Sunday, December 5, 2010

Two great blogs to check out

I've been meaning to alert you to two great blogs, one for economics by Andrew McCarthy (elearning and economics) and another one for English by Eric MacKnight.

These are the links. I'll add them to my list on the right asap:

elearning and economics



Monday, November 22, 2010

On QE, Germany, China and Friedman

This is the link to Krugman's op ed piece today in The NY Times / IHT. IB Economics students should be able to understand it perfectly well. Useful for examples in long essays etc.

Sunday, November 21, 2010

Food prices and poverty

It's been a loooong time and I really am sorry to have neglected this blog but today, Sunday, even though I am still way behind in my work, I did tumble upon a very interesting post while browsing the Free Exchange Economist blog. It is an article by Timothy Wise in Triple Crisis (post link here)titled 'Are high agricultural prices good or bad for poverty'. I have always told my students that it depends upon whether the poor are net buers (net importers) or net sellers (net exporters) but is seems that this may be missing important issues.

Read the post!

(btw, I read there that Dani Rodrik is posting again which is great news in my opinion)

Hope to resume posting soon!

Thursday, September 16, 2010

For IB Economics Year 1 students/ Candidates 2012

I have already mentioned to some of you the importance of watching now (and again, later) the video 'Commanding Heights' produced by PBS a few years ago.

You can view the video here or here (choose captions 'on' here).

The link for the 'home' page is here.

Trust me and click on the links above!

Tuesday, August 24, 2010

Rehn, the European commissioner for economic and monetary affairs on Greece (WSJ)

A ray of optimism - but we'll have to keep on eye on what happens in September and October in the streets of Athens:

Recall March 2010. Tensions over the Greek debt crisis were running high within the euro zone and among our international partners. People were talking about the end of the single currency. After weeks of intense consultations, phone calls, long days and even longer nights locked in meetings, a sense of determination and solidarity prevailed among European policy makers: "We swim together or we sink together."

Then came May 2010. Europe agreed on a joint euro area and IMF loan-support package for Athens, conditional on Greece's strict implementation of a credible fiscal adjustment program. Many outside critics doubted whether Athens could get the job done.

Now, August 2010. The Commission's first review of the program's implementation shows that, so far, Athens has proved the doubters wrong. Greece's ambitious and front-loaded adjustment program is on track to deliver a return to macroeconomic and financial stability, and stronger and more balanced growth in the medium-term.....

Read it all here.

Saturday, August 21, 2010

'Needed: A New Economic Paradigm' / Stiglitz

Stiglitz is always interesting and illuminating to read. In his Aug 18 FT piece titled 'Needed: A New Economic Paradigm' he once again argues (convincingly in my opinion) of why much of the toolkit available in Economics may be inappropriate / distorting and even dangerous.
...It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply – and that meant there could be no unemployment. (Right now a lot of people are just enjoying an extra dose of leisure; why they are unhappy is a matter for psychiatry, not economics.) Many used “representative agent models” – all individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favoured assumptions, full rationality.

Bad models lead to bad policy: central banks, for instance, focused on the small economic inefficiencies arising from inflation, to the exclusion of the far, far greater inefficiencies arising from dysfunctional financial markets and asset price bubbles. After all, their models said that financial markets were always efficient. Remarkably, standard macroeconomic models did not even incorporate adequate analyses of banks. No wonder former Federal Reserve chairman Alan Greenspan, in his famous mea culpa, could express his surprise that banks did not do a better job at risk management. The real surprise was his surprise: even a cursory look at the perverse incentives confronting banks and their managers would have predicted short-sighted behaviour with excessive risk-taking....

...Fortunately, while much of the mainstream focused on these flawed models, numerous researchers were engaged in developing alternative approaches. Economic theory had already shown that many of the central conclusions of the standard model were not robust – that is, small changes in assumptions led to large changes in conclusions. Even small information asymmetries, or imperfections in risk markets, meant that markets were not efficient. Celebrated results, such as Adam Smith’s invisible hand, did not hold; the invisible hand was invisible because it was not there. Few today would argue that bank managers, in their pursuit of their self-interest, had promoted the well-being of the global economy....

...Changing paradigms is not easy. Too many have invested too much in the wrong models. Like the Ptolemaic attempts to preserve earth-centric views of the universe, there will be heroic efforts to add complexities and refinements to the standard paradigm. The resulting models will be an improvement and policies based on them may do better, but they too are likely to fail. Nothing less than a paradigm shift will do.

The full article can be found here (subscription required) or (most of it) here.

(one more reason why our 'evaluation'-mania in IB Economics is so important...)

On Fiscal Policy again...

Well, the academic year is about to begin and, slowly, work effort is picking up! I checked out Project Syndicate and there was an article by Skidelsky titled 'Fixing the Right Hole" which concerns fiscal policy and why the position of the 'fiscal hawks' may not make all that much sense:

Yet the budget cutters have a fallback position. The problem with fiscal stimulus, they say, is that it destroys confidence in government finances, thereby impeding recovery. So a credible deficit-reduction program is needed now to “consolidate recovery.”

What is it about cutting the deficit that is supposed to restore confidence? Well, deficit reduction may lead consumers to believe that a permanent tax reduction is on the horizon. This will have a positive wealth effect and increase private consumption. But why on earth should consumers believe that cutting a deficit, and raising taxes now, will lead to tax cuts later?

One implausible hypothesis follows another. Fiscal consolidation, its advocates claim, “might” lead investors to expect improvement on the supply side of the economy. But it is unemployment, loss of skills and self-confidence, and investment rationing that are hitting the supply side.

We are told that the “credible announcement and implementation” of fiscal-consolidation strategy “may” diminish the risk premium associated with government debt. This will reduce real interest rates and make “crowding in” of private spending more likely. But real interest rates on long-term government debt in the US, Japan, Germany, and the United Kingdom are already close to zero. Not only do investors view the risks of depression and deflation as greater than those of default, but bonds are being preferred to equities for the same reason.

Finally, the reduction of governments’ borrowing requirements “might” have a beneficial effect on output in the long run, owing to lower long-term interest rates. Of course, low long-term interest rates are necessary for recovery. But so are profit expectations, and these depend on buoyant demand. No matter how cheap it is for businessmen to borrow, they will not do so if they see no demand for their products.

