Tales from Pig countries

In recent days, the sovereign debts of the Mediterranean countries are again under scrutiny; reasons for this can be found in the influence of events such as the decision of the German Constitutional Court to verify the Omt (Outright monetary transactions), or declarations of Bernanke on (future) slowdown in U.S. monetary policy.

But in addition there are two facts specific for Greece and Portugal. In Greece, the Troika threats to withhold a tranche of eight billion in loans (by the European ESM) if the government will not prove diligent in applying the recommended therapies from Brussels and Berlin. In Portugal, the coalition government has been rocked by internal tensions of the majority parties, resignation of ministers and possible elections in 2013, after the third year of recession (with a -2.4%); the population does not seem to will continue to be subject to the Troika therapy.

It is worthwhile to take a look at the past five years by the crisis of the three countries that have requested European funding and the IMF (and in the case of Greece, also obtained a partial default of the public debt). Below are the details of the debt-Gdp ratio at the end of 2007, the deficit (always in relation with the Gdp) in the next three years, and finally of the debt at the end of 2012.

    *Net of 100 billion haircut. The Greek deficits are the actual ones, not those declared by the Karamanlis government*

As you can see, the three countries have had some impressive increases in the debt-GDP ratio, taking into account the 100 billion cut in public debt greek. It should be noted that the difference between final and initial debt is much greater than the sum of the five years of deficit; the difference depends on the fall of the denominator, i.e. the Gdp. Even in Greece we would have had the same phenomenon, without the debt haircut. Of course, the cumulative fall in GDP was much higher in Greece (-20%), with respect to what has happened in Ireland and Portugal (-6.1% and -5.8%).

Greece aside, at the end of 2007, Ireland had a very low ratio, and also the Portuguese was slightly above the level of 60% established in Maastricht. With the start of the financial crisis in 2008 there is an increase in deficits in all three countries, reflecting a fall in production in the period 2008-9 which causes a negative sign in the performance of Gdp (-7, 6% in Ireland, 3.3% in Greece, 2.9% in Portugal). The decision of the Irish Government, to assume the debts of the banks, does skyrocket the deficit in 2010. It 's interesting to note that at the end of the fifth year the budget deficit is equal to or greater than the initial ones for all countries.

According to the German view, endorsed by Brussels, Europe's problems are due to fiscal irresponsibility of governments Mediterranean and Greece is the paradigm. This view reverses the historical reality, since the economic crisis is the result of unbridled financial deregulation introduced in the past. The Irish case is the perfect paradigm of a banking crisis due to excessive debts that were shifted on the community. But if we consider the Greek case, where actually after the Olympic games in Athens Karamanlis had resorted to creative financing, we note that in 2010 the deficit had been reduced by five percentage points, a tremendous effort. At that point it was time to stop the fiscal tightening and boost the economy, and, as recognized by the IMF itself, to cut immediately the debt.

Instead, the Troika continued with the line of fiscal austerity, with the result that the fall in GDP (-7.1 in 2011 and -6.4 in 2012) prevented the same deficit to improve. It 's obvious that the strategy of the Troika has deemed to fail. The document of the IMF, however, seems schizophrenic; on the one hand acknowledges that the austerity measures have had an impact on GDP more than three times greater than expected, but on the other hand believes that the same measures were necessary in amount and timing: “the report does not question the overall thrust of policies adopted …. Fiscal adjustment was unavoidable, as was the sharp pace of deficit reduction given that official financing was already at the limit of political feasibility and debt restructuring was initially ruled out. Structural reforms were clearly essential to restoring competitiveness. Some questions can be raised about the types of measures (overly reliant on tax increases) and structural conditionality (too detailed in the fiscal area), but the policies adopted under the program appear to have been broadly correct”.

In conclusion, the three errors of the Troika are: i) reversal of the cause-effect relationship between the financial crisis and public debt, ii) application of austerity policies is wrong, as when doctors used the bloodletting to tuberculosis; iii) recognition that three European countries have a very different economic structure: the ratio of exports to GDP was, in 2012, 104.4 in Ireland, 38.7 in Portugal and 27 in Greece.