak time only.
NORTH/SOUTH ROUTES
North South traffic is lighter than East/west, but road capacity is far too small for current volumes. The main obstacles are the river and two East/west railway lines with inadequate bridges. There are two principal routes, the A 321 from the M3 in the south to Henley via Wokingham, and the A 327 from Eversley to Reading via Shinfield. The B3030 route from Arborfield to Hurst where it links with the A 321 is also an important north/south corridor.
The river crossing at Sonning has just a one way at a time bridge with one mile queues as a regular peak feature.There is little that can be done about this given the nature of the bridge and setting. The back bridges and approach road from the north could be improved further by Oxfordshire which would help.
The two way bridge at Henley is backed by a light controlled junction, which creates two mile tail backs during the long rowing/festival periods, and one mile tail backs at normal peaks. The route of the minor road intercepting the A 321 by the riverside in Henley and the traffic lights are a bigger cause of the jams than the bridge itself. Wokingham has long supported a 3rd crossing but neighbouring Councils remain opposed.
People wishing to go north on the national highway network from the Wokingham constituency are more likely to use national roads, by heading east on the M4 to use the bridges on the A 404(M) over the river and railway, or heading west to the A 34 trunk which also has good bridges over river and railway. Both these routes can entail substantial detours and place additional strain on the east/west national highway for what are south/north journeys.
The railway crossing at the Finchampstead Road does not permit two way traffic flows with large vehicles and is now scheduled for improvement. One rail bridge crossing in Wokingham is insufficient and an additional one is scheduled. The rail crossing in Winnersh does flow. The three sets of barrier controlled level crossings in the Wokingham area are major impediments to traffic flow and are potentially dangerous, so additional bridge routes that take most of the flow are necessary.
Twyford is a major north/south bottleneck on the A321, including parking on the main highway to pick and put down passengers for the station. This is outside my constituency.
Cycle lanes and routes should be segregated from these main roads. London has experienced an alarming increase in cycling deaths with cycle lanes and more cycle use of main roads without physical separation from traffic. The Council should identify footpaths and pavements that could be converted, and verges and alternative routes that could provide safer segregated capacity for bikes.
Productivity is primarily a public sector problem
Over Labour’s long years in power from 1997 to 2010 the public sector received plenty of spending to help it on its way. This was all called investment, and some of the money did indeed go into investment. Despite this there was no productivity growth at all in this large part of the UK economy. The government needs to turn its prime attention to boosting public sector productivity. It needs to work with its own staff – and the employees of the all the Councils and quangos – to help them work smarter and achieve more for less cost. That is what productivity is all about. That is what the UK manufacturing sector has been doing well year after year.
The problem with the lack of public sector productivity gains is not just that it reduces the performance of the whole by depressing the average, but the poor performance of the public sector in crucial areas like transport does damage to the private sector as it tries to become more productive.
The national and local highways authorities do not make getting to your destination in your vehicle their priority. Councils seem to take a delight in shutting the roads to vehicles as often as possible. They persist in allowing the placement of pipes and cables under main roads, so every repair or improvement requires digging up the road. Many Councils seek to take roadspace away from general vehicles for priority routes for buses or cycles, instead of supplying additional safe capacity for special users. Roads are closed for long periods after an accident or incident, and long after anyone injured has rightly been given priority and rescued. Councils phase lights badly, holding up traffic on the main routes in favour of minor routes or pedestrian crossing when there is no-one wishing to use the green phase and no sensor to realise this. Councils put in far too many sets of traffic lights, deliberately creating traffic jam traps that never flow.
Meanwhile the nationalised railway, Network Rail, gobbles huge sums of money and delivers very little new or better. Large sums go on changing from diesel to electric, when what is needed is more capacity and more reliable and intelligent signals. The nationalised railway impedes development of its substantial property estate, demands ransom payments from Councils and others that wish to bridge the railway line or make other improvements near rail routes, fails to think about total journey times and the difficulty of getting to many stations and parking there, and leaves parts of its estate in poor condition.
The government’s productivity drive should have short and long term programmes to deal with these major blockages to our economy. For our local roads we need
1, Roundabouts to replace traffic lights at difficult junctions
2. More traffic sensors on traffic lights
3. More left and right turning lanes at junctions to improve flows
4. More bypasses
5.Fewer permissions for road closures
6.All replacement pipes and cables to be placed under pavements or verges with easier repair access
7.More bridges over railway lines and rivers, as a shortage of bridge capacity is often the single main cause of peak congestion into and out of main towns and cities
8. Cycle routes provided safely away from main A roads
What we need for our nationalised railway will the subject of a future post.