The ECB’s arguments look to me like scraping the bottom of the intellectual barrel. The truth is that it is not fear of government bankruptcy, but governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders. The problem is not the hole in the budget; it is the hole in the economy.

He makes reference to an article in the July issue of the ECB Monthly Bulletin ('The effectiveness of euro area fiscal policies', p. 67) and I would advise IB year 2 Higher Level (but even interested standard level) economics students to read carefully section 2 (pp. 68-71) titled 'Fiscal policy effectiveness: theoretical considerations". Skidelski's piece can be then thought of as an evaluation of the ECB position. The July issue of the ECB's monthly bulletin can be found here.

Friday, July 2, 2010

Fiscal 'hawks'

The link to this was found at the Economist blog. It describes Alesina's position on how to tackle a crisis:

This is Alesina's hour. In April in Madrid, he told the European Union's economic and finance ministers that "large, credible, and decisive" spending cuts to reduce budget deficits have frequently been followed by economic growth.
Alesina argues that austerity can stimulate economic growth by calming bond markets, which lowers interest rates and promotes investment. In addition, he says, deficit-cutting reassures taxpayers that more wrenching fiscal adjustments won't be needed later. That revives their animal spirits and their spending. Alesina says that as a way to shrink deficits, spending cuts are better for growth than raising taxes.

The last sentence is worth noting:
Clearly, economists are as divided as politicians. The problem is that if austerity budgets are pursued and they prove ill-advised, many more people will suffer than just a few economists.

Cross your fingers....

The post is found here

Tuesday, June 15, 2010


Always suspected it, but this 'confirms' it!

From Free Exchange:

Luck”, James Simons, the founder of Renaissance Technologies, a hedge fund, once said, “plays a meaningful role in everyone’s lives.” Mr Simons, a 71-year-old former university professor and a celebrated mathematician, has been blessed with the stuff. His flagship fund, Medallion, has had average annual gains of more than 35% for 20 years. Last year he was named the best-paid hedge-fund manager in America by Alpha, a hedge-fund magazine, reportedly earning $2.5 billion. Medallion gained 80% last year, and this year is up a further 12%.


Where other funds might recruit employees with financial or economic backgrounds and have them test hypotheses against data, Renaissance employeed thinkers who had spent the bulk of their career in non-economic analytical fields, like mathematics, physics, and astronomy. Once at Renaissance, those thinkers would build data-processing models without any preconceptions about what should cause what, when. The firm's advantage is in its willingness to trade what doesn't necessarily make sense.

Read it here: 'If it works, bet it'

Thursday, June 10, 2010

Rodrik on Germany's role in this mess

Rodrik offers an interesting viewpoint on who may also be responsible and who has to act now before it is too late in this crisi.

Just a quote:
European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members. As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment. As Angela Merkel puts it, “growth can’t come at the price of high state budget deficits.”

But trying to redress budget deficits in the midst of a collapse in domestic demand makes problems worse, not better. A shrinking economy makes private and public debt look less sustainable, which does nothing for market confidence.

In fact, it sets in motion a vicious cycle. The poorer an economy’s growth prospects, the larger the fiscal correction and deleveraging needed to convince markets of underlying solvency. But the greater the fiscal correction and private-sector deleveraging, the worse growth prospects become. The best way to get rid of debt (short of default) is to grow out of it.

So Europe needs a short-term growth strategy to supplement its financial-support package and its plans for fiscal consolidation. The greatest obstacle to implementing such a strategy is the EU’s largest economy and its putative leader: Germany.

Even though its fiscal and external accounts are strong, Germany has resisted calls for boosting its domestic demand further. Its fiscal policy has been expansionary, but nowhere near the level of the US. Germany’s structural fiscal deficit has increased by 3.8 percentage points of GDP since 2007, compared to 6.1 percentage points in the US.

What makes this perverse is that Germany runs a huge current-account surplus. Projected to amount to 5.5% of GDP in 2010, this surplus is not far behind China’s 6.2%. So Germany has to thank deficit countries like the US, or Spain and Greece in Europe, for propping up its industries and preventing its unemployment rate from rising further. For a wealthy economy that is supposed to contribute to global economic stability, Germany is not only failing to do its fair share, but is free-riding on other countries’ economies.

It is Germany’s partners in the eurozone, especially badly hit countries like Greece and Spain, that bear the brunt of the costs. These countries’ combined current-account deficit matches Germany’s surplus almost exactly. (The eurozone’s aggregate current account with the rest of the world is balanced.)

Read it here.

Friday, May 14, 2010

We did this essay in class the other day:

Using an appropriate diagram, explain how a government decision to decrease income tax rates could lead to a movement along the short-run Phillips curve. [Nov 09, 5]

I have posted the ideas discussed in my wikispaces site for any interested IB Economics (higher level) candidate to look at. If you are not my student, please keep in mind that what your own instructor expects is more important.

There are many ways to tackle this question. One could start off by mentioning that taxes can be distinguished into direct (e.g. taxes on income, on profits, on wealth) and indirect (taxes on goods and on expenditures).

You would then explain that a decrease in income tax rates would increase disposable income (defined as income minus direct taxes plus transfer payments). Consumption (spending by households on durables, non-durables and services per period) is thus expected to increase and, since consumption expenditures are typically a large component of aggregate demand (total spending per period on domestic output), AD is expected to increase and to shift to the right from AD1 to AD2 (you should, in my opinion include a simple AD/AS diagram):

(the rest of the stuff is found here)


Friday, April 23, 2010

Joe Stiglitz on R. Skidelsy and his new book on Keynes

Robert Skidelsky has published a new book, 'Keynes: The Return of the Master', and my ex-student Alexandros Stavrakas who is now editor-in-chief of Bedeutung, a magazine of Philosophy, Current Affairs, Art and Literature was kind enough to bring to my attention a review of the book written by Joseph Stglitz.

