By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.
For some time now I have been pointing out poor economic policy implementations within the European economy and how those policies are likely to effect the real economies of European nations. As I re-stated on Monday, my major concern with the current thinking from European economic leaders is their misguided belief that implementing austerity before credit write-downs/offs is a credible policy for a highly indebted, non-export competitive nation with a non-deflatable currency.
As I have explained many times before, this policy will fail because the deflationary effects of austerity will mean that the economy no longer has the ability to services its existing debts as it is not receiving compensation for that deflation via its export sector due to the non-responsive currency.
So, as I have been saying, all that will happen with the continued implementation of these policies is failing periphery economies which will require constant bailouts. Greece continues to demonstrate this outcome:
The International Monetary Fund sees the Greek economy deeper in recession in 2011 than the government expects and a wider-than-forecast budget shortfall, adding that the country has still a lot of work to do on reforms.
In a country review, the IMF said Tuesday the Greek economy is forecast to contract by up to 6% in 2011, versus Greece’s official estimate for negative economic output of 5.5%, ahead of a downturn in 2012 in the region of 2.75% to 3%. In its fourth year of recession, Greece has already revised lower its growth figure to 5.5% of output for 2011 from a forecast of negative 3.8% earlier in the year.
“The economy is trending notably lower than what was expected. Investor sentiments have not improved as hoped, given the unexpected turmoil in other countries in the euro area periphery, uncertainties among investors about the framework for a comprehensive policy response to the crisis, and also uncertainties about private sector involvement in reducing Greece’s debt,” it said.
“However, the most important factor has been the slowing pace of structural reforms this year.”
Among the changes the IMF said Greece needs to adopt in order to return to a growth path are shutting down inefficient state entities, reducing the large public-sector work force, cutting public wage and pension levels and stronger budget control.
“Greece is still well away from the critical mass of reforms needed to transform the investment climate.”
With the recession weighing on tax revenues and boosting spending on social welfare, the budget deficit this year is seen at about 9% of GDP, versus a recently revised government forecast of 8.5%.
So austerity is causing unemployment, which in turn requires the government to spend more on welfare, and therefore the government spending continues to rise which in turn means the “pace of structural reforms is slowing”. The fact that Greece is inside the Eurozone means there is no currency devaluation effect as the economy weakens which means that the only compensating factor for austerity is wages and employment. In other words, the nation will not be competitive again until the entire country takes a large pay cut, which wouldn’t be so bad if they weren’t also expected to continue to pay the debts they accumulated while receiving far higher wages.
Quite simply the policy is failing in every way. The nation isn’t becoming more competitive, every single macroeconomic metric is going in the wrong direction and on top of that there is simply no way creditors are going to get paid. The most worrying thing is that instead of recognising, at least publicly, that the policy is failing the Troika continues to enact ever harsher austerity under the promise that “if we just do a bit more it will all get better”. The fact is it will not, because it can’t without significant debt reductions far beyond what the currently stalling PSI+ plan involves. (See more on the PSI+ here).
What concerns me now is that the IMF appears to be becoming increasing desperate to prove themselves right even in the face of obvious failure. In a separate article Poul Thomsen, the IMF mission chief in Greece was quoted as saying:
I think one of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” Poul Thomsen, the IMF mission chief in Greece, told reporters in a conference call.
Greece’s austerity program “has relied, in our view, too much on taxes and I think one of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” Thomsen said. “Any further measures, if needed, should be on the expenditure side.”
So the current policy has failed to produce the result that it was supposed to under the IMF’s ideology, as I said they would, because they didn’t begin the plan by writing down most of the existing debt and their other assumptions were completely misguided. As even the most junior project manager would tell you, the failure to make steps towards realising your original benefits is a sure determinate that your project is failing and should be halted pending a review to determine if its worth proceeding. But instead of using some basic project governance, the IMF continues to plough on in the opposite direction in what now appears to be a plan to start cutting welfare and services to the same people that the original failings forced into unemployment.
Europe continues to have everything back-to-front to the detriment of everyone involved. The banking system reforms are exactly the same.
As a macro-prudential regulator, the correct time to implement tighter guide lines on capital ratios is when the economy is strong and the banks are able to secure additional capital to support their risk-weighted assets without causing systemic risk. This should have been happening during the boom years when it was obvious that capital flows into countries like Spain and Ireland were leading to credit bubbles in the private sector that had a risk of strong and sudden reversal. But alas, no one did anything then. However, now that the entire European economy is reeling from the after effects of such events and the entire banking system is on the verge of collapse, the EU expects the banks to recapitalise to meet Basel III requirements. We have already seen evidence that this is pushing risk into east European economies as banks lessen their non-core exposure and repatriate capital back to home base. We are now seeing this move to the next level with banks selling off profitable parts of their asset base:
European banks, under pressure from regulators to bolster capital, are selling some of their fastest-growing businesses to competitors from outside the region — at the expense of future profit and economic growth.
Spain’s Banco Santander SA (SAN), Belgium’s KBC Groep NV (KBC)and Germany’s Deutsche Bank AG are accelerating plans to exit profitable operations outside their home markets. Santander, which said in October it needs to plug a 5.2 billion-euro ($6.9 billion) capital gap, sold its Colombian unit last week to Chile’s Corpbanca for $1.16 billion. Deutsche Bank is weighing options including a sale of most of its asset-management unit, while KBC may dispose of businesses in Poland.
Such sales risk hurting long-term profit, just as Europe enters recession, investors say. It’s the unintended consequence of the decision by European regulators to make banks increase core capital to 9 percent by June instead of 2019. Unwilling to raise equity because their share prices are too low, lenders are selling profitable assets because they’re struggling to find buyers willing to pay enough for their troubled loans to avoid a loss that would erode capital. Investors say the sales risk leaving banks focused on a stagnant economy and deprive them of economic growth from outside the region.
The mismanagement of European economies continues to stun me. No wonder the ECB is offering long term repos on the European bank’s star wars figure collections, what choice have they got?
On a positive, at least the suicide pact appears to be stumbling.