Why is a Grexit now likely?

Greece owes the IMF 1.6 billion euro that it doesn’t have but is supposed to pay by tomorrow. Unless the ECB lends it to the Greeks, effectively converting the IMF debt into an ECB debt, Greece is bankrupt tomorrow. In months to come, much bigger debt repayments are scheduled to the ECB-IMF in tranches of 4 billion, and Greece won’t have that money either as its economy is still contracting.

Greece didn’t have the money to pay off the previous debts in the last 5 years either though, and that just lead to more debts in return for symbolic reforms that weren’t implemented.

Why not muddle through then and let the Northern European politicians present a pretend-reform package to their population as a victory? And why would bankruptcy force a Grexit, given that there is no official mechanism to force any country out of the Euro, once it is in?

What is forcing it is the combination of the referendum on the symbolic reforms, together with the bank-run on the Greek banks that has this morning lead to capital controls. Let me explain how the two force a Grexit.

The referendum is called for this Sunday, one day before the banks re-open. The idea is that Greeks vote on whether to accept the current set of symbolic reforms, which would entail cuts to pensions and loss of employment of many civil servants. The government will campaign against them, and most of the Greek parliamentarians are with the government, successfully whipping the country into a ‘no austerity’ mood. There is hence no way that the Greek population would vote ‘yes’. And even if they did, the Greek government then would not implement reforms as its own backers would constitute the ‘no’ vote.

But the referendum also makes it impossible to agree on something symbolic beforehand: it binds the hands of the Greek politicians who called for it (almost surely so they wouldn’t be blamed for the coming Grexit). This means nothing can be offered to them that would prevent bankruptcy tomorrow.

Previous symbolic reform packages were not implemented, partly because the Greek governments didn’t want to implement them and partly because they couldn’t even if they wanted to. Tax collection, for instance, would take many years to clean up and, as a Greek economist told me recently, it is still normal to send Greek tax collectors home in an election year! But to the Northern Europeans, the Greek politicians at least pretended they were going to pay back the loans and reform. The referendum is now expressly fought on a platform of not even pretending either, taking away the much-needed fig-leaf that the Northern Europeans wanted.

Worst of all, the referendum is a slap in the face of the other politicians who were negotiating at this late hour with the Greek politicians on the terms of the next symbolic set of reforms. It is part of the rules of the game in Brussels that this was a real deadline that forced everyone to agree to some face-saving formula. The referendum has made this impossible: the Greek politicians won’t play by the European rule-book. No face saving, just Greek theatrics and grand-standing.

So the other European politicians have been sufficiently humiliated that they feel they need to be tough, an attitude you see most clearly in Christine Lagarde from the IMF who made it clear tomorrow’s deadline is not negotiable.

Hence the referendum will be followed by a continuation of the bank run next Monday by Greeks who calculate their country’s approaching bankruptcy, and this time there cannot be a bailout: the only bailout that is now possible within the Greek political system is one whereby the ECB lends money without symbolic reforms, an open loss for the Northern Europeans. That means there will be no bailout. In concrete terms, the Greek central bank will not be getting any more Euros to distribute amongst its banks. The Greek government wont be able to pay to its employees, welfare recipients, and other recipients of state money.

So the day after the referendum, neither the Greek central bank, nor the Greek government has money to prop up the Greek commercial banks nor pay its own workers. That is what will force the Grexit, I think, not the inability to pay back loans to non-Greeks: the slow bank-run, in which billions in deposits are withdrawn weekly from Greek banks, will force them into it.

If the Greek government does not introduce a new currency then it will have no means to prevent the bank-run and the Greek banks will run out of money and go bankrupt themselves. Without an intervention, that will wipe out all the savings in those banks and lead to a major disruption of the Greek financial sector and the Greek economy. Tax avoidance will go up as the visible money streams that go via the banks will stop and the remaining economy will go via invisible money streams that are harder to tax. Greek civil servants will not get paid, nor will welfare recipients get their payouts, meaning they will have no money either, forcing them to join the bank run to pay for groceries.