Here are the opening paragraphs:
It has become a commonplace to say, in the aftermath of the Great Recession, that ‘we are all Keynesians now.’ If this is so, then Keynes’s great biographer, Robert Skidelsky, should have much to say about the recession, its causes and the appropriate cures. And so indeed he does. I share with Skidelsky the view that, while most of the blame for the crisis should reside with those in the financial markets, who did such a poor job both in allocating capital and in managing risk (their key responsibilities), a considerable portion of it lies with the economics profession. The notion economists pushed – that markets are efficient and self-adjusting – gave comfort to regulators like Alan Greenspan, who didn’t believe in regulation in the first place. They provided support for the movement which stripped away the regulations that had provided the basis of financial stability in the decades after the Great Depression; and they gave justification to those, like Larry Summers and Robert Rubin, Treasury secretaries under Clinton, who opposed doing anything about derivatives, even after the dangers had been exposed in the Long-Term Capital Management crisis of 1998.

We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era. Bruce Greenwald and I had explained that Adam Smith’s hand was not in fact invisible: it wasn’t there. Sanford Grossman and I had explained that if markets were as efficient in transmitting information as the free marketeers claimed, no one would have any incentive to gather and process it. Free marketeers, and the special interests that benefited from their doctrines, paid little attention to these inconvenient truths.

The review is, of course, much more than a review so it would be a good idea to read it and get a sense of how things are in the profession and in the world right now.

On page 5 of the article Stiglitz discusses the situation that Greece and other PIIGS are facing:'
... There are speculative attacks against the weakest countries, which find themselves caught between a rock and a hard place. They worry that deficits will lead to higher interest rates, not because (as is usually argued) public spending will crowd out private spending, but because of growing ‘risk premiums’. But the effect is much the same: more government spending will force cutbacks in private spending, with the obvious adverse effects on the economy. The financial markets that caused the crisis – which in turn caused the deficits – went silent as money was being spent on the bail-out; but now they are telling governments they have to cut public spending. Wages are to be cut, even if bank bonuses are to be kept.

If markets were rational, there would be an easy policy response. Spending on investments that yielded even moderate real returns (say, of 5 to 6 per cent) would lower long-term debt levels; such spending increases output in the short run, thus garnering more tax revenue, and the future returns generate still more tax revenue. If markets could be convinced, for example, that European governments can and will meet their debt obligations, interest rates would fall, and even the countries with the highest levels of debt would find it easy to meet their obligations. But markets are not necessarily rational, and even when they are, they are not always well intentioned. The objective of a speculative attack is to generate profits for the speculators, regardless of the cost to the rest of society. They can make money by inducing panic and then feel pleased with their ‘insight’: their concerns were justified, but only because of the responses to which their actions gave rise.

Since the time of Keynes, the ability of markets to mount such speculative attacks has increased enormously. But governments are not powerless to tame them, and in some cases can counter-attack, as Hong Kong did in foiling Wall Street’s famous ‘Hong Kong double play’, when speculators simultaneously sold short both the currency and the stock market. The speculators knew that governments traditionally respond to a currency attack by raising interest rates, which lowers stock prices. If Hong Kong failed to raise interest rates, they would make money by shorting the currency. If Hong Kong did raise them to save its currency, the speculators would make money by shorting the stock market. Hong Kong outsmarted them by simultaneously raising interest rates and supporting the stock market by buying shares. Taxes on short-term capital gains, regulations on the ever more powerful speculative instruments (like credit default swaps), and – especially for developing countries – the imposition of barriers on the uncontrolled movement of short-term capital across borders, can reduce the scope for and returns from this kind of behaviour.

The article is found here.

PS: May 2010 IB candidtates taking the Higher or Standard Level Economics exam on May 19/20 should definitely read this and take down a couple of notes. Examples and awareness of what is going on in the world are always much appreciated by examiners. Do not forget that. Even a mediocre essay will earn higher marks if it includes some relevant examples.

Thursday, April 22, 2010

oh, how true...

Europe does not need the French plan for coordination of tax policies, or another IMF, but there does need to be fiscal discipline to prevent other countries from free riding, as the Greeks seem to have done. They apparently assumed that the rest of Europe would overlook continuing high deficits, and that, as eurozone members, the market would consider their debt to be just like German bonds, though issued by friendly and welcoming people in an agreeable climate, and with a glass of ouzo on the side.

The rest here.

On indutrial policy

We are discussing supply side policies and we mentioned industrial policy as an interventionist and rather controversial type.

Dani Rodrik of Harvard recently wrote a beautifully enlightening short article on it.

British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right.

Industrial policy is back.

In fact, industrial policy never went out of fashion. Economists enamored of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation.

China is a case in point. Its phenomenal manufacturing prowess rests in large part on public assistance to new industries. State-owned enterprises have acted as incubators for technical skills and managerial talent. Local-content requirements have spawned productive supplier industries in automotive and electronics products. Generous export incentives have helped firms break into competitive global markets.

Chile, which is often portrayed as a free-market paradise, is another example. The government has played a crucial role in developing every significant new export that the country produces. Chilean grapes broke into world markets thanks to publicly financed R&D. Forest products were heavily subsidized by none other than General Augusto Pinochet. And the highly successful salmon industry is the creation of Fundación Chile, a quasi-public venture fund.

But when it comes to industrial policy, it is the United States that takes the cake. This is ironic, because the term “industrial policy” is anathema in American political discourse. It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs.

Yet the US owes much of its innovative prowess to government support. As Harvard Business School professor Josh Lerner explains in his book Boulevard of Broken Dreams, US Department of Defense contracts played a crucial role in accelerating the early growth of Silicon Valley. The Internet, possibly the most significant innovation of our time, grew out of a Defense Department project initiated in 1969.

Nor is America’s embrace of industrial policy a matter of historical interest only. Today the US federal government is the world’s biggest venture capitalist by far. According to The Wall Street Journal, the US Department of Energy (DOE) alone is planning to spend more than $40 billion in loans and grants to encourage private firms to develop green technologies, such as electric cars, new batteries, wind turbines, and solar panels. During the first three quarters on 2009, private venture capital firms invested less than $3 billion combined in this sector. The DOE invested $13 billion.
The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known: developing new industries often requires a nudge from government. The nudge can take the form of subsidies, loans, infrastructure, and other kinds of support. But scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath.

Read the rest here.

PS: required reading (and, note taking -for examples- for my own little dorks)

Wednesday, April 21, 2010

no comment.....

Once again, doesn't look good...

on deregulation

These days in class we are discussing supply side policies and we initialy discussed two ways of distinguishing them. One route is to make the distinction between interventionist and pro-market policies and another way is to divide them into policies that are commonly accepted and policies that are considered more controversial which, in my opinion at least, include the 'pro-market' set and industrial policiy.

