Greece should consider selling some of its uninhabited islands to cut its debt, according to ...Quem acham que terá dado o conselho?
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By Nouriel Roubini and Arnab Das(o resto é a pagar)
2/11/2010 | Last Updated
EXECUTIVE SUMMARY
The extent of the fiscal pressures facing Greece, and the inherent inability of the EU/ECB to handle such crises with the deliberation and conditionality required, suggest the need for IMF involvement if the EU is to avoid a larger, more devastating round of contagion across the weaker tier of eurozone members. The interlinked nature of EMU turns a relative midget – Greece, accounting for a mere 3 percent of the eurozone’s GDP, into a systemic entity. Thus, if Greece is, as RGE believes, “too-interconnected-to-fail,” the EU needs to put theoretical concerns about moral hazard and global prestige aside, [...]
Paul Krugman advocates an additional stimulus program, along the lines of the $787 billion stimulus program enacted last February. He has not, to my knowledge, indicated how large a program he wants, but presumably it would be very large, perhaps equal in size to last year's program. He realizes that the nation cannot continue running up its debt without serious long-run consequences, but believes that now is not the time to reduce deficits by higher taxes or lower government spending; that we should wait for the economy to recover, and then address our debt through economizing measures, primarily in health care--he believes that the Obama health care plan would reduce the federal deficit.
He is not being realistic. There is almost certainly not going to be another stimulus program of any magnitude as long as the recovery, anemic though it seems to be, doesn't give way to a 1937-style second depression. And there aren't, in all likelihood, going to be any significant spending cuts; the perfection of interest-group politics will see to that. There is no way, it seems to me, that adding 30 or 40 or 50 million people to the health insurance roles (in the event that an ambitious health care program is enacted after all) can avoid an increase in the costs of health care borne by the government, because those people will demand more care once they have insurance. There won't be offsetting cuts in Medicare because the old people won't stand for any reduction in their treatment options. There aren't going to be big tax hikes, either, to pay off the debt; neither political party dares to raise taxes, beyond letting a small part of the Bush tax increases expire on schedule in 2011. Because spending won't fall or taxes rise, the public debt will rise, so the interest on it will rise, and its rise will be compounded by higher interest rates as the debt grows. Rising interest expense will combine with rising Medicare and Social Security costs to further compound the debt. It looks as if, mainly by virtue of the Bush deficits and the costs (in reduced tax collections and increased welfare expenses, bailouts, and stimulus), the public debt will reach $10 trillion in a couple of years.
I conclude that there probably is only one way out of our fiscal dilemma, apart from default, devaluation, or runaway inflation, and that is to increase the rate of economic growth to the point at which a growing public debt falls, or at least does not increase further, in percentage of GDP. But measures to increase economic growth must satisfy four criteria: that they not interfere with the economic recovery; that they not put the government in the futile position of trying to pick tomorrow's industry winners and investing in them ("industrial policy"); that they not cost too much, as that will contribute to the deficit, because the costs are likely to be incurred before the benefits are obtained; that they be politically feasible.
With these constraints in mind, I suggest the following candidates for stimulating the growth of the economy.
1. Remove all limits on the immigration of highly skilled workers, or persons of wealth. (This should be done gradually, so as not to increase unemployment while the unemployment rate remains very high.)
2. Decriminalize most drug offenses in order to reduce the prison population, perhaps by as much as a half, which will both economize on government expenditures and increase the number of workers. (Again and for the same reason, phase in gradually.)
3. Curtail medical malpractice liability, which increases medical costs gratuitously (because the courts are very poor at identifying actual malpractice) and, more important, engenders a great deal of very costly, and largely worthless, "defensive medicine."
4. Augment the admirable efforts being made by the Obama administration to improve public education.
5. Increase investment in the treatment of mental illness, which disables people during their productive years.
6. Simplify the federal tax code.
This list is merely suggestive, and could surely be improved. It is meant to suggest a more productive alternative to the current efforts at comprehensive health care reform, unpromising job subsidy and mortgage relief programs, and ambitious financial regulatory reform--all measures that are likely to slow the recovery by making the economic environment more uncertain and our fiscal problems more acute.
Now what? A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley’s Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger “the mother of all financial crises.” So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.
But that’s not going to happen anytime soon. What we’ll probably see over the next few years is a painful process of muddling through: bailouts accompanied by demands for savage austerity, all against a background of very high unemployment, perpetuated by the grinding deflation I already mentioned.
It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.
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Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal.
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"If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.
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For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.
Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.
But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.
“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”
In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.
