Lavengro in Spain

The foreigners are doomed!

	They’re all doomed! DOOMED!

The Independent’s relentlessly Eurosceptic economics correspondent Hamish McRae foresees, in the best Scottish tradition, gloom and doom for southern (i.e. Catholic) Europe. He worries about the million or so people that the UK ‘has living’ in Spain, as if all of us were not workers and permanent residents but expatriate retirees, are just here for the cheap fags and booze and willing to return if things get tough. And he reassures us that ‘we’, by which he apparently means the British state, are preparing to help those million people if the foreigners screw up completely and Spanish cash machines run out of money. Such is the nature of a self-fulfilling prophecy that this panic will be monged and wildly overvalued by the City of London and disaster in the Mediterranean will be provoked – deliberately or not according to your point of view.

He also says:

If you were abroad over Easter and noticed the exchange rate, you may have been surprised to see that sterling is not as weak as it has been of late. The pound yesterday was at its highest since mid-February 2011. The rise has been particularly against the euro…

It is (deliberately?) unclear what he means by ‘of late’. If he means the last three months he is demonstrably wrong. The sterling/euro exchange rate for the last 12 months has been this:

In early July last year sterling reached a low point of €1.1136 and the other day it reached a high of €1.2060, which is lower than the high point of €1.2079 reached in early January.

At that lowest rate last July, a cup of coffee or a beer that costs 2 euros would have changed from £1.80 to £1.66, a 15-euro lunch would cost £13.47 instead of £12.48 and a dinner for 50 euros would be £44.90 against £41.46. That, remember, is taking the lowest dip on the 1-year graph and its second-highest point, and is using the interbank rate. By the time banks have had their share the effect on the total budget of a weekend away is hardly severe. Certainly my British friends who were here last weekend didn’t mention any particular problem.

Eurodoom – or perhaps not

While British Eurosceptics are quick to write off the euro as being doomed, those who care to look will see a curious thing. Despite the current crisis the euro has held its own with sterling for the last three years, This graph from Oanda.com shows how there was a great devaluation of sterling in 2008 but since then there has been no real overall change in the exchange rate. Obviously the markets do not see the state of the euro in such dire terms as the British media do. Or perhaps sterling is just as doomed as the euro.

Why Greece won’t leave the euro

Being the economics commentator of what passes in the UK for a serious newspaper doesn’t mean that you have any idea about how the EU works, or indeed about the basic facts of economic life. Yesterday Hamish McRae in the Independent was speculating that Greece will leave the eurozone. It won’t.

Firstly, the legal position is very far from clear. Euro membership is a treaty requirement and is a condition of membership of the EU. There is no specific provision for a country leaving the eurozone. The ECJ would have to rule but it is quite possible that leaving the eurozone would mean leaving the EU itself. That would be possible but it could not happen immediately and, as we will see, time is the important factor here.

Even if there were no legal obstacle to Greece’s leaving the eurozone, what would happen if it wished to do so? It couldn’t be done overnight; it’s not like leaving the ERM or dropping the gold standard. We are talking about changing a currency. There would have to be a fixed exchange rate, and even if that could be negotiated and decided in the utmost secrecy, then what? You can’t say one morning that as of today we are going to use drachmas instead of euros. Where are the notes and coins? They have to be printed and minted, and that could never be done in secret. How will ATMs work? They will have to be adapted. What about prices in shops? How will they be converted immediately? What about taximeters and vending machines? When the euro came in we had two years of its existence as an underlying virtual currency that was valid for commercial purposes (invoicing and accounting for example) but that had no physical existence, and there was a long awareness-raising campaign about the coming change-over followed by a period of dual circulation.

Leaving the euro would be a similar process to joining it and it would take time. So let us imagine that Greece announces that in three months’ time it will leave the euro. Immediately every liquid euro that is not required for minimum day-to-day expenditure will shoot out of the country at the speed of light (literally in the case of electronic transactions). It is after all a currency union. It would be impossible to stop it. So, on D-Day there would be only a tiny amount of euro currency in Greece to convert into new drachmas. For that reason, and because the new drachma would be undesirable in the markets, its value would go down the drain faster than the eye can see. Result? Greece has a worthless currency but still has huge debts that are still denominated in euros. It obviously can’t pay them, so that debt becomes unrecoverable. It is held largely by French and German banks, which will then go bust spectacularly.

So, Greece will not wish to leave the euro*. And it certainly won’t be forced out. And all this is not about rescuing Greece. It is about rescuing stupid, greedy banks that lent money that they never should have lent in the first place.

*Update 2-11-2011: This was posted before Papandreou announced that he would be holding a referendum on whether or not the country should commit economic suicide and drag the rest of the EU down with it.

The crisis – as easy as 1, 2, 3.

