The misunderstood effects of a default: A Guide to Politicians and Policymakers

Although I had thought that the issue with Cyprus was very similar to the one with Greece, Portugal and Ireland it appears that it isn't so in the eyes of some. From what I can see on some websites, it appears that the case is not so clear for one reason or another. For example, denying aid to the island has been an issue in the German parliament over the past few weeks. Notably, Angela Merkel's coalition partners the FDP have raised their voice in opposing a bail-out scheme. Even in Merkel's own party (the CDU) there appears to be some hesitation. Yet, it appears that they are not so against it as they used to be, if we believe Spiegel.

From my point of view, it appears that some politicians are not really thinking this through. For their sake, let's take a walk through this once again. Just to make it simple for them I will not even use country names so that it will be easier to be used as a formula in the future.

We have two options:

1. We give money to [insert nation here]

2. We let them default

Consequences of Option 1:

The nation receiving the aid would have to be very careful with its public finances. Thus it will inevitably have to make some budget cuts, including cuts in wages and salaries. However, these cuts will have to be implemented slowly. If they are rapidly employed on the economy they will cause a severe contraction (for a simple thought experiment on fiscal multipliers have a look at this) and thus increase the debt-to-GDP ratio significantly, making the debt unsustainable. This would mean that a debt haircut must be implemented which will mean that either private investors (with banks being the majority) or assisting nations (or both) would lose money. If a haircut is to be avoided then further assistance in the form of extending the debt period and significantly lowering the interest rates is to be given. Yet, this would also mean money lost and since losing money is not good for reputation we can agree that the best way to deal with option 1 would be to give the nation the money it needs but make gradual fiscal corrections in order for its debt to remain sustainable. In addition what would be an even better idea would be to directly bail-out banking institutions and force them to invest these money in their government's bonds, but that might be too much thinking. So let's stick to what is easy: If we give money then we have to be sure that change is being done gradually if we do not want unnecessary losses.

What should be mentioned here is that the ECB could also be given the authority to deal with the issue of financial aid. As it has large quantities of money available it can readily assist any ailing nation without any other nation's assets being in danger.

Consequences of Option 2:

If the nation does not receive any aid then it will survive for as long as it can with what money it has left and then declare bankruptcy. The issue is what happens next. The definition of default is when a nation cannot pay the interest on its debts. Then, sooner or later this will also mean that it will also cease to pay its debt (the technical term for that is insolvency). What happens then: well first a debt restructuring for foreign creditors occurs, which means either debt restructuring or debt cancellation. This is in essence a haircut which ends up in loses for the nation's creditor. Then after this huge mess where the state itself has to decide which creditors to ignore and which to honour, another issue arises: how is the nation going to get new money to finance its needs (including the needs of its banks)?

There are only two options for that: either receive money from external sources or print more of its national money. For a country which is in the Eurozone, however, the latter cannot be done. So other countries have to decide again whether to lend it or not. If they do decide to lend the nation then they would be inconsistent to the decision they have made before (when not choose Option 1 instead of Option 2, and suffer the complications of these decisions if you are going to give money after all?) so they will most likely choose not to lend it money again. To which, the already defaulted nation has to respond with exiting the Eurozone in order to print its own money.

Thus, choosing not to lend money to a nation in danger of default leads to their exit from the Eurozone. 

Is this bad? Well it depends. First of all we cannot have conflicting policies: either we assist all nations in need or we do not assist any. So if we assist one we have to assist all the others as well. Second, we have to figure out whether we want to preserve the Eurozone or not. David Cameron stated that the UK should have a referendum on whether it would prefer to stay in the EU or not. If one country exits the euro then it will only be a matter of time before every country which faces the dilemma of inane austerity and a Eurozone exit will choose the latter over the former.

When we analyze it deep enough it boils down to whether we want to maintain a common monetary union or not. If we do then the only solution is to assist all countries needing a bail-out. If we do not then why do we bother having this discussions at all?

Lack of Leaders or Why I Understand Abstention

As a fellow blogger noted, in 2013 elections are approaching in Cyprus, Italy, Malta, Bulgaria, Germany and Austria (in that order). Although their outcome is highly controversial, their importance cannot be overstated as they will affect developments in the aforementioned countries as well as in the EU for the next 4-5 years. Electoral campaigns have been raging in Italy and Cyprus and although German elections are scheduled in September, speculation began about a year earlier.

Yet, even though most politicians spend millions of euros trying to promote themselves and/or their parties people's appetite for voting seems to have reached satiety. Young people specifically are not very eager to listen to the same political agendas that candidates have been preaching over the last 20 years. What is worse for politicians is that even those who have been participating in elections and are now middle-aged, appear to be fed up with the situation.