So the Greek government will face financial collapse the day after the referendum. Capital controls will slow the collapse down, but the only thing it can do, really, is to take over the obligations of the commercial Greek banks and pay its employees and welfare recipients with something else. That something else is a new currency, whether it starts life being called an I-Owe-You (IOU) or a Varoufakis-florint: it will have to be declared legal currency inside Greece so that one can make payments with it. Hence in order to save its own banks and thereby its depositors, Greece will have to Grexit.

Now, no-one can force Greece to give up the Euro, so Greece can in principle maintain a dual currency system for a long time, having both the Euro and the new currency. This is not abnormal, as Hong Kong airport has shown you can run a 3-currency system indefinitely: you can pay there with Honk-Kong dollars, Euros, and US dollars. Yet, if the state sector runs on fast devaluing drachmas and the rest on stable Euros then the Greeks will be incurring a lot of transaction costs.

It will not really matter whether Greece hangs on to two currencies or just the new one: with the re-introduction of a separate legal currency, Greece will have effectively left the Euro and become like Macedonia and Bulgaria, where you can also pay in lots of places with Euros but that are no longer official members of the Eurozone.

I wouldn’t be surprised if stacks of the new currency are already in Greece, ready to replace the Euro as the official currency, with contingency scenarios now being taken off the rack in the main financial European institutions (EIB, ECB, EU-C). This means a Grexit is also a physical possibility now whilst it probably could not have been done 5 years ago.

Is there a way to prevent the coming Grexit? Normally, I expect the political system in the EU to come up with a watery compromise at the last minute. The Greeks politicians have however, I think, made this impossible with a referendum that takes away the ability for compromises to be offered and accepted. Time will tell though.

Will the Grexit be good for Greece? In the medium-run, I do think so as the state-related sector takes a much needed price-correction vis-a-vis the exporting sector. In the short run, pain is coming though, I am afraid, particularly for the old and infirm in Greece dependent on the state. And the recovery will be hampered by the fact that the Greek economy is tied to the rest of Europe, whom they have just had a falling-out with.

Observations on a possible Grexit

After two weeks of a new government in Greece, a Greek exit from the Euro (termed a ‘Grexit’) looks more and more likely. The betting markets give it about 30% to happen this year, and Greece is the out and out market favourite to exit the Euro before any other country.

Though I have not followed it super-closely the last 2 years, I have some observations to offer:

  1. Greek politicians are very used to being in the situation of owing other countries money and negotiating more favourable terms. In a way, their hand is the easy one to play as they can credibly claim not to be able to pay back the debts and then offer to promise to pay back something, with the alternative being open bankruptcy for which they would then blame the lenders. If the lender is owed enough money, the lender often reluctantly plays along in the hope of getting something back. This strategy has worked well for the previous Greek governments, which have quite successfully in the last 7 years gotten 3 bailouts, and the current government should be favourite again in the current situation to come out with an even better deal than before.
  2. The political imperative to pretend that Greece will pay back its loans is diminishing on both sides of the loan relation because of increased concentration of debts. The Greek state now directly owes the rest of the EU in that 80% of its debt is mainly to tax-payer owned entities outside of Greece (EU governments, the ECB, the IMF, etc.). This puts Greece into a great position to get a better deal as the Greek state has taken over many of the debts owed by Greek banks (meaning bank collapses are less of a worry), and European tax-payer institutions can rationally hope to simply have the ECB print the equivalent amount of money that they would have to write off as lost Greek debts. This printing-to-cover-debts is already starting to happen as the ECB has announced it wants to buy up government bonds, effectively a form of money printing for governments. For Greece, this means that an official bankruptcy would save the Greek state close to 150% of GDP in terms of liabilities, without the Greek banks being as exposed as in 2007 (Greek banks owe the ECB around 75 billion euro in fairly low-interest loans).
  3. Previous Greek governments have successfully sabotaged many reforms they agreed to. Continue reading

An MYEFO mystery: what’s with the resource tax?

It’s the time of the mid-year Economic Fiscal Outlook (MYEFO) and we’re told that we’re about 11 billion deeper in the red this financial year than we thought, with the treasurer blaming the dropping iron price and the reduced wage growth. I have gone over the MYEFO documents (which are an exercise in obfuscation if ever I saw one), found that wage growth and the dropped iron ore price would ‘only’ cost us 2.3 billion each in this financial year (2014-2015), noted that this was far short of the 11 billion headline, and thus went looking for the ‘real story’.