Mrs Merkel’s dilemma over Greece
Mrs Merkel seems to be at war with herself. Euro Merkel knows she has to do what it takes to keep the Euro together, and to advance her European dream of a German led united Euro area – or EU as she would prefer. German Merkel knows that more and more of her fellow countrymen and women, and members of her own party, have lost patience with Greece and do not want a Euro more of Germany’s money to be lent, given or pledged to Greece.
Mrs Merkel also probably has enough self knowledge of both Germany’s considerable power in the EU, and the constraints on being seen to use that power too openly. Were Germany to lead a public ousting of Greece from the Euro, there would be bad press about brutal Germany cutting loose weaker countries because Germany had no sympathy with poorer countries nor any wish to share burdens and riches within the Eurozone. Were Germany to give ground and lead yet another bail out of Greece, but insist on austerity policies, there would be those who spoke and wrote about an authoritarian and dogmatic Germany forcing others to do as Germany instructed. Neither is a welcome thought capable of uniting a happy Eurozone.
So Mrs Merkel dithers. She tells us all where there is a will there is a way. If only Greece can behave better they might be accommodated. This is rather like saying if Greece had elected a CDU government there would not be a problem. At the same time she seeks to reassure her restive German friends and Parliament that this time there will be no easy terms bail out for a Greece which has failed to conform to past loan terms and to work properly through agreed programmes.
The tragedy for the Euro area is no-one around the table seems capable of leading the zone to a decision. That is why we have had weeks of damaging bad press for the zone, weeks of lending Greece more money from the ECB who assisted whilst the politicians delayed, and now two weeks of banks closed, no additional liquidity, and an air of great crisis. The ECB was made to carry the Euro from January and has now lent a total of Euro 89 billion to Greek banks, only to see them close and be unable to pay out people’s money when requested.
The preparatory work for Sunday’s meeting can run over once again all the old detail about what Greece might cut from its state budgets and which tax revenue it might be able to raise, but this is now looking very dated. The economic have deteriorated markedly thanks to the dithering of this year. Greece is starved of cash. Tax revenues have fallen. Output has suffered from the lack of confidence and now from the bank closures. Agreeing a modest three year loan and some changes to the state budget is not about to trigger a decent recovery and set Greece on the path to financial independence within the Eurozone. It might kick the can down the road one more time, only to create a bigger and more expensive problem some months later.
The first fix the assembled leaders need to arrange whether Greece leaves or stays within the zone is a fix for the banks. That will now be costly, given the damage inflicted on them. The banks may well need extra capital, as well as substantial additional liquidity. They remain the responsibility of the ECB and the wider Eurozone unless and until Greece leaves the Euro and has her own independent Central Bank. We are probably talking tens of billions here.
The second fix is for the Greek economy. Whilst I do not agree with all of Syriza’s policies, they are right to say the EU/IMF package has failed so far to get Greece growing, but growth has to be the priority. How do you get cash to flow and sensible new credit to be extended in a part of a currency zone that is as damaged and stressed by its single currency’s rules and massive German surplus?
The third and largest requirement is to fix the politics. The Euro bosses decided to take on the Greek government, aiming either to change their policies or to change the government. Instead the Greek people backed their government. What is the Euro area’s answer to a democratic government that simply does not accept Euro area rules? Lecturing them on their duties as borrowers has not worked. Either the Euro area has to have the full powers it needs to overrule a member state’s government, or it has to sit down and talk to whoever is elected and try to accommodate them. The last few weeks have seen a largely impotent Euroland clumsily interfering in Greek politics and losing. On Sunday they have to show they have learned from this bitter experience and can find a way to improve the position. If they decide they cannot lose face and lend Greece more, they need to help Greece organise an orderly transition to the drachma. That has to start with the ECB standing behind the Greek banks so they can open again.
Real public spending rises again
Yesterday’s budget papers confirmed that real public current spending has been rising. On page 65 of the OBR Report they confirm that real government consumption increased by 1% per annum 2010-14. This is interesting as when I argued that there would be real rises in current spending on the cash figures most said that was wrong and the official forecasts talked of cuts.
2015-20 is forecast to show further real growth in government consumption. General government consumption is to grow in real terms every year between now and 2010, as is real government capital spending apart from minus 0.1% in 2016.
The OBR Report summarises the impact of the budget well. It says that departmental government spending will be £83 billion higher than in the March plan. The tax rises in the budget will increase revenues by £47 billion over the Parliament (dividend tax, insurance tax, pension tax and vehicle excise duty), to be offset by cuts in Income Tax and Corporation tax worth £24.6bn. Borrowing will be higher in 2016-17 to 2018-19 by £16.7bn.