The Economist

The Economist in its "Economics Focus" column this week features Jacopo Ponticelli's and my work on unrest and austerity... as well as my earlier paper on Latin America, making a related point -- the more you cut, the higher the level of unrest will be. 

What's Greek for "Erfüllungspolitik"?

Today came the news that Greece (again) missed its deficit targets, with the red ink growing in September. Slow growth is typically blamed, and surely austerity doesn't help much in stabilizing growth. How do we make sense of the grim determination paraded around by the Greek government, and round after round of austerity? One interpretation says - it just can't be done, the cuts are too much for growth and tax collection plummets with GDP. The other interpretation thinks of the current posturing by the Greeks as theatre: Look, it really cannot be done, so please spare a few billion euros (insert transfer from the EU/debt forgiveness here).

My money is on the latter interpretation. It's pretty clear that only a small part of the overall fiscal mess can be attributed to slow growth. An inability/unwillingness to go after tax dodgers, throw them in jail, and make them pay (to encourage the others) is more than half the story. I think the Greeks are taking a leaf from the book of another country with monumentally high debts, and then failed to repay them: Germany.

After World War I, Germany was saddled with reparations payments of unspecified magnitude. The politicians charged with running the country's first full democracy didn't like it any better than the right-wing nuts who would have liked to say no, with a good chance to start the war. Their solution? Trying to convince the Allies that it really cannot be done. Taxes went up, inflation was soaring, and still, the Germans didn't manage to generate surpluses, and transfer them successfully to the victors of 1918. The attempt was better than half-hearted, but a good deal less than whole-hearted. It had a name -- "Erfüllungspolitik", the politics of fulfillment. For a country that had just been forced to reduce its army to 100,000 men, it's hard to think of an alternative (which didn't stop right-wing extremists from murdering politicians in charge, such as Walter Rathenau, the then foreign secretary). The cost, for sure, was terrible. By 1923, inflation had destroyed middle class wealth on an unimaginable scale, and output was still below 1914 levels.

And yet, in terms of its primary aim Erfüllungspolitik "worked". By 1924, everyone realized that Germany needed help and a respite. The solution - a big loan from the US - ushered in Weimar's only halcyon years. The Greeks seem hell-bent to demonstrate to the world that they cannot pay, as did the Germans; and they are equally good at destroying their economy along the way.

Kafka

... is alive and well, and writing the script for Russian news anchors. I was in New York yesterday, to give a talk about anti-Semitism at NYU. To make the most of my time there, I gave an interview to  Russian TV about the European bailout package, release 2.0. Or so I thought. All was well for the first minute or so... until someone must have handed the wrong sheet to the girl, who promptly proceeded to quizz me about oil prices, Obama, and the Arab spring. There is always a risk of something going wrong on live television, but this was a curved ball I didn't see coming at all. You can see my flabbergasted expression about 1.10 into the clip over at youtube. It's funnier after the fact than when it happens... It gets slightly better after that: http://www.youtube.com/watch?v=krKvZfePUq8

EFSF leveraging - a miserable accounting trick

The Euro rescue fund, known as EFSF, could be made bigger at no extra cost to the tax payer - or so leading Eurocrats seem to suggest. To me, this looks like a bad accounting trick. Currently scheduled to top out at a lowly €440 bn, the fund could be allowed to leverage itself by borrowing from the ECB. In that way, it could, say, get 5€ for each € of capital, and really get going on ... buying Italian, Spanish, and Greek sovereign bonds. Overall, the EFSF's firepower could amount to a cool 1.5-2 trillion €. Surely, that would be enough to banish the default genie back into its bottle?

I have no view on whether 2 trillion would do the trick. Eventually, once almost all public debt of Southern Euro member states is owned by either the EFSF or the ECB, politicians can safely ignore what the markets say. A couple of trillion help, but they won't last for more than a year or two. Leveraging the EFSF reminds me of one of Private Baldrick's cunning plans (link here), of Captain Blackadder fame. The reason is simple -- the leveraging is simply a silly accounting stunt. If the EFSF buys a euro of government debt, and it goes bad, who pays? The EU taxpayer. If it leverages that investment, by borrowing from the ECB 5 euros, and the investment goes bad, who pays? Exactly. Either the Euro taxpayer (by underwriting the leveraged loss of the EFSF) or the Euro taxpayer (by having to recapitalize the ECB after it loses a ton of money). If politicians feel they cannot, in good conscience, explain more than €440 bn in rescue funds to their voters, then they cannot justify the idea of leveraging.

Of course, the idea of going for broke shows just how fundamentally flawed and unworkable the system of ever-greater rescue packages really is. The alternative? Let the Greeks default. Nationalize and recapitalize the banks that lose their shirts - and use this as a golden opportunity to cut the banks down to size, by selling the nationalized banks in sizes that are 1/10 of their size today. That way, we also reduce the risk of a major financial meltdown every time a bank gets into trouble.

RAC1 interview

You can listen to my words of wisdom about the future of the Euro (and about who is more useful - astrologers or economists) over at RAC1 [in Spanish - program intro is in Catalan].

As part of the media reaction to my Spiegel interview, there is also a bit more over at CNN's excellent background piece on the origins of the Euro crisis, and interviews with European news service EURACTIV with Austrian newspapers Kleine Zeitung and Salzburger Nachrichten. 

My CNN soapbox

A small op-ed piece of mine over at CNN, on whether true Finns, Dutch, or Austrians will break the Euro...

Facebook revolutions

The Arab spring and London riots created a lot of media hype about how the internet and cellphones can create mass movements. I was a bit sceptical, not least because Jacopo Ponticelli and I (in our paper on Austerity and Anarchy) didn't find much when we looked at media penetration and the likelihood of demonstrations, riots, etc. Now, Navid Hassanpour has a new paper on "Media Disruption and Revolutionary Unrest". He looks at what the effect is of cutting off cell phone service. Here is the abstract:

Conventional wisdom suggests that lapses in media connectivity - for example, disruption of Internet and cell phone access - have a negative effect on political mobilization. I argue that on the contrary, sudden interruption of mass communication accelerates revolutionary mobilization and proliferates decentralized contention. Using a dynamic threshold model for participation in network collective action I demonstrate that full connectivity in a social network can hinder revolutionary action. I exploit a decision by Mubarak's regime to disrupt the Internet and mobile communication during the 2011 Egyptian uprising to provide an empirical proof for the hypothesis. A difference-in difference inference strategy reveals the impact of media disruption on the dispersion of the protests. The evidence is corroborated using historical, anecdotal, and statistical accounts.

It's a really nice study - cleanly identified, detailed, and timely. Let's see what the media make of it.