In discussing 'deregulation' I mentioned that quite a few consider the US banking and financial deregulation of the 1980s as being to a significant extent responsible for the current crisis.

Today, I was reading in Project Syndicate a short article by Hector R. Torres, a former Executive Director of the IMF.

The whole article is of nterest but these paragraphs are especially interesting for us:

Let us now consider the second question – whether the Fund suffered from a mindset that blinded it to the causes of what was happening. As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets. Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors.

Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.” In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed.

Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time. And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for.

Read the piece here.

Friday, April 16, 2010

revenue and profit maximization

Ideas on past IB Economics HL P2 questions on profit vs. revenue maximization can be found here at the IB Freeway.

A short on trade

If you are a May 2010 candidate and you are taking higher economics you should be comfortable with the analysis of a tariff.

These are 2 past IB questions relating to tariff analysis:

* How do tariffs affect economic welfare? (Short trade 3)

* Using an appropriate diagram, explain who gains and who loses from the introduction of a tariff (Short trade 34)

An analysis that may be considered useful can be found in my wikispace here. The usual warning: make sure you listen to your own teacher before adopting what I say to my students....

On Greece and the IMF

The situation in Greece as it is unfolding doesn't look that good but one positive side effect is that you guys ('you' in a very narrow sense i.e. my year 1 students) will, by the time you graduate next year, know much more about the IMF than most other candidates from our school since 1993...!

Here is the transcript of an interesting IMF press briefing on what is going on right now between Greece and the Fund. Easy reading and you get an idea about the process.

The October 2009 World Economic Outlook can be found here. Downloading and skimming over Chapter 2 may be a good idea. Some stuff will sound familiar (and, as we move along the syllabus, you will understand more and more) but even just looking at some figures and tables and trying to 'read' them and make sense out of them is a good idea.

Thursday, April 15, 2010

IB May 2010 Exams - Economics

The May exams are approaching fast...

I had prepared this for my students and I think that it may be interesting (or, perhaps, even useful) to post here. The usual caveat: listen to your teacher and what he/she has to say before adopting someone else's approach.

Candidates are often asked to evaluate fiscal policy (in HP1 / SP1 or in HP3/SP2) so here are some thoughts:

Evaluating Fiscal Policy

Possible Strengths of Expansionary Fiscal Policy
* Fiscal policy is direct: any increase in government spending will automatically increase national income (Y) by at least as much, if not more
* If the government expenditure multiplier is greater than one (Christina Romer, the Chief Economist of Obama’s Council of Economic Advisors, estimates it at 1.6) then it is also a very powerful tool
* A decrease in taxes to reflate an economy (as part of an expansionary stimulus plan) may also have beneficial supply-side effects as lower taxes may improve the incentives to work and to invest
* In an economy in deep recession (or, depression) interest rates may be at or close to zero, so monetary policy is totally ineffective; in such a case policymakers have only fiscal policy to turn to
* If the institutional framework of the economy is equipped with unemployment benefits and a progressive income tax system then policymakers have the benefits of ‘built-in stabilizers’ (automatic stabilizers)
* If the increased government expenditures of a stimulus package include spending on infrastructure (roads, bridges, harbors, telecommunications etc i.e. physical capital typically financed by governments that create very significant positive externalities decreasing transaction costs across the board), health and education then a positive supply-side effect will also result
* If the increased government expenditures of a stimulus package include spending on the development of ‘green’ technologies then an additional long run benefit will be the improvement of the environment, permitting sustainable growth.

On the other hand (Possible Weaknesses of Fiscal Policy):
* The government expenditure multiplier may even be less than one as some economists claim (Robert Barro of Harvard, is one example)
* There are significant time lags associated with fiscal policy that may even end up destabilizing instead of stabilizing an economy
* Large deficit spending may increase national debt to unsustainable levels and may force significant tax increases in the future (so, in a sense the cost of such a policy is shifted on to future generations)
* There is also the chance that if the fiscal effect continues for longer than needed then inflationary pressures may arise
* There is always the possibility that the increased funding needs of a stimulus plan (remember the Government must borrow from the ‘loanable funds’ market to finance the deficit spending) may crowd-out private investment (and consumption) through a rise in interest rates or even directly (resource crowding-out)
* Also, fiscal policy suffers from an ‘expansionary bias’ because politicians often are irresponsible and prefer to spend more and tax less rather than spending less and taxing more as the former maximizes their short term re-election chances (Greece is now suffering from the ‘fiscal irresponsibility of governments of the last 30 years’….)

Lastly, contractionary fiscal policy to fight inflationary pressures is more difficult to employ compared to increasing interest rates (i.e. tight monetary policy).

On the size of the multiplier see Barro: ; for a more general discussion of the size of the multiplier read this.

Hope this helps.

PS: the word file that you can tweak can be found here at my wikispace as entry #9

Monday, April 12, 2010

Rogoff on the IMF and Greece

An interesting to read short article by Ken Rogoff:

...Now, the eurozone countries have agreed that the Fund can come into Greece and, presumably, Portugal, Spain, Italy, and Ireland, if needed.

...To be fair, the Fund’s reputation for imposing austerity is mostly an illusion. Countries usually call in the IMF only when they have been jilted by international capital markets, and are faced with desperate tightening measures no matter where they turn. Countries turn to the Fund for help because it is typically a far softer touch than private markets.

The stakes for the IMF in Europe are huge. It is not going to be an easy balancing act. If the Fund attaches tough “German-style” conditions to its loans, it risks provoking immediate confrontation and default. This is the last thing that it wants to do.

Read the article here.

Sunday, February 28, 2010

... a little bit of Bono bashing, a little bit of Harrod - Domar and ....

....lots of evaluation of foreign aid!

A great, short, article (actually, a review by Bhagwati of a new book ) that is great for IB Economics 2010 candidates to read. Highly recommended.