Once you start listening to people, you find out that what they really want is someone they can trust. And they cannot find that in 99% of politicians. People want credibility and reliability; no candidate appears to have it. So it boils down to either voting for the one who appears to be somewhat better than the competition or not vote at all. Which option is the best? Let's have a look at them

Option 1: Vote for the best of the worst.

The essence of this choice is that in the land of the blind, the one-eyed man is king. It is inevitable that one of the candidates (if we are talking about a presidential election which we will assume for simplicity) will be elected regardless on whether we vote or not. There are some people who will vote whether we want it or not, (those being the hard-headed political cronies or fanatics) so the only thing we can do in order for their candidate not to be elected (if it is indeed the worst option) is to vote for someone who is even slightly better than him/her. Yet, if we use this option and the candidate we have voted ends up being the same as all politicians have ever been, or even worse, it is no-one's fault but ours. Worse, we may even know from before what the final outcome may be. The most important consequence of this option is that we are forced to compromise every single time, keeping our needs and ideals hidden, adhering to principles which do not express us and, what is worst, allowing politicians to be the same as ever. It is the same as a pilot not having the map of the airport he is landing and trying to make it up with having the map of another. You wouldn't feel so good being on that plane would you?

Option 2: Do not vote at all
This is an interesting choice which has two possible explanations: either we do not like politics and abstain from them completely or we do not have have any preference on the candidate elections which means we have no motive to vote. Yet, on closer look both explanations seem to converge into one: we do not like the politicians of our country. Thus, we prefer to pass on our right to vote. The problem is that we essentially have given others the right to decide who is going to run our affairs for the next years and we have had no opinion on the subject. We allow our disappointment for the affairs of our nation and the current unfortunate realities to take the best of us and make us give power to someone else. The candidate elected may have been the worst of the lot. Yet, as we did not cast our vote we have not done our best to prevent it from happening. It is the same as saying "I do not care what happens to my relationship" while in fact you do, and feel just disappointed and sad when things get ugly. What is enough for bad things to happen is for good people to do nothing.

Joseph de Maistre has stated: Every country has the government it deserves. Is he right though? What is the lesser of two evils as presented in options 1 and 2? You may have guessed it. None. Neither of the above is a valid option. Why? Because people everywhere deserve much better than this. We need someone we can trust, who will (for once) keep the promises made, and make some changes. I think I am saying this on behalf of most Europeans: we have had enough. We do not want politicians fighting on issues and do nothing, we want them to shut up and start working. The world has never changed in words and neither will it ever do. 

Mohandas Gandhi and Nelson Mandela. Probably the most influential politicians of the 20th century

Is this too much to ask? Yet we have not even asked the future generation of politicians to stand on its own. We are tired of hearing the same over and over again. What is the point of being young if you have the same ideas of a 50-year-old? It is what Alex Ghita has dubbed Democratic Masochism. Democratic Masochists are people who belong to option 1; and those who belong in option 2 allow them and their country to remain that way for ever. 

Think about it for a second. When was the last time that some politician inspired you? For me it hasn't been this way almost since I was born. We are currently living in a century whose main characteristic is the lack of great people; people who can inspire confidence and trust. The only bright examples of the current period were the actions of Mario Monti and Antonis Samaras. If Greece, with a series of rotten politicians dating almost since its inception can have a good man running it why not every other country as well? I am not claiming that Monti or Samaras are perfect or error-free. They have done their share of errata. Yet, they are honest, hard-working and do not engage in unnecessary discussions or promise things they do not deliver. In fact, most of the times they did not even promise anything. We should not expect politicians to be perfect. Yet we should expect them to give their best for their country and be held responsible for their actions.

Hope is not to be lost. Better men and women will get into politics and we should be able to move forward with them. Yet, we should not lay idle and not do anything while rotten people are running our country for us. Take action, any way that you can. If people do not start saying what they believe and what they expect no-one will ever give it to them.

Unemployment Update in the EU

Source: Eurostat

Well, the figures give more or less the same story as last month. Unemployment is roughly the same in the EA17 or the EU27 (up just 0.1% in the EA17), Greece and Spain are champions both in youth as well as in overall unemployment, Italy, Ireland and Cyprus saw their unemployment rate rise while Austria's, Netherlands's, Luxemburg's and Germany's remained the countries with the lowest figures.

What I am eagerly waiting for some time now, is for the Eurostat announcement that EU27 and EA17 GDP has contracted over the last quarter thus officially throwing the Union into recession. I am not doing this out of hate towards the Union; just because I hope that this will be a wake-up call for politicians and policymakers all through Europe that what they have been doing up to now is erroneous. What the reader may ask is whether they have the common sense to admit their mistakes, which unfortunately I cannot answer now. Time will show and hopefully after that time we will still be part of a Union. Better late than never.