This threw up the mystery of the resource tax. Here is what it says on table 3.2:

Table 3.2: Impact of Senate on the Budget (underlying cash balance)
Estimates Projections
2014‑15 2015‑16 2016‑17 2017‑18 Total
$m $m $m $m $m
Impact of decision taken as part of Senate negotiations(a)
Repeal of the Minerals Resource Rent Tax and related measures -1,684 -2,334 -1,670 -947 -6,634

which seems to means that the repeal of the minerals resource rent tax (and related measures) is costing us around 2 billion per year. Yet, in the ‘Overview Part’, the MYEFO says “The repeal of the Minerals Resource Rent Tax and other related measures will save the budget over $10 billion over the forward estimates and around $50 billion over the next decade.”.

What is going on?

Update (thanks Chris Lloyd): it seems to be a language issue. Part of the story seems to be that the MYEFO is counting the repeal of the mining tax, which was an election promise, as something the Senate inflicted on the budget, so the 2 billion a year is ‘revenue foregone’. So the MYEFO is blaming the Senate for the outcome of an election promise, using an odd formulation to say that the repeal will save us 50 billion when it seems to imply it would cost us 50 billion. Weird.

What was unexpected about Syria and Egypt?

Middle-East watchers have been surprised by the events in Syria and Egypt the last 2 years. The betting markets in 2011 and 2012 expected the collapse of the Syrian regime, but it didn’t happen. The West and most Al-Jazeera commentators thought the coup that deposed the Morsi-government was unsustainable and that some accommodation with the Brotherhood would have to be found. Even Israeli analysts, who by and large were against the Morsi-government, predicted that the new military regime could not survive. Both judgements seem incorrect so far: the Syrian regime looks safe and the Egyptian military junta is now as firmly in charge as ever. What did the watchers miss, ie what should we pay more attention to in the future that we didn’t see before?

And let me honest and say that I too was wrong on both counts: I have been making a point of giving predictions on many aspects of European and Middle Eastern politics for about 4 years now. I called lots of things right, from the chaos in Lybia, to the continued Greek bailouts in the EU, to the rise of the Egyptian brotherhood. Nearly everything, except for the developments in Syria and Egypt. As I said in December 2013, I thought in 2012 that the Americans would arm some part of the Syrian opposition and thus bring down the Assad regime. The betting markets scored it around 85% likely that Assad would be gone by the end of 2013. Similarly, in August of 2013 I thought there was no way the Egyptian army could so clearly assume total economic and political control (I thought this alongside 15 Al-Jazeera commentators at the time and, apparently, the Israeli intelligence community thought the military junta very fragile too). What did I/we fail to see?

In the case of Syria, it now appears that the missing ingredient was the psychology of the US president. As expected, the US state department did indeed want to pick a winner in the Syrian civil war. At least, Hillary Clinton claims to have argued for it strongly. But Obama vetoed it according to her, apparently not able to see the tremendous disruption that would ensue in the whole region of a failure to interfere. Obama might have been following his father’s belief that to interfere was neo-colonial and would only lead to more future trouble. Obama might have thought that others in the region, such as the Turks, would not tolerate any mayor disruption and take control. Obama might have simply miscalculated the brutality that the Syrian regime was willing to inflict on its own population, or the brutality of the many groups who were being sponsored by other countries. Whatever the reason, it seems Obama won the internal fight and kept the US out of it.

The muddled strategy of the US was pretty hard to foresee in 2011/2012 and it seems to have involved the particular psychology of the president, so on that one the main lesson is that some presidents mean what they say and can deliver when they say they don’t want to involve the US in foreign adventures. To see that coming would require an intimate level of knowledge of the actual psychology of lots of world-leaders, something that is not reasonable to expect from any individual observer because politicians and their entourage make a point of creating an appealing image of themselves which makes it nigh impossible to know what they are really like, so as a mis-predictions go there is little structural to be learned there: a particularly unusual draw of the statistical error term!