Banned Aid: Why International Assistance Does Not Alleviate Poverty

Krugman in the New Yorker

(in the picture, Krugman and his wife, Robin Wells, at home with their cats, Doris Lessing and Albert Einstein...(!))
....In recent years Krugman has also spent a great deal of time distilling his views into an undergraduate textbook. When he first signed the contract to write it, in 1994, he did it mostly for the money. Then he did no work on it for years. Finally, his publisher told him that he had to get moving, that he should work with a co-author who was better organized and more highly motivated than he was, and suggested his wife. It took them five years of intense work to write the first edition.

“It’s excruciatingly hard,” Wells says.

“You have to put yourself back in the mind of an eighteen-year-old,” Krugman says. “And it has to be impeccable. If you’re writing an academic paper, if you have some stuff that’s blurrily written, that won’t do too much harm. If you write a newspaper article and a third of the readers don’t get it, that’s a success. But a textbook has to be perfect.”

Even though they were doing it mostly for the money, they knew that, for the students who read it, their textbook might be the only time in their lives that they were exposed to proper economic thinking, which of course would have an influence on their political thinking.

“The books we’re competing with tend to be much more rah-rah about the market,” Wells says. “That’s partly because that reflects the views of the author, but also because it’s easy to do it that way—you just find where the lines cross and everybody’s happy. It’s more difficult to talk about how markets fail.”

“The trend when we were putting the latest edition together was to have less and less about the business cycle, and we said, ‘No, this is wrong, the business-cycle sections are still important,’ ” Krugman says. “That turns out to have been a really good bet.”

“We were the only textbook that incorporated the financial crisis, as we were chronically late. We were supposed to have the manuscript delivered in August or September, and by October we were still working, and we just said, ‘We can’t send it out like this, too much is going on.’ We were really in nail-biting territory, because you have to get it to the printers by a certain date or you miss the academic year.”

“We were right in the middle of that when the Nobel Prize committee called, and Robin’s reaction was ‘We don’t have time for this!’ The stress of the week or so after the announcement was crazy, so we actually went off to St. Croix. We were working frantically.”

Fun reading about the life of a Nobel Prize guy. Click here.

Thursday, February 18, 2010

Myths and facts about Greece and the current crisis

Prof. Charles Wyplosz, co-author of the most popular text "Macroeconomics: A European Text' which many of you (my students) may use in college (mostly those bound for UK schools), wrote these 'Myths and Facts" that will definitely enlighten you:

Myth 1: Greece is bankrupt. Countries cannot be bankrupt; their governments can only default on their debts. In the absence of internationally recognised resolution mechanisms, government defaults open up a messy situation as governments negotiate with their creditors.

Fact 1: There is no reason for the Greek government to default. It is not in its interest and it can service its debt, whose size is half that of the Japanese government and the same order of magnitude as that of many other governments, including soon the UK and the US (OECD 2010). Yet, markets can force the government to default if they refuse to refinance the parts of the debt that reach maturity. This is a pure case of self-fulfilling crisis.

Fact 2: This crisis started as a panic reaction to fears of default but, as usual, some market players now also bet on a default. The market reaction is both defensive and offensive.

Myth 2: Greece is being singled out because it cheated repeatedly. Reports of Greek data manipulation have occurred long before this crisis. The latest report was issued by the government elected in October 2009 while the risk premia have been large since October 2008.

Myth 3: The Greek government is particularly vulnerable because its debt is widely held internationally, in contrast with the Japanese debt. Crisis after crisis, post-mortem examinations reveal that residents act exactly like non-residents. They panic and speculate like all financiers do, independently of where they live and work.

Fact 3: The monetary union is an agreement to take monetary policy out of national sovereignty. Very explicitly the Treaties leave budgetary matters in national hands. There is no sense in which the current crisis is a “proof” that Europe has failed. The Greek (and Portugese, and Spanish…) debt situation is a Greek (and Portugese and Spanish…) problem.

Myth 4: This is a euro crisis, which could result in a breakup of the monetary union. There is no mechanism for transforming the debt crisis into a Eurozone breakup. No country can be forced out and it is in no country’s interest to leave (Eichengreen 2007). Had Greece not been part of the eurozone, it would have long undergone a major currency depreciation, like in Hungary in November 2008. The euro protects Greece.

Fact 4: A debt default by the Greek government, on its own, would be a non-event. Greece is a relatively small country (with 11 million people, its GDP amounts to less than 3% of Eurozone’s GDP). Contagion to Portugal, which is even smaller, would also be a non-event. Moving on to Spain and Italy is another matter.

Myth 5: Contagion, already under way, would be destructive. This statement is too vague. It cannot destroy the monetary union, as argued above. But contagion can bring the value of the euro down – but this would be mostly good news for the Eurozone as it is suffering from an overvalued exchange rate at a time of anaemic domestic demand.

Fact 5: The real worry is the banking system. Some European banks hold part of the Greek debt and, if still saddled with unrecognised losses from the subprime crisis, some might become bankrupt. Many governments have simply not pushed their banks to straighten up their accounts, and they are now discovering some of the unforeseen consequences of supervisory forbearance.

Myth 6: Other Eurozone governments should support the Greek government to avoid destructive contagion. I argued that contagion need not be destructive if banks can bear it, so the need for a collective bailout is not established. There is a huge moral hazard cost, on the other hand.

Fact 6: The Treaty strictly prohibits bailouts. Art. 100(2) states: “Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control, the Council may, acting unanimously on a proposal from the Commission, grant, under certain conditions, Community financial assistance to the Member State concerned. Where the severe difficulties are caused by natural disasters, the Council shall act by qualified majority.” This article has been written precisely to ban bailouts. Interpreting continuing fiscal indiscipline as “exceptional occurrences beyond its control” runs against the spirit of the Treaty. Violating the Treaty to rescue countries whose successive governments have made no effort to achieve fiscal discipline over the last decade (or longer) is indefensible.

Fact 7: If Greece, and other countries, needs support to refinance their public debts, they can and should call the IMF. In contrast to EU countries that have no instrument to impose debt discipline (the Stability Pact has failed over and again and is completely discredited by now), the IMF operates an effective conditionality machinery.

Myth 7: The IMF cannot intervene in this case because the euro is a shared currency; an IMF intervention would reduce the sovereignty of all Eurozone countries. This is a serious misunderstanding of what IMF routinely does. It deals with any financing problem, independently of currency difficulties. The IMF would impose conditions on fiscal policy, not on monetary policy. Besides, the Eurozone is not a member of IMF – it only has observer status – but individual countries are.

