Zoltán Pogátsa's blog on economics in English

Zoltán Pogátsa's blog on economics in English

Wednesday, 21 December 2011

The Crisis: Euro, Hungary, Greece, Italy

An interview Lucia Najslova did with me on topics such as the Eurocrisis, the Orbán government, Greece, Italy, the European integrations process. It appears in Zahranicna Politika in Slovak.

After the recent (Dec 9) summit, Hungarian government expressed reluctance in supporting deeper fiscal integration. Why?

According to what we know so far, this is a bad treaty. It does not solve the eurozone crisis in any way, but undemocratically limits the legitimacy of the fiscal process.

Does Hungary have alternative proposals?

Hungary? Orbán talks about deep going reforms to the eurozone, but no one has yet bothered to ask him what he means by it.

What about Hungary & joining eurozone?

No date set.

Is there a debate on this issue?

It would be a joke to even dream of it in the present economic situation. Hungary is on the verge of a sovereign debt default.

Which brings us to the negotiations with the IMF and the European Commission. Both left the table recently, arguing they will not lend to Hungary if its central bank's independence is under threat from government.

The independence of central banks is a fiction. Governments appoint Chairmen, Monetary Council members, etc. It is only that their terms are set apart from the terms of governments, which the current Hungarian government wants to upset.

Sure, why do then EC&IMF criticize the new law?

Chiefly because it goes against THEIR understanding of the independence of central bank, and it threatens those who implement their versions of monetary policy. i.e. the incumbent Hungarian policymakers.

Can you elaborate a bit where you see the problem of their version?

They want to target inflation. Which is wrong, because it is growth that should receive priority. It is also wrong methodologically, because the Central Bank cannot state for certain why the inflation rate remains so high in Hungary, as opposed elsewhere in the region.

How should they support growth?

By gradual lowering of interest rates. I have to add, that at this point this becomes impossible due to the horrible EUR HUF exchange rate, since lowering central bank indicative rates would send the EURHUF rate through the roof. But such a change of policy would have been possible in past years. So the government is pushing at the wrong time.

What would be the best thing for the government to do now?

Push the central bank issue at a later point, and concentrate on a credible budgetary alternative with the goal to avoid having to take the IMF loan.

Would that mean spending cuts?

Never. Spending cuts NEVER make sense in NO SITUATION in NO COUNTRY.

How do we stimulate growth without borrowing and cutting spending?

Spending cuts lead to a fall in demand, which leads to a worse economic situation, which leads to more cuts..etc. Economic hardships should be used to, firstly, restructure tax revenues and secondly, to reform expenditure.

This is what Joseph Stiglitz is saying - that Europe fought with wrong tools & austerity is not the answer. How should then Hungary redirect its expenses?

Cut the possibility to avoid taxes through offshoring, reintroduce a progressive private income tax, reintroduce inheritance tax, introduce loads of taxes on environmental pollution. It should increase spending on education, education, education. And employment systems, anti-corruption, tax agency.

Would that mean bigger taxes for corporations, for man on the street/employee or both?

Bigger taxes for large corporations and owners of capital. Especially the ones who have been avoiding taxes. Lower taxes for domestic small and medium enterprises. When it comes to individuals, it would mean higher taxes for the rich.

Why hasn't the Hungarian government taken up such measures yet?

Because their policy has been to "boost the upper middle class". The only problem is that there is no upper middle class in Hungary.

Coming back to Stiglitz, he as well suggests that in present shape eurozone cannot save itself. Two reasons - lack of central fiscal authority plus low mobility. Can we have one European currency & economic zone without one finance ministry?

A central fiscal authority would have been nice at Maastricht in 1992. But Europe did not want it. It would have required elections at the Commission level. Member states never wanted that. And now it would even be too late. Italy needs refinancing today, not fiscal monitoring tomorrow. So peeping into the Italian budget from a nonelected Commission that derives from member states is in NO WAY better than the member state itself.

Most integration measures in Europe were not introduced because member states "wanted" them, but because it was the least bad option.

But most crucial ones have been blocked by one or more member state for decades. For instance, they never introduced a real political union, only a free trade based EU.

Do you feel than that deeper integration is not happening as a response to the crisis? That the treaty will be buried?

