Friday, 14 September 2012

Persistence of Ideologies

I have been reading Yanis Varoufakis's blog post today and what has stricken me with amazement was how much ideology is affecting economists. As you may read from his post, he is criticizing the newly developed plan for purchasing EU bonds in the secondary market, called OMT (Outright Monetary Transactions), my comments about which you may find here.

In the article, Yanis states that the EU is currently facing a battle between Bundesbank and the private German banks which want to avoid banking integration and the EU leadership
who wants to promote an EU-wide banking regulatory system. The main advantage of this proposal is that "small" countries will not be taken down as soon as their banks face disaster. What is most important is that under a common regulatory framework, all banks of the EU should (at least in theory) be treated equally without any national prejudices.

I may be too optimistic, or too pro-European in comparison to Varoufakis. Truth be told, I do not believe that Greece is innocent of all its sins and the situation there should not amaze us:
If you happened to watch any news about Greece over the last 10-20 years you would see how little trust the Greeks had in their governments, no matter what the ruling party was. Add to this an ideology proposed
by the world's leading economists (i.e. Friedman, who I am sure is laughing gaily now since he did not believe a monetary Union could be achieved in Europe) and what we get
is an anti-European attitude. I understand Greek frustration over the current situation of what seems to be perpetual austerity measures and wage cuts, nevertheless, this will not last forever.

It is more than obvious, and I have stated it more than once, that the Greek public sector was over-crowded and under-functioning. What they lacked in efficiency, they tried to achieve with staff, which obviously caused more trouble than good. Nowadays, with the efforts of the new Greek government, the public has began to shrink and be much more efficient. Although the media now present us only major budget cuts and austerity measures, they seem to be forgetting that many Greeks cheated the government over the years. Stealing of public money was not just a practice of the ruling class, it was also happening at lower social classes. Reports of more than 10 gardeners getting paid for a garden which did not exist, of dead people receiving the full social insurance, of social workers receiving allowances if they arrived at work on time (amazing policy indeed!), having multiple state-funded organizations for doing simple tasks (which now have fortunately been dismantled) or of a nation not knowing how many social workers it was currently paying are seldom commented by the Greeks. A Kleptocratic system which, if the revelations of fraud had not come to light,  would exist ad infinitum.

Another point which Varoufakis usually makes in his proposals is the role the European Investment Bank has to play, in order to assist Greece and other Southern nations. In his Modest Proposal, Yanis states that the EIB should focus its activities in the periphery of Europe. If this happens then I am sure that the EIB's impeccable record will not be so impeccable in the future. (for more on Yanis's Modest Proposal read this). And yet today, the EIB has announced a plan to facilitate about 750 million over the next few months. In the article's words: "...will be guaranteeing EIB loans to SMEs via partner banks in Greece totaling up to EUR 1 billion. SME financing is key in re-launching growth, securing and creating jobs, as well as strengthening the competitiveness of the Greek economy". This will help the Greek government recover much faster than by directly funding projects with the Hellenic government.

Another current issue is whether the new mechanisms created to support the EU economy are sustainable or even democratic. The EFSF/ESM fund is not a panacea and I agree on that. The purpose of its existence should be to support the monetary Union and not undermine it as this article in Der Spiegel states. If the criteria of support (i.e. austerity or other measures) are not met, then the ECB should stop buying bonds from the nation and let its bonds, spreads and interest rates be prey to the appetites of investors, who to be fair, can smell danger from miles away.

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