In the case of Egypt, what was missed seems more fundamental: no ‘random error’ in sight to explain what has happened. No single individual has behaved unusually, rather the Egyptian population has reacted differently from expected. At least, no one I have read called all the developments before they happened. Continue reading

Does increasing the legal age for buying alcohol reduce traffic accidents?

Does increasing the legal drinking age reduce traffic accidents caused by young drivers? The idea is that if you increase the legal age at which people can drink, young people are going to quietly abide by the law, not do anything stupid, read the bible, contemplate their sinful natures, and stay out of trouble.

Hang on though, one thinks: drink-driving is already illegal at any age, so what exactly does one expect to change when one restricts the sale of alcohol to 21 years and over, instead of having the current age limit of 18? If you were worried about them breaking the law before, why would you think changing the drinking laws would help? Breaking 2 laws is harder than 1?

In a recent letter to the Medical Journal of Australia, Jason Lindo and Peter Siminski, two economists from Texas and Wollongong respectively, point out that the more recent and more authoritative economics studies find that raising the age limit on buying alcohol does not help reduce serious traffic accidents at all. They do this in reaction to a completely one-sided account by medics who call for the drinking age increase, citing mainly cross-sectional studies (find attached the letter by the two economists and the reply of the authors of the offending article, which basically admits the cherry-picking that they originally engaged in:Lindo and Siminski 2014 with Toumbourou et al reply).

Lindo and Siminski point out that in New South Wales, changes to drinking laws did not change the accident rate of young people. Neither did a recent reduction in the drinking age in New Zealand, where the drinking age reduced from 20 to 18, increase accident rates amongst the 18-19 year olds (their behaviour was changing already, but not after the law change). Moreover, they point to studies that show that people indeed do substitute alcohol for other drugs that also affect their driving, which helps explain why there is on balance neither a positive nor a negative effect on traffic accidents from changing the age drinking laws. The studies they quote, which include the only studies on Australia on this topic, used the latest techniques based on analysing changes in behaviour of young people just before and after the introduction of the laws, which is what one wants to do. Prior studies are less convincing because they compare behaviour between regions within a country or over long time periods, which comes with the problem that regions and periods differ for many other reasons than merely the drinking age.

More generally, one can doubt the wisdom of a puritanical attitude to alcohol simply by looking at differences across countries. Central Europe, and in particular France, Italy, Spain, and the other Southern European countries, have much more relaxed attitudes to alcohol, with kids learning much younger to be responsible with alcohol. The more repressive attitude in the UK and here in Australia, on the other hand, is associated with binge drinking, very high rates of teenage pregnancies, and extreme risk behaviour. Once the kids do get access to alcohol, often by illicit means as the forbidden fruit is made so enticing, they dont hold back, which should make one wonder about the wisdom of declaring the fruit so forbidden.

Lando and Siminski thus try to inject a bit of common sense and self-reflection into our debates on alcohol laws, apparently having to fight a rather puritanical bunch of medics that insists we cannot trust young people and should ban them from buying alcohol till they are 21. Yet, we allow those between 18 and 21 to drive, to vote, and to die for us as soldiers in foreign battles, but we are supposed to declare them incompetent when it comes to drinking?

Lando and Siminski are hence right, both on the latest science that says there is no real relation between the drinking age and traffic accidents, and on the larger issue of consumer choice: if we abandon the idea that all voters are equal and that we should proscribe the behaviour of some of them, where do we stop? Should we lock up all young people from the age of 15 to 25 to prevent them from doing anything we did ourselves but do not want them to do? I have heard medics argue this at conferences….

So it is a very paternalistic and holier-than-though brigade that wishes to control the lives of others, without any regard to the joy they are destroying, using selective studies to argue their case. Why did the MJA publish the original one-sided piece by medics, one wonders? Economists are right to resist such reckless and blinkered destruction of consumer surplus.

PhD Scholarships on “The Behavioural Economics of Undesirable Cooperation”

Some people engage in socially disruptive behaviour on their own, such as when they free-ride on paying taxes. Others cooperate with others though when they are socially disruptive: cronyism, corruption, nepotism, gangsterism, and favouritism are all examples of cooperative behaviour that benefits a clique but comes at the expense of larger organisations and societies. How does such socially detrimental cooperation arise and is it done by the same people who would be disruptive on their own? What adverse consequences does it have for other members of society? What can be done to counter such behaviour?

An international team of top scholars at the University of New South Wales, the University of Queensland, and Duke University has obtained an Australian Research Council Discovery grant to find out. Fully funded PhD scholarships are available for students interested in these questions.

Students would be involved in devising and running laboratory experiments, as well as possibly running field experiments in developing countries. There will also be opportunities to help construct theoretical models of clique formation in diverse contexts, and to conduct micro-econometric modelling of the incidence and consequences of undesirable cooperation.  Outcomes of interest might include output, income, mental health, happiness, social cohesion, job mobility, and entrepreneurship.

Successful applicants will need to have at a minimum an undergraduate degree with Honours in economics, good written English, and excellent analytical skills. Proven interests in experiments, panel data econometrics, micro-models, and/or behavioural economics are desirable. Willingness to travel internationally and conduct research in developing countries would also be beneficial.

Students would be based in Sydney, though supervision would be shared with the University of Queensland. PhD scholarships of up to AUD$30,000 per year for 3 years are available.

Applications should be sent to Dr. Gigi Foster at [email protected].   Want more information?  Contact Ben Greiner ([email protected]) or Paul Frijters ([email protected]).

Where are we with Geo-Engineering in 2014?

Geo-engineering is increasingly looking like the only politically viable way of averting temperature rises above 2 degrees in the coming century. This is for three interlocking reasons: i) Any mayor country can try geo-engineering on its own without permission from anyone else, meaning one does not need a world coalition sustained for centuries to have an effect; ii) It holds the promise of immediate relief because ‘natural Solar Radiation Management’, ie volcanic eruptions that add lots of light-reflecting particles into the atmosphere, were found to cause immediate worldwide temperature drops, which compares favourably with the lags of decades and centuries that hold for CO2 emission reduction plans; and iii) It might be exceedingly cheap compared to any policy involving emission markets. For instance, according to a 2012 piece by McClellan and co-authors, we could keep the planet at current temperature levels at a cost of merely 10 billion dollars a year by having a fleet of planes deliver reflective particles high in the earth’s atmosphere.[1]

Given that continued global warming is predicted to happen in the next century no matter what emission policies are adopted, geo-engineering by some impatient large country is starting to look nigh inevitable. I reported in 2012 on the research efforts funded by the Royal Society, the Gates Foundation, and others. You now have dedicated institutes on this issue (eg. http://iagp.ac.uk ), and lots of new proposed experiments. With a large glut of published studies in recent years, it is time for an update: how far are we now in the world of geo-engineering?

The honest answer is that the scientific community is pussyfooting around when it comes to geo-engineering. Field experiments are largely stalled as scientists are awaiting regulatory frameworks that will protect them from criticisms of other scientists and environmental groups. Proposed regulatory frameworks designed to deliver this, such as by Nordhaus and colleagues, find it hard to get much political traction because politicians seen to support regulatory frameworks themselves become targets for criticism, both by those who pretend there is no climate change and by those who insist there is climate change but who also insist on emission reductions as the only way to return to our current climate some 300 years from now. Voters who agree the world is getting too hot and who would like it cooled down in their own lifetime rather than that of their great-great-great-great-grandchildren are still too rare to bother with for politicians.

This does not mean there is a lack of bright ideas. The engineers looking into this really are a very creative bunch, talking about whitening clouds, aerosol sprays, reflective shields, and artificial trees. One new idea that I hadn’t heard before is to genetically alter our crops so that they reflect sunlight better than the current crops. I don’t know whether this has any chance of getting serious traction, but one has to admire the ingenuity of the idea. Still, ominously, almost no field tests or large scale long-term testing is underway as scientists are waiting for societal approval to go ahead. Continue reading

Scottish independence: a good idea or a bad idea?

Today the people residing in Scotland can decide whether they want to see an independent Scotland or to have Scotland remain in the UK. The betting markets concur with the opinion polls and favour the status quo: the markets give roughly 20% chance that the ‘yes’ vote will win and that Scotland will become independent.

The majority of economists talking about the referendum have focused on whether or not the Scots would be financially better off with their own country, debating things like North Sea oil revenues and currency unions. I think that is a distraction: looking at small and large countries in Europe, you would have to say there is no noticeable advantage or disadvantage to being a small country and that the Scots are hence unlikely to be materially affected in the long run by independence.
Independence is more about self-image and identity than it is about money. Even though the push for independence might well come from politicians and bureaucracies that gain prestige and income if they ruled an independent country, the population deciding on the vote will probably vote on emotional grounds, not economic. Young male Scots appear overwhelmingly in favour of independence; females and old people prefer to keep things the way they are. The latter groups are bigger and are expected to sway the day.

Personally, I have two related reasons to oppose the breaking up of larger countries in Europe into smaller ethnically defined states, not just Scotland, but also Catalonia, the Basque region, the Frisian province, Bavaria, and all the other regions of Europe:

  1. These independence movements are ethnic and hence by definition exclusionary. This is a big concern: large nation states have slowly moved away from the story that they exist for people of the ‘right’ bloodlines and with ancestors who lived in the ‘right’ place. The UK, the US, France, Australia, and even Germany and Spain have moved towards an identity based on stories about what it means to be British, American, French, Australian, etc., rather than a ‘blood and earth’ ethnic nation state story. Speaking tongue-in-cheek, the Brits have an upper lip story, the Americans have an exceptionalism story, the French have been convinced they like reading Proust, the new Australians are told in their citizenship exams that they believe in a fair go, etc. These stories contain treasured national stereotypes, complete with imagined histories. The key thing is that are inclusive, ie any newcomer from another place can participate in such stories. The Australian national anthem is a beautiful example of this super-inclusive attitude as it, almost uniquely, mentions neither ethnicity nor religion as a basis for being Australian. The ethnic stories of the independence movements are, in contrast, exclusionary and hence harmful to the self-image of any migrant. It is a move to a past that we have little reason to be proud of, as it marginalises current and future migrants. The story surrounding Scottish independence is thus not that the Scots are people who like to wear kilts and enjoy haggis, but that they make up the people who have suffered 700 years of oppression by the English. What is a recent newcomer from, say, Poland to do with such a self-image but conclude that they do not really belong there? Continue reading

The Prophet on Polygamy

My brothers, did I not tell you that “None of you becomes a true believer until he likes for his brother what he likes for himself” and that “Being a true Muslim is achieved by loving for people what you love for yourself”?

And what can you want more fervently for your brothers than that they have wives of their own? What is more despicable, more lecherous, and more an affront to god than to deny your brothers a wife by taking all the desirable young women for yourselves?

I weep when I see rich Muslims take 2, 3, 4, sometimes even 7 young wives for themselves whilst their impoverished brothers have none and are thus forced into extreme behaviour for their chance to be happy. This is not Islam, this is greed.

I weep when I hear rumours of the rich Gulf States offering deals to Muslim governments of poorer countries to have 14 to 21 year old Muslimas come and clean their houses on temporary visas without the accompaniment and protection of their families. Why not give the job to old widowed women? Have you not had your fill of Phillipinos by now? This is not Islam.

I weep as the mullahs, imams, ayatollahs, and the other powerful use my example as an excuse for their behaviour. I married widows and divorcees, in a situation where many men had died in war and were scarce. Now there are more than enough men. Is it not Sharia Law that polygamy should be the exception? As a wise judge recently said to a man who misguidedly claimed refuge in Sharia Law for his lecherous behaviour: polygamy should be the exception, such as when the first wife is infertile or “as a part of social duty and charitable motives or when it seeks to prevent destitution”. Hoarding women for status and sexual pleasure is not Islam.

So shame on you, King Abdullah-of-11-wives! Shame on you, Bin-Laden-of-4-wives! And shame on you, all those princes and wealthy men that have followed their examples and denied wives to others by having so many yourselves!

My fatwa is that all those who have married additional wives desirable to others that you should seek out new husbands for those wives and in each instance that you meet a suitable match, you should divide your wealth in as many parts as you have wives and offer the biggest share in dowry.

Your Prophet Continue reading