Fact 8: Greece, along with Spain, Portugal and Ireland suffer from a loss of competitiveness due to continuing higher inflation. This partly explains their widening current account deficits until the crisis. Yet, the budget deficits are unrelated to this evolution.

Myth 8: The loss of competitiveness is a threat to the monetary union that warrants collective support. It is true that the competitiveness situation represents a huge policy challenge but a bailout will not help and could well make matters worse if it means that unwarranted wage and price increases are supported by the rest of the Eurozone.

The remaining three can be found here.
(found at voxeu)

Wednesday, February 17, 2010

On Prof. Stiglitz once again

The new IB economics syllabus will include bits fom the economics of information literature which a owes vey much to Joseph Stiglitz.

As I mentioned in one of my sections a few days ago, the latest issue of the IMF magazine 'Finance and Development' has a very interesting and readable presentation of Stiglitz and his work that you should read.
Realizing Stiglitz’s potential, his professors encouraged him to leave Amherst after his third year and start graduate work elsewhere; they were nevertheless devastated to see him go. “Frankly, seeing Stiglitz leave is like watching the disappearance of one’s right arm,” one of them wrote. The Massachusetts Institute of Technology (MIT), however, was overjoyed to get him as a student. The institution’s admissions committee sent his information to the economics department and asked what the amount of his stipend should be, listing choices ranging from no stipend to $12,000. The professor assessing Stiglitz’s application scribbled on the folder: “Offer him Department Head’s salary.”

A common theme in his papers is the difficulty in getting markets to function properly when information is costly to acquire or when the parties involved in a transaction are not equally informed.

In a 1981 paper with Andrew Weiss, Stiglitz gave a powerful demonstration of how credit markets could malfunction when this was the case. In the textbook model of credit markets, interest rates work to bring about balance between supply and demand; if there is too much demand for credit relative to supply, interest rates rise to cut off the demand of some of the borrowers. But what if lenders don’t know which of their borrowers will work hard at their projects and repay the loan and which are going to shirk and simply hope that good fortune will enable them to pay off the loan? If there is excess demand for credit, raising the interest rate discourages the hard-working borrowers but not those who are intending to take a gamble with the loan. So, far from restoring balance between supply and demand as in the textbook model, the rise in the interest rate actually ends up tilting the composition of borrowers toward the undesirable type. Nalebuff says the Stiglitz-Weiss paper shows that “who you end up lending money to or what they do with that loan changes with the interest rate you charge . . . . Or, as Groucho Marx might have said: ‘I wouldn’t want to lend money to anyone who would borrow at that interest rate.’ ” The Stiglitz-Weiss paper helped develop a more realistic description of credit markets by showing why lenders might engage in credit rationing (i.e., limit the volume of loans) rather than raise the interest rate. In other papers, Stiglitz showed that such information gaps could also plague labor markets. In the textbook model, the wage rate is the lever that eliminates unemployment by moving up or down as needed to balance out the demand and supply of labor. But, just as in the credit market, there are informational deficiencies. Employers often lack accurate information about which of their workers will give the proverbial 110 percent to their job and which are inclined to shirk. They could of course monitor their employees to determine who’s been working hard and who’s been merely saying so. But such monitoring is costly in terms of the employer’s time and can lower employee morale.

Employers, Stiglitz argued, are therefore likely to use the wage rate as a tool to separate workers from shirkers. They may offer a wage higher than the going market rate as an incentive to induce hard work from those who are willing and able to supply it. Paying a wage higher than the competition means that the good workers have something to lose if their jobs are terminated; they thus have an incentive to work hard. But with wages set above a competitive level, the wage rate no longer acts a lever to eliminate unemployment. In fact, as Stiglitz demonstrated in a 1984 paper with Carl Shapiro, unemployment is necessary as a “disciplining device” to keep workers from shirking.

Stiglitz also questioned how well stock markets could work when their information was costly to acquire. A tenet of the textbook model of stock markets is that stock prices accurately reflect all publicly available information. But in a 1980 paper with Sandy Grossman, Stiglitz presented a paradox. If prices reflect all the market information perfectly, then no one should bother to collect information because they can get it for free from the prices. But if no one bothers to collect information, then prices reveal no information. “The paradox lays the basis for the argument that imperfect information is likely to be the rule, rather than the exception,” says Nalebuff.

Read the whole article here.

Tuesday, February 16, 2010

at a theater (very) near you.....

Read this on our debt problem and the 'between a rock and a hard place' very uncomfortable condition for the Greek government:

Crisis to take a month off

on the optimal inflation target

We're discussing this week in class the goals of macropolicy and we've just introduced the 'price stability - low inflation' goal realizing that the meaning of 'low' is pretty fluid (just as 'satisfactory' growth is pretty fuzzy).

To add to this fuzziness, skim through this (probably, better to save the link so we discuss a few of the easier issues in class):

What's the right inflation target?

Friday, February 12, 2010

Reorienting macroeconomic policy

Thanks to Free Exchange:

Check out:
IMF Explores Contours of Future Macroeconomic Policy

Perhaps the most interesting quote (NB for IB2 candidates ready to sit the May exam):
IMF survey online: Central banks have chosen low inflation targets, around 2 percent. In your paper, you argue that maybe we should revisit this target. Why?

Blanchard: The crisis has shown that interest rates can actually hit the zero level, and when this happens it is a severe constraint on monetary policy that ties your hands during times of trouble.

As a matter of logic, higher average inflation and thus higher average nominal interest rates before the crisis would have given more room for monetary policy to be eased during the crisis and would have resulted in less deterioration of fiscal positions. What we need to think about now if whether this could justify setting a higher inflation target in the future.

Monday, February 8, 2010

On road pricing

We've introduced the analytics of road pricing this week in class so do check out these:

London Congestion Pricing: Implications for Other Cities

Road pricing: Lessons from London (David Newbery Cambridge University and CEPR)

(full paper: here --> skim only, of course, to see the structure of a professional paper and only if something strikes you as interesting, make an attempt to read a bit)

In Greek: 'Σχεδιασμός, εγκατάσταση και λειτουργία συστημάτων οδικής χρέωσης σε κυκλοφοριακά κορεσμένες περιοχές'

and, read section 2: definition of tradable permits from here.