1. The greedy banks, aided and abetted  by their malevolent friends in the rating agencies, cause untold misery and mayhem in the world’s financial and economic system.
2. The democratic governments of the affected countries are left picking up the pieces. They have an idea. Maybe the banks could play a part in clearing up …
3. The greedy banks, aided and abetted  by their malevolent friends in the rating agencies, kick the democratic governments in the balls and scream, ‘Don’t even think of it or I’ll rip them off with my bare hands, make mincemeat of them, and force them down your throat for tomorrow’s breakfast.’

Writing the script

If it’s Greece, it must be a drama – a tragedy for preference. Such is the tramline thinking of the British media.

Adrian Hamilton says in the Independent:

the Greek parliament has voted to pass the "crucial" budget cuts, albeit with the narrowest of majorities

and a Guardian editorial tells us that

the package was voted through by a wafer-thin majority

In fact the voting was 155 yes, 138 no, 5 abstentions.

Admittedly the outcome of the vote was uncertain. One deputy was expelled from the government party for saying he would vote against. That left them with 154, still a majority of the 300 seats in the Greek parliament. So it seems that one opposition member voted with the government. But anyway, a majority of 17 out of 300 is obviously not ‘the narrowest of majorities’ (which would be a majority of one, Mr Hamilton), nor can it reasonably be described as ‘wafer-thin’.

The eurozone

This graph (El País 6-6-11, click to enlarge) is what underlies all serious comment* on the problems facing the eurozone. It shows the difference in yields (country risk) on 10-year bonds between Germany (reference) and the countries that the 'Anglo-Saxons' insultingly refer to as PIGS: Portugal, Ireland, Greece and Spain. It starts at the left in January (E for enero) 2010 and runs to June 2011. The vertical scale is in hundredths of one per cent: Spain has to pay 2.241% more interest on its debt than Germany does.

The graph clearly shows the panic in early May last year, when the euro was in serious danger. That was the weekend following the British general election and the British media were obviously preoccupied with other things but the risk was real, and Angela Merkel's own preoccupation with a Land election that Sunday (which she lost anyway) caused her to delay the inevitable and necessary action until it was very nearly too late.

However, the really important point from Spain's point of view is what happened in late July. Until then Spain had pretty well mirrored the other three countries (though some way below them) but on 23 July the bank stress tests were published and Spain immediately separated itself from the general trend. The figures were there for all to see, but actually believing that a Mediterranean country can manage its affairs properly is alien to the northern mind-set, even though anyone who looked at the matter knew that Spain's banks had been forbidden by the Bank of Spain to buy dodgy US mortgages and were in fact remarkably healthy. In those stress tests Spain exposed 90% of its banking system. The minimum, adhered to by most countries, was 50%. That way, Germany and other countries could conceal some real horrors. The published figures showed Santander alone holding more Greek debt than all of Germany because it had issued a small amount of properly guaranteed trade credit while no German bank let on that it even held any Greek state debt!

Spain has problems. It is not completely out of the woods. There is a lot of debt in the Autonomous Communities and a lot of fuss has been made of it following the recent elections, which handed the PP a landslide. But for all its centralising nature, when the PP runs a community its barons want as much local power as they can get and have not been slow to become indebted themselves; and with something like 60% (from memory) of Spain's GDP spent outside Madrid, its effect on the national economy is very considerable. This is not a surprise, however. The nature of Spain's system of government is not a secret, and many banks will have made provisions already to deal with the problem.

The problem -- and this is surprising -- is with Germany. I have known Germany well all my life and I know that the country has always been remarkably well governed. There have been ups and downs of course, but overall its domestic and foreign policy has been well managed -- until the arrival of Angela Merkel. Her inward-looking nationalism is both a surprise and a disappointment. One purpose of the EU was to produce a European Germany rather than a German Europe. The latter is being forced on us by events and I for one don't object to it in principle, but the narrowness of the German view is not good for anyone. The idea of the German ants and the Mediterranean grasshoppers overlooks the fact that the German trade surplus has only been possible because people in Mediterranean countries have been buying German products and -- yes -- getting in debt to do so. But a large part of that debt is held by German banks, and any default will affect Germany itself. Merkel's comments show more influence from Bild Zeitung than a sensible politician should allow, and her recent comment that Spain's retirement age was lower than Germany's was plain, factually wrong.

Which brings me on to the famous cucumbers. They have nothing to do with the euro, but the immediate response of the Hamburg Health Senator (Minister) to blame Spain, when the cause of the problem was, as we now know, very close to her own home, simply smacks of the typical north European arrogance towards southerners that has been much in evidence during this long financial crisis.

*As opposed to the ignorance of the British media (e.g. the Guardian 'Spain [is] an obvious candidate for some close attention from the bond market vigilantes.' (as if it wasn't already)) and the malevolence of the ratings agencies.

