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Ekonomista, doradca finansowy

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2014-06-14 21:28
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Niskie płace to żałosny atut
o ile Niemcy mogą przebijać nas pracowitością, wydajnością, to czym przebijają nas grecy?, a[...]
2014-05-20 08:05
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Niskie płace to żałosny atut
Panie Petru, mówi pan o wydajności pracy. Czy niemiecki kierowca zawodowy przejeżdża 4x więcej[...]
2014-02-16 05:56
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Czas na ekspansję
Zawsze jest czas na jakiegoś rodzaju inwestycje.

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Stefan Kawalec and Ernest Pytlarczyk state  that the fact that the euro cannot be devalued means it may not be possible to adjust competitiveness of euro zone economies which in turn may lead to their disorderly disintegration. To avoid this, they suggest an orderly dismantling of the currency but I personally don't like either scenario.


The problems of various euro zone countries are not caused by the common currency but by faulty economic policies.  If responsible policies were in place a "simple adjustment instrument" would be superfluous.  Obviously without the euro, warning signs would have appeared earlier.  But the lack of such signs was not caused by the single currency but by european institutions giving the markets the wrong message.  But let's look at things as they occurred.


Today the euro zone crisis usually refers to five countries:  Greece, Portugal, Ireland, Spain and Italy.  There we can see the problems caused by the existence of a common currency and how a return to national currencies could solve problems piling over the years.  Greece benefited amongst other things from a considerable drop in the cost of debt servicing.  Those savings were earmarked for current expenditure.  For the years that followed, despite competitiveness falling because of excessive wage growth, the Greek economy grew at a fast pace thanks to external financing.  Until 2009, the yield on Greek bonds was only at 0.3percent, which was higher than the yield on German bonds - all this with Greek debt already at 113 percent of GDP!  People often ask why financial market did not react to such high debt and stop Greece from taking on even more but the markets did not react, and the ECB treated Greek bonds the same as Germany bonds!  The market was giving out the message that Greek debt was safe.   Moreover european politicians themselves suggested that a euro zone country cannot go bankrupt - in other words - others will carry the Greek debt can.  It only emerged earlier this year that things don't quite work like that and Greek debt underwent controlled restructuring.  Earlier, investors had received false signs from decision makers.  If they hadn't, each of the euro zone country's debt would have been assessed individually and Greece would never have got into debt of such unprecedented proportions.  Greece would have had to pay higher interest rates much sooner and the market would have stopped financing the debt several years earlier.  Adjustments to the Greek economy would most probably have started in the middle of last decade and been far lesser.  Portugal is facing a similar situation although this is thankfully more contained.


Spain and Ireland are another story.  Both of those countries had a responsible budgetary policy - at least on paper.  Spain's deficit was low and in Ireland the budget was in surplus only no one seemed to notice that this was based on the boom in property prices.  Then the bubble burst, unleashing the current financial problems.  The property boom was caused above all by cheap money, or by excessively low interest rates which are the same for all countries in the euro zone. 


They were too low for both Spain and Ireland but if we look over to the US and Great Britain, both much larger countries but where very low interest rates also let to property prices spiralling out of control.  Both the FED and the Bank of England took decisions exclusively based on the needs of their own economies.  In other words,  excessively low rates are not just a problem of euro zone countries. 


If rates are too low - be it in euroland, the US or in the UK,  steps must be taken to keep the situation in check.  This means proper banking supervision.  These are the kind of measures that were implemented in Poland, namely the notorious "S" recommendation which restricted the supply of loans in foreign currencies which at the time were much more attractive than loans expressed in zloty.


In other words, the explosion in the cost of goods is not an exclusively euro zone feature.  This is why each country should use whatever means are necessary to fend off such imbalance.  In Ireland and Spain,  at the heart of the boom was the banking sector, the losses of which led to public debt in Ireland doubling in the course of one year.  In Spain, the unhealthy state of the banks do not permit the holders of Spanish bonds to sleep easy.  Where was banking supervision during the credit boom?


Italy suffered a lost decade.  There was neither wild growth in debt like in Greece nor a property boom.  In Italy and other countries, wages increased disproportionately and the country lost its competitiveness compared with its main trade partners and  in particular with Germany.  An example is the transfer of Fiat Panda production from Poland to a much more expensive Italy.  The Germans did exactly the opposite which explains their current account surplus of 5% GDP and the reverse trend occurring in the above mentioned countries (a shrinkage of 2 to 3% of GDP).  During that period Germany neither experienced a property boom nor did they increase their debt excessively, nor was there an excessive increase in wages.  Moreover, Germany transferred part of their production to central and eastern europe and took full advantage of the common currency which was cheap for them.  If it hadn't been for the euro, they would not have enjoyed such an increase in their current account surplus.  Germany has benefitted for years from its membership of the common currency club  which means they would be somewhat affected if it disappeared.  The collapse of the euro zone would be a huge blow to the competitiveness of that country.  Now Italy is faced with the difficult task of following in Germany's footsteps.


It took Germany ten years to reach its current position of strength.  This will be the case for countries like Ireland, Spain or Italy.  I don't want to express an opinion on Greece because the situation there is much more difficult given the scale of the problems and the quality of the political class.  However, in other countries, growth in wages has to be curbed and there have to be supply side reforms which improve economic potential (deregulating the labour market, opening up access to heretofore closed professions and trades, an increase in the retirement age, privatisation).  All this is on the agenda in those countries.  It's therefore not true to say that the only way to improve competitiveness is through fiscal adjustment in order to force internal devaluation.  Applying that same rhetoric, it is possible to say that Germany applied the policy of internal devaluation in the first decade of the millenium, curbing wage growth, deregulating the labour market and not using a budget deficit to stimulate the economy.  That kind of long term adjustment is not easy but undoubtedly safer than the shock therapy which leaving the euro zone would mean.


The collapse of the euro zone would most probably give rise to a greater crisis than the fall of the Lehman Brothers.  More importantly, we are not able, like on the 15th august 2008, to estimate the scale of devastation following such an event.  With today's volatile financial markets, the exit of one single country, even of Greece, would transfer the attention of the markets and with it the valuation of debt securities, to another country, or to Portugal and then Spain and Italy which would anticipate the devaluation of their currencies.  This process would be difficult to control and it would result in a paralysis of trade and investments. 


This theory which is completely divorced from economic and political reality cannot be taken seriously and European politicians are doing everything to ensure this remains just a theory.   In the future, of course, there must be a formal procedure enabling a country to  legally leave the  euro zone if it so wishes.  Today such a possibility doesn't even exist on paper.


2012-04-23 15:16
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