Change can only come from within as Protesilaos states in his latest article. Here's the part that I liked the most:

"The troika's "expertise", or in general the technocratic, "objective" knowledge of the various bureaucrats that make crucial decisions on the citizens' behalf (e.g. the preposterous proposal to have a Commissioner veto national budgets), is in effect nothing more than the facade which conceals an apocryphal desire or rather a specific strategy for the redesign of the Euro area along the lines of a corporatist-neoliberal economic system that will realize economies of scale for a selective corporate elite at the expense of suppressing the standard of living of most people across Europe; while also rendering any spontaneous entrepreneurial initiative practically unprofitable or near-impossible due to the complexity of legislation and entry criteria, which always operate as means of insulating big business from the powerful forces of real competition (neoliberalism should never be confused with genuine free markets)" 

I do not know whether there is a plan or strategy behind Troika's decisions. Nevertheless, it seems that the measures they are proposing are damaging the middle and lower class and leave the upper class unaffected. This basically means that people pay for the faults of their governments and/or banks without the latter assuming anything of the blame. Now I do not know how do you call such a regime but exploitism sounds like a good name.

Trust no one over 30

It is known that the Southern European countries face an unemployment problem. It is known that youth unemployment has reached 50% in some countries. What is also known is that politicians and other policymakers seem not to do anything about this. In an excellent article in Der Spiegel this situation is outlined. What is not offered in the article is a remedy.

To be honest, I cannot think of a better remedy than removing all existing politicians and policymakers over 50 and replacing them with people under 30. This is of course impossible under the current circumstances. Old heads would never understand what they are doing wrong and would never quit. The problems that come with aging are denial, the inability to believe that you are wrong and someone else is right until the moment it all blows on your face and the inability to understand and accept something new.

The main problems in Europe originate from the old heads: young people are more idealistic, much less racist, have more knowledge, refuse to enter to political games of power, require more access to information, more transparency and less corruption. On the other hand old heads accept these issues (no information, no transparency, corruption, political games, racism) as unavoidable and "the way the world is". They are unwilling to do anything to change the current situation as they believe that anything they do will be futile. Monetary returns are far more important than anything else.

Youths do not share these problems: they are eager to act, do not usually fall victims of pessimism and past views, understand the power of people, do not usually follow their family's voting tradition as they think for themselves and are less prone to corruption. They lack in experience, true, however what they lack in experience they more than make it with action. I would prefer a person with no experience doing things, than a person with experience doing nothing.

Most EU governments are elected by the votes of the persons over 50. Most youths are indifferent to elections. The reason is more than obvious: When a politician in his late 60's states his campaign issues, he/she usually avoids addressing the issue of the youth. Even when one does address it, give me one rational person in his 20's, be it late or early, who would believe that a person 40 years his senior would understand how he feels.

The solution would be political parties by youth for the youth. We need more parties like the Pirate Party (which actually originated in Sweden not Germany). Power should be given to the youth and not to the old. We have seen what the old can do. Basically, divide Europe and cause economic distress. Now, lets see what the young can do.

Unspecified Policies

Over the history of mankind, whenever politician wanted to speak in presence of the public, their words spoke of broad generalizations on the subjects they were to address and accusations towards their political opponents. Over the centuries this kind of talking was (and is) the norm of political conversation. However, since the beginning of the 20th century, and due to the increased exposure to information mankind has obtained since then, people have started to catch up with them and demand specific answers to specific problems. Unfortunately, politicians (and policymakers as well) are yet to live up to these standards. 

There are only three possible explanations about this phenomenon: 

1. They think that by dizzying their audience with excessive verbiage will make the latter think that they know their stuff

2. They really don't have any idea about a subject and the only way not to look stupid would be to speak in broad generalizations (which would be fine as long as they only did it on a few subjects. Being excessively general means that they either No.1 or No.3 is true or hmm they have no idea about any subject at all!)

3. If they give a specific solution to a specific problem people will expect them to enforce what they propose.

Studies have shown that people respond better to politicians and policymakers who propose specific solutions to specific problems. From my point of view, being specific help people understand how the policy will affect them and even improve it by direct communication with the policymaker. This helps avoid the three I's as stated in Poor Economics: Ideology, Ignorance, Inertia. Specific policies lead to more votes for politicians and more credibility for policymakers.

It is thus not strange that Draghi-type statements ("the ECB will do everything to save the euro") are not very popular. "Do everything" does not mean anything at all. What is everything? Does it mean stand still and wait as it all breaks down? Does it mean financial aid to banks? Does it mean new plans for a Greek haircut? It could mean anything. Or it most probably means that they have no idea of what to do and just hope to boost financial markets by statements. Guess what guys: Markets (and everything else in REAL LIFE) don't go up in words, only in action.