Carbon Trading (and airlines in the EU)

In today's IHT, an article on carbon trading (tradable pollution permits - we were discussing the issue in class these days) with a couple of interesting points:

Carbon trading is a system that caps the amount of carbon dioxide, the main greenhouse gas, that companies may emit each year. Companies exceeding their quota can buy extra certificates from those companies that succeeded in shrinking their carbon footprint by adopting environmentally friendly technology or modifying production in other ways.

The system is the main tool used by the European Union to meet its ambitious pollution-reduction goals.

Many economists say trading provides the most economically efficient way to reduce pollution. They point out that environmental markets elsewhere in the world, including in the United States, have succeeded in bringing down levels of sulfur dioxide emissions, which cause acid rain.

Last week, the European Commission emphasized that the attack would not set back its plans to include international airlines in the system beginning in 2012, and it vowed to impose “high-security standards in its legislation to prepare for the inclusion of the aviation sector” in the system.

This is relevant to a data on the 'true cost of flying' we'll be doing later on in class!

See Fraud Besets E.U. Carbon Trade System

Monday, February 1, 2010

Rapping this time about Keynes - Hayek

I found this at the Georgia Council on Economic Education and since we'll be staring soon our macro lectures I thought this video might provoke some questions:

For IB Economics students (macro short essays sorted by subtopic)

I have just completed reorganizing my file with all past (May 1988 - May 2009) HP2 macro related questions (the short essay questions).

The file has been uploaded in our wikispace. You can find it and download it by clicking here.

Hope it helps your work!

Friday, January 29, 2010

Mark Danner's 'Stripping Bare the Body: Politics Violence War'

Again back to Haiti. This time a review of Danner's new book 'Stripping Bare the Body: Politics Violence War' by Charles Simic in the New York Review of Books.

...History repeats itself in unhappy countries. The absence of respected institutions and well-established laws that a person can count on to protect him condemns these societies to reenact the same conflicts, make the same mistakes more than once, and bear the same horrific consequences of these acts...
How true.

Not IB economics but really interesting...!

The Chess Master and the Computer (a book review by Garry Kasparov)
...The number of legal chess positions is 10^40, the number of different possible games, 10^120. Authors have attempted various ways to convey this immensity, usually based on one of the few fields to regularly employ such exponents, astronomy. In his book Chess Metaphors, Diego Rasskin-Gutman points out that a player looking eight moves ahead is already presented with as many possible games as there are stars in the galaxy. Another staple, a variation of which is also used by Rasskin-Gutman, is to say there are more possible chess games than the number of atoms in the universe. All of these comparisons impress upon the casual observer why brute-force computer calculation can't solve this ancient board game. They are also handy, and I am not above doing this myself, for impressing people with how complicated chess is, if only in a largely irrelevant mathematical way.

Read the whole review- worth your time - here.

Thursday, January 28, 2010

On Haiti, the importance of history, the role of aid etc

One more post on Haiti.

I'd like you, (my) IB Econ students, to read this op-ed from the NYT. It shows why it is so important to know a bit of history when discussing economics, especially development.
...And yet there is nothing mystical in Haiti’s pain, no inescapable curse that haunts the land. From independence and before, Haiti’s harms have been caused by men, not demons. Act of nature that it was, the earthquake last week was able to kill so many because of the corruption and weakness of the Haitian state, a state built for predation and plunder. Recovery can come only with vital, even heroic, outside help; but such help, no matter how inspiring the generosity it embodies, will do little to restore Haiti unless it addresses, as countless prior interventions built on transports of sympathy have not, the man-made causes that lie beneath the Haitian malady

...Hundreds of thousands of enslaved Africans had labored to make Saint-Domingue, as Haiti was then known, the richest colony on earth, a vastly productive slave-powered factory producing tons upon tons of sugar cane, the 18th-century’s great cash crop. For pre-Revolutionary France, Haiti was an inexhaustible cash cow, floating much of its economy. Generation after generation, the second sons of the great French families took ship for Saint-Domingue to preside over the sugar plantations, enjoy the favors of enslaved African women and make their fortunes.

Even by the standards of the day, conditions in Saint-Domingue’s cane fields were grisly and brutal; slaves died young, and in droves; they had few children. As exports of sugar and coffee boomed, imports of fresh Africans boomed with them. So by the time the slaves launched their great revolt in 1791, most of those half-million blacks had been born in Africa, spoke African languages, worshipped African gods.

In an immensely complex decade-long conflict, these African slave-soldiers, commanded by legendary leaders like Toussaint Louverture and Jean-Jacques Dessalines, defeated three Western armies, including the unstoppable superpower of the day, Napoleonic France. In an increasingly savage war — “Burn houses! Cut off heads!” was the slogan of Dessalines — the slaves murdered their white masters, or drove them from the land.

On Jan. 1, 1804, when Dessalines created the Haitian flag by tearing the white middle from the French tricolor, he achieved what even Spartacus could not: he had led to triumph the only successful slave revolt in history. Haiti became the world’s first independent black republic and the second independent nation in the Western Hemisphere.

Alas, the first such republic, the United States, despite its revolutionary creed that “all men are created equal,” looked upon these self-freed men with shock, contempt and fear. Indeed, to all the great Western trading powers of the day — much of whose wealth was built on the labor of enslaved Africans — Haiti stood as a frightful example of freedom carried too far. American slaveholders desperately feared that Haiti’s fires of revolt would overleap those few hundred miles of sea and inflame their own human chattel.

For this reason, the United States refused for nearly six decades even to recognize Haiti. (Abraham Lincoln finally did so in 1862.) Along with the great colonial powers, America instead rewarded Haiti’s triumphant slaves with a suffocating trade embargo — and a demand that in exchange for peace the fledgling country pay enormous reparations to its former colonial overseer. Having won their freedom by force of arms, Haiti’s former slaves would be made to purchase it with treasure.

...At its apex, the white colonists were supplanted by a new ruling class, made up largely of black and mulatto officers. Though these groups soon became bitter political rivals, they were as one in their determination to maintain in independent Haiti the cardinal principle of governance inherited from Saint-Domingue: the brutal predatory extraction of the country’s wealth by a chosen powerful few.