There have been 21 summit meeting in 14 months. After each one they claimed to have had a breakthrough. Yet things get worse and the average European is not even keeping an eye on these bullshit meetings any more.

Yes, the Europeans are either resigned or just angry. But should we then proceed only by saving the burning cases like Greece and Italy? Isn't the crisis a sign that the EMU stands on weak pillars?

It is time to face reality. The EMU was stillborn, and needs to be rolled back somehow. As Robert Mundell wrote in 1968, and this was repeatedly mentioned in the debate around Maastricht, you cannot have a common currency for an unoptimal currency area.

What did he mean by unoptimal?

Where there are high and low growth countries, there is no good common interest rate.

Would eurozone then make sense for countries with similar cycles of growth? Or do you argue for total abandonment of euro?

The central bank will always keep interest rates low for those countries with no growth, and will therefore fuel bubbles in the high growth ones: Ireland, Italy, Greece, Spain, Portugal. If you could guarantee that economic cycles align in all states, you could have them in a Eurozone. Otherwise it is a nice but detrimental dream.

Well, let’s imagine we'll say goodbye to euro. What could be the impact on the free market?

The free market is the other reason why countries like Greece suffered. They completely deindustrialised after 1981, their EC entry, after decades of 7-9% growth under protectionism. So when the euro came with low interest rates, they bought from the Germans, because they could not produce anything.

Still – what would be the impact of eurozone's dissolution on free market?

There would most likely be more of a reluctance to trade. So free trade would diminish. But it would not be a tragedy. Free trade as a dogma need to be rethought just as much as monetary integration. It is not necessarily equally beneficial for all. It is time to face reality.

And now Germans are basically saving themselves – i.e. state investments, not the banks. So they cannot let Greece fall, right?


But then, following the reports from Greece, it does not seem that the bailout has helped.
People are facing new and new austerity measures + they read about how the other Europeans are angry that they have to send them some money.

Greece has had 5 waves of fiscal stabilisations in 25 years. They only led to fruther fiscal stabilisations. In Slovakia, Sulik is right. And I don't often say that about him.

So, in your view the stability mechanism is a bluff.


Why does then everybody support it with exceptions like Sulik and why has it become such a symbol of "Europeanness"?

For a number of reasons. First, it lets the Commission ignore the fact that the Eurozone was stillborn. Second, it would have made sense at Maastricht, but only with democratic legitimation. The EU has long given up on any need for democratic legitimation. Finally, the mainstream consensus is the stupid one that the PIIGS were to blame. That they were irresponsible.

After Sulik said "no", the Slovak papers were full of commentaries that he is not 'European enough" and various Slovak elites have expressed fear that when they will travel to Brussels now, they will have to feel ashamed.

Eastern European elites understand very little of European integration. They have these superficial tribelike mentalities of being the best pupil.

Well, PIIGS might have had creative accounting, but we are speaking of big German and French investments...so they either overlooked problems in Pigs or they just exploited the situation without thinking of tomorrow?

PIIGS were helped in their creative accounting by the same firm that Mr. Monti, Draghi and Papademos worked for, Goldman Sachs.

So it is the vicious circle of face-saving for everyone

Pretty much. Without having to have real democracy at the federal level, and having to get rid of the stillborn euro, the detrimental free trade arrangement, or the offshore tax havens.

Would you then suggest that Greece undergoes supervised bankruptcy?

Greece is already undergoing supervised bankruptcy.

Would the same scenario work for Italy, a much bigger economy?

No. We would need four times the money we have painfully horded together in the ESFS.

Will Italy then undergo a 'spontaneous' bankruptcy?

Unless we introduce the eurobonds, yes.

What is the major factor preventing us from their introduction?

Angela Merkel.

Why does Merkel say it is not in their interest?

It would increase the German borrowing rate.

In the short term. But in the long run it might stabilise economies, no?

Yes.. but in a crisis, when the market threatens you, you tend to think in a short-term perspective. Germany has already experienced a surprise increase on its government bond rate.

The expression "markets are scared" or "markets threaten you" has been used so many times in the debate on crisis. Who are these markets?

Investors who buy government bonds or your currency, or your company shares.

