Wednesday, October 26, 2011
Most people likely agree that our current economic and political environment is not ideal. Incredible amounts of time and effort is being spent across the country by intelligent people, all trying to find answers to the current problems. Although the options considered in these efforts are surely vast, those recommendations made by politicians and pundits alike, typically focus only on those plans deemed politically feasible. Yet in a democracy, feasibility, to some extent, relies on the public's ability to support a decision. I think it's fair to say that most individuals, myself included, have not spent (and simply don't have) the requisite time necessary to be aware of the ideal options for fixing each sector of the economy. If individuals, broadly, are never made aware of these possibilities, then the odds of public support are clearly diminished. But what if these choices were presented candidly as being ideal along side other options that were deemed more feasible. Would this outlay of options generate more or less support for those policies considered feasible? Would the public occasionally show widespread support for an ideal resolution? Would politicians be praised for providing more information or punished for appearing unwilling to fight for the best outcome?
Breaking with tradition is always risky, but I wonder if more transparency might not lead to greater feasibility. My belief is that expanding knowledge will ultimately lead to better decisions and better outcomes. My hope is that politicians will be willing to test these waters more often and be rewarded by voters for taking that risk.
What are different readers' perspectives on this topic and the questions noted above?
Please share your thoughts through comments...
Friday, October 14, 2011
Many Americans are currently taking issue with China’s policy of pegging their currency, the renimbi (or yuan), to the US dollar at a below market level. China accomplishes this feat by increasing the supply of their own currency and buying US dollars. Based on these simple actions, it seems obvious that China is manipulating the value of its’ currency. However, if we consider the actions of other governments around the globe, it becomes clear that practically all governments manipulate the supply of their own currency and interest rates. In fact, the US government has been very active in recent years, increasing the supply of dollars and holding interest rates effectively at zero percent. From this standpoint, practically all countries are currency manipulators.
(Note: Don Boudreaux at Cafe Hayek has written a number of great posts on the same theme recently. For anyone interested in further examples of the benefits of China’s currency policy, I strongly suggest reading through his blog posts.)
Sunday, October 9, 2011
Yesterday we reported that tiny Slovakia's refusal to ratify the expansion of the EFSF 2.0 (even though a 4.0 version will be required this week after the "Dexia-event"), may throw the Eurozone into a tailspin as all 17 countries have to agree to agree to kick the can down the road: even one defector kills the entire Swiss Watch plan. Yet an interview conducted between German Spiegel and Slovakia party head Richard Sulik confirms that tiny does not mean irrelevant, and certainly not stupid. In fact, just the opposite: his words are precisely what the heads ot the bigger and far less credible countries should be saying. Alas they are not. Which is precisely why the euro is doomed.
Only two countries, Malta and Slovakia, have yet to ratify the expansion of the euro bailout fund. Its fate may be in the hands of a minor Slovak party headed by Richard Sulik. In an