Tuesday 1 June 2010

P(II)GS: too big to fail.

   A recent Report by economists at the Royal Bank of Scotland estimates that the total amount of public and private debt issued by entities resident in Greece, Spain and Portugal that is held by foreign financial institutions -- financial entities outside the P(II)GS -- is about 2000 billion euros. This is about 22 percent of the euro area GDP.
   (by the way, I found no links to the report itself, but a brief description that essentially corroborates the calculations may be found here .
   The message seems clear: P(II)GS are too big to fail.
   Hence the bail-out that European Union leaders (together with the IMF and the US) have designed for Greece.
   And hence the need for fiscal rules, coupled with fiscal federalism, that several of us have been arguing for in this blog -- stressing, as I have done, how they would be positive for our profligate country in need of importing yet this good that it can not produce domestically (discipline).
   I think, moreover, that this Report makes it clear why the solution that Ricardo Cabral devised in a post to EuVox -- rescheduling and reestructuring -- is economically misconceived. The international financial turmoil would be enormous and the Euro would be in real danger. We wouldn't want to have Argentina in Europe.
This said, the essence of the problem remains to be solved: P(II)GS simply cannot live above their means so systematically and deeply. Think about Portugal: 10 percent of GDP of current account deficit, year after year; a country that is lacking structural competitiveness; and politicians that (some, to be fair) remain autistic about this.
   Against this background, has the Portuguese government done everything to its reach in order to contain the indebtedness of Portuguese entities? I do not think so.
   Public expenditure should be significantly reduced, which I haven't seen so far (at least compared with Ireland and Spain's immediate measures). And -- a crucial 'and', for me -- renewed incentives for residents to hold public debt should be created. The Portuguese twin deficits will only be tackled if and when the Government actually stops spending inefficiently and sucking resources from the public to finance that spending; and when it creates virtuous 'forced savings', instead of the vicious ones that have been recently implemented (increased taxes). If the Portuguese save more because they are stimulated to allocate increased savings to public debt, the international financial exposure of the Government would fall, imports would deccelerate and the international financial exposure of the country as a whole would decrease; the immediate signs needed for Brussels -- cutting the deficit -- should have given much more via spending cuts than they have actually been given.


  1. Funny that the word "autistic" presents itself in an entirely moralistic post on nothing else than the longbearded notion of state profligacy of those darned southern europeans. I wonder how you would explain the fact that even if public spending in PT were to vanish, said country would still be in the throes of debt.
    Furthermore, your argument for a decrease in public spending is a) a non sequitur from the first part, where no evidence of public indebtedness being a major driver of whatever, and b) not necessarily consistent with the idea of smart government. Paraphrasing Brad deLong, why oh why do economists disguise moral philosophy as neoclassical macroeconomics? Moral philosophy is good in its own right, no need to present mouldy preconceptions such as "profligacy" - funny how northern surpluses are always silent in these stories - and discipline - not so funny to see economists arguing for a constitutional cap on deficits, thinking that the invisible hand qua market equilibrium must be perfect because the theory says so.

    And no, I'm not an economist nor do I pretend to be. Just a critical citizen who doesn't swallow every bit of economic wishwash.

  2. If anyone was to participate in a friends' conversation about the brain surgery that one of the group needed to undergo;
    If anyone was to participate in a cafe conversation about the explosion of the Discovery;
    My guess is that nobody would dare to make technical suggestions -- say, on how to perform the craniotomy or how to prevent further shuttle explosions.
    Hence my surprise when I hear and read, everyday, too many (non-expert) people arguing for or against all kind of (difficult) economic problems.

  3. Manuel,

    You're actually comparing economics to brain surgery or rocket science? Oh my god...

  4. I really canno't understand why is the euro such a sacred cow. Can any of these economists enlight me ?

  5. The inescapable fact remains that, for all the contortions, analyses, lobotomies or spacecraft explosions over Florida, the euro-zone is not an optimal currency area. If the debate is to stick to economics and economic soundness and leave political gimmickry aside, the conclusion must be that the P(II)GS should never have joined the euro and the sooner they leave it the better for all concerned, including the Germans. It will indeed be painful, but it's a case of abandoning the Rolls-Royce you cannot afford and go back to driving a Vauxhall.

  6. I'd really like to know if any of my colleagues in this blog questions the net advantages of the Portuguese participation in the EMU.
    It is a pity that none has joined the debate, which finally may be constructive (it is a repetition of an old debate, held in the early 90s, but now with some more info).
    (I'm not questioning whether the EMu is an OCA or not; studies pointing either way may be found; I do think Greece should not be a member; but do not think so about Portugal)