And why do you have to abide by their 'threats' when in the end they are dependent on government regulations. Moreover, in a simplistic explanation - the very essence of market is that in many transactions someone looses and someone gains - so, the 'markets' do not act like 1 person, do they?

They do not threaten you. They simply refuse to buy you bonds. Who will finance you then?

Sure, government is as well dependent on them, just like they depend on government

They do not depend on the government.

Well, government & parliament regulate the environment in which markets/investors function.

Governments can regulate the markets. But it is not a question of regulation whether you decide to invest in something or not. It is an independent decision.

So, what would the eurobonds bring?

Eurobonds would mean a transitory period of peace for the EU as whole, and somewhat higher refinancing rates for the Germans.

Let’s look at the issue that you have mentioned several times – democratic legitimacy in Europe. Can European governance be legitimate unless we become a federation?

The European Commission is composed of delegates from the member states, and is financed from national contributions. It is therefore dependent and controlled by member states. The European Parliament has its strongest powers in the co-decision procedure, but even there the Council can veto it. And finally in the Council any state has de facto veto power even after Lisbon, and in many important cases even de jure veto power.

Yes, so, the EU as it is now is legitimate? Just because member states have veto?

The EU is essentially still an intergovernmental organisation, run by the Member states. The next question to ask is: who controls the member state governments?

European governments are often composed of parties that got votes of minority of population.
Plus, you have Europeans who would be happier to vote for a representative of another member state since they are not happy with the menu presented at home

That is not the main issue in my opinion. The main issue is that European governments are made up of parties that had been intransparently financed by big business in the elections, who expect something back.

Yes, business influence is certainly relevant consideration the new "99 percent" party in Slovakia
is (quite cynically) financed by people from arms industry. But, how can we overcome the influence of big business on politics?

1. One party campaign donations account nationwide. 2. One party campaign expenditure account nationwide. 3. Ban on any business entity financing political parties. 4. Private individuals should only donate to the degree of the price of one single television set. 5. No political ads in national media.

Great idea. And this law would have to be adopted by - parliament. Which is composed of.... etc.

Parties that run on THIS platform. And they gain popular support.

Is there a country where this already works?

Several. Belgium, Netherlands, etc In Sweden even personal income tax returns are in the public domain...

Perhaps here the Commission could show its usefulness and propose a directive to apply these rules to all countries

The Commission is a captive of the member states, who are in turn captives of big business.

It worked with anti-discrimination directive but then, there was no money involved, 'just' human rights

Barroso is a former Maoist who turned conservative, and then a promoter of genetically modified potato.

Back to European governance. Can you imagine that Europe would have a joined federal government composed on the basis of results of elections to European parliament
in which European citizens would not have to choose only from national nominees?

There should be Europe-wide elections with pan-European parties for the EP. There should be Europe-wide elections WITH SEVERAL CANDIDATES for the Commission. (Leonhid Barroso was elected from ONE candidate. 3. The post of the Council President should be scrapped, it is totally redundant, and only serves to confuse. (He was elected from NO candidates! Noone volunteered their name on the morning when Rompuy was elected!).

Is that possible without panEuropean media ? Who watches Euronews? The only pan-European medium is BBC and we know the UK's European thoughts..

This is the other way around. EU institutions do not matter, so Europeans do not read/watch them...

Or journalists are not able to show cases where EU institutions do matter..

Also, yes.

As a Hungarian citizen, are you glad that Hungary was not ready to adopt euro earlier?
Or, does it matter?

It does not matter. Countries that are fiscally sound, like Slovakia, do NOT need the euro. Countries that are fiscally unsound, like Hungary, would need it, but would never achieve it.

What makes SVK fiscally sound? Our expenditures to relevant sectors -i.e. education are a joke.

The Dzurinda government opened up to FDI inflow exactly at the time when the inflow of FDI had the post transition reconstruction effect of bringing in more revenues, while they also radically cut expenditure to live up the future of Slovakia. Fiscally sound in this narrow sense only means BALANCED. It does not mean that the allocative, redistributive or regulatory roles pf the budget are OK as well.

FDI's are in short term irrefutable - but, if we look at what type of labor is requested in many of the newly opened factories it does not really contribute to development of significant added value

Low wage, low value added, unsustainable. Dzurinda admitted that much after having lost the election to Fico.

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