...Less and less money now comes from the land, for Haiti’s topsoil has grown enfeebled from overproduction and lack of investment. Aid from foreigners, nations or private organizations, has largely supplanted it: under the Duvaliers Haiti became the great petri dish of foreign aid. A handful of projects have done lasting good; many have been self-serving and even counterproductive. All have helped make it possible, by lifting basic burdens of governance from Haiti’s powerful, for the predatory state to endure.

...What might, then? America could start by throwing open its markets to Haitian agricultural produce and manufactured goods, broadening and making permanent the provisions of a promising trade bill negotiated in 2008. Such a step would not be glamorous; it would not “remake Haiti.” But it would require a lasting commitment by American farmers and manufacturers and, as the country heals, it would actually bring permanent jobs, investment and income to Haiti.

Second, the United States and other donors could make a formal undertaking to ensure that the vast amounts that will soon pour into the country for reconstruction go not to foreigners but to Haitians — and not only to Haitian contractors and builders but to Haitian workers, at reasonable wages. This would put real money in the hands of many Haitians, not just a few, and begin to shift power away from both the rapacious government and the well-meaning and too often ineffectual charities that seek to circumvent it. The world’s greatest gift would be to make it possible, and necessary, for Haitians — all Haitians — to rebuild Haiti.

Putting money in people’s hands will not make Haiti’s predatory state disappear. But in time, with rising incomes and a concomitant decentralization of power, it might evolve. In coming days much grander ambitions are sure to be declared, just as more scenes of disaster and disorder will transfix us, more stunning and colorful images of irresistible calamity. We will see if the present catastrophe, on a scale that dwarfs all that have come before, can do anything truly to alter the reality of Haiti.

The link to the aticle To Heal Haiti, Look to History, Not Nature by Mark Danner is here.

Wednesday, January 27, 2010

IB economics: short essays (HP2) broken down by topic

As I mentioned in class, I just got done with re-organizing our file with all past micro short essay questions by topic. This means that all past short essay exam questions on, say, the shut down rule, are grouped together, all questions on externalities are together etc.

The file can be found at our wiki here.

Monday, January 25, 2010

On Haiti, explanations of poverty and the role of aid by N. Kristof

A few quotes from the article:

Pat Robertson, the religious broadcaster, went furthest by suggesting that Haiti’s earthquake flowed from a pact with the devil more than two centuries ago. While it’s not for a journalist to nitpick a minister’s theological credentials, that implication of belated seismic revenge on Haitian children seems defamatory of God.

Why is Haiti so poor? Is it because Haitians are dimwitted or incapable of getting their act together?

Haiti isn’t impoverished because the devil got his due; it’s impoverished partly because of debts due. France imposed a huge debt that strangled Haiti. And when foreigners weren’t looting Haiti, its own rulers were.

The greatest predation was the deforestation of Haiti, so that only 2 percent of the country is forested today. Some trees have been — and continue to be — cut by local peasants, but many were destroyed either by foreigners or to pay off debts to foreigners. Last year, I drove across the island of Hispaniola, and it was surreal: You traverse what in places is a Haitian moonscape until you reach the border with the Dominican Republic — and jungle.

Without trees, Haiti lost its topsoil through erosion, crippling agriculture.

To visit Haiti is to know that its problem isn’t its people. They are its treasure — smart, industrious and hospitable — and Haitians tend to be successful in the United States (and everywhere but in Haiti).

A report for the United Nations by a prominent British economist, Paul Collier, outlined the best strategy for Haiti: building garment factories. That idea (sweatshops!) may sound horrific to Americans. But it’s a strategy that has worked for other countries, such as Bangladesh, and Haitians in the slums would tell you that their most fervent wish is for jobs. A few dozen major shirt factories could be transformational for Haiti.

So in the coming months as we help Haitians rebuild, let’s dispatch not only aid workers, but also business investors. Haiti desperately needs new schools and hospitals, but also new factories.

And let’s challenge the myth that because Haiti has been poor, it always will be. That kind of self-fulfilling fatalism may be the biggest threat of all to Haiti, the real pact with the devil.

This is the link to Kristof's column: Some Frank Talk About Haiti.

Sunday, January 24, 2010

Online papers for the Internal Assessment

We will be discussing in class the requirements for the internally assessed component for higher level IB economics soon. I will post here some pointers and I will also upload the full file at our ibecon wiki in a few days but for the time being, here are some useful links for all:

This is site with links to online newspapers of the world. It is in my opinion pretty good:

The google news site which can be useful:
the archives site here

Wednesday, January 13, 2010

Wednesday, January 6, 2010

Expelling Greece from the Eurozone....

A very upsetting article in Project Syndicate on Greece, its debt and its governments. Even if the author is harsh he does, unfortunately, speak the truth.

The mentality and the practices he describes are so prevalent and so engrained even among the younger that it makes you wonder if there is any hope.

.....Moreover, the Greek government turned out to be untrustworthy. In 2004, Greece admitted that it had lied about the size of its deficit ever since 2000 – precisely the years used to assess Greece’s application to join the euro zone. In other words, Greece qualified only by cheating. In November 2009, it appeared that the Greek government lied once again, this time about the deficit in 2008 and the projected deficit for 2009.

....Ten years later, it seems as if time has stood still down south. Both the Greek and Italian public debt remain almost unchanged, despite the fact that both countries have benefited the most from the euro, as their long-term interest rates declined to German levels following its adoption. That alone yielded a windfall of tens of billions of euros per year. But it barely made a dent in their national debts, which can mean only one thing: massive squandering. That is evident from their credit ratings. Greece boasts by far the lowest credit rating in the euro zone. Standard & Poor’s has put the already low A- rating under review for a possible downgrade. Fitch Ratings has cut the Greek rating to BBB+, the third-lowest investment grade. Indeed, those scores mean that Greece is much less creditworthy than for example Botswana and Malaysia, which are rated A+ .

....A member of the euro zone cannot be expelled under current rules, allowing countries like Greece to lie, manipulate, blackmail, and collect more and more EU funds. In the long term, this will be disastrous for greater European cooperation, because public support will whither.

Europe should therefore consider bearing the high short-term costs of changing the rules of the game. If expelling even one member could establish a more credible mechanism for guaranteeing fiscal discipline in the euro zone than the SGP and financial fines have proven to be, the price would be more than worth it.

The full article is found here.