Not in the Moody’s

So we have another euro crisis. It’s different though. Back in the spring Greece asked for help in February but electoral considerations in Germany and the UK stopped anything happening till May. Now Ireland is in trouble and the EU, and Germany in particular, is trying to force help on the country, but for Irish electoral reasons the government is unwilling to accept it.

Another difference is the apparent absence of the dreaded ratings agencies, whose contribution to the spring crisis consisted mainly in throwing petrol onto any fire they could get near. What has happened? Have their banking friends made enough money out of trying to ruin economies or have they been effectively sat upon?

Forges, El País 2 May 2010

Goya, The Third of May 1808

The Independent still doesn’t like France

A tale of two cultures. While a sober, relaxed British middle class man reacts to the cuts by making tea in a kitchen with sunlight streaming through the window and his adoring cat looking up at him, a Frenchman with hunched shoulders reacts by making a Molotov cocktail in his poorly-lit kitchen overshadowed by his neighbours, with an empty wine glass and even a lighted cigarette close by (that’s how stupid he is). Such is the implication in this cartoon from today’s Independent. It is difficult to imagine such a crude stereotype of any non-European racial group coupled with an implication of white British superiority being printed in a newspaper that prides itself on its liberalism.

A search of Le Monde shows just one reference to a Molotov cocktail in recent days:

A Montpellier, un lycée a été la cible de jets de cocktails Molotov, provoquant 200 000 euros de dégâts, selon la région. (In Montpellier Molotov cocktails were thrown at a secondary school causing 200,000 euros worth of damage according to the regional authorities.)

That is most certainly to be regretted but one incident is hardly a basis for a cultural or racial stereotype. However, as I have mentioned before, the Independent has form for this kind of thing.

What is truth? Who cares?

Nobody expects the Grauniad to get things right of course; the paper even managed to spell its own name wrong once. But it is worth looking at today’s leader in which it takes it upon itself to tell the people of Europe what we are doing wrong.

… the rightwing German chancellor, Angela Merkel, has been to the left of her British, French and Spanish colleagues by paying firms to keep their workers in jobs;

I can’t speak for Britain and France, but the new Spanish labour legislation deliberately follows the German model of providing top-up state benefit for people who are on short-time working. And while Christian Democrats are indeed on the right, they are not to be confused with British Tories – as the Tories themselves have recognised in their European Parliament affiliation.

For Spanish unions the issue is not that they produced a general strike (it was only the fifth in four decades) but that it came three months after a reform designed to lower the cost of firing workers.

In fact it’s the seventh general strike since 1978. The problem was not so much that firing workers was expensive; many employers chose a more expensive way than was strictly necessary (improcedente, unfair dismissal), paying standard compensation rather than risking unpredictable legal action and wrangling over breaking contracts. The problem was that much employment was on the basis of temporary contracts, providing precarious employment, precisely because of the risk involved in giving people indefinite contracts that could only be broken with very great difficulty. There were precarious temporary contracts and indefinite contracts and nothing between them. Just this morning I spoke to a young woman whose four-month contract with the Catalan government came to an end in August. The present law provides for 20 days’ redundancy pay for each year of employment and allows employers to lay off workers if the company is heading for financial difficulties. It is said that this latter provision is too generous for the employers. Its definition will inevitably be tested in the courts.

I have no idea how these provisions compare with other countries but unlike the Guardian I admit when I don’t know things. I don’t just make them up. It is also said that the reform will be a failure because it will not create employment. That may be so but the economics labour law in general is not a matter on which I have any great knowledge, and I prefer not to comment.

The new system was announced in a Royal Decree before the summer and passed into law a few weeks ago. The chances of the law being changed now are zero.

José Luis Zapatero is one of the last major social democrats standing in Europe and his labour minister praised the great sense of responsibility of the Spanish unions, but both are now on the other side.

Yes, one interesting photo published yesterday was of Zapatero supporting the strike in 2002. Since then he has become prime minister and has found that things look a bit different when you actually have the responsibility of keeping the ship afloat.

* * * * *

And now for something completely different. Today’s Guardian has a letter from a number of people supporting the boat that is breaking the blockade of Gaza. It ends with these words:

We believe that this boat … has been of immense symbolic significance in highlighting the blockade and reasserting the Jewish tradition of standing up for the victims of injustice.

But how does the Guardian manage to headline this letter? Like this:

Reasserting the Jewish tradition of defending injustice

Some people might suspect a not-so-Freudian slip on the part of a sub-editor.

A euro myth

The BBC says:

Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Austria and Finland adopted the [euro] in 2002.

This is not true. The euro became the currency of those countries when the irrevocable exchange rate came into effect on 1 January 1999. After that the precise exchange rates to six digits were known and the euro could be used for paper and electronic operations. The existing peseta, franc, Mark etc. notes and coins merely represented a certain value in euros. On 1 January 2002 the new physical currency began circulating but the euro had already been in existence as the currency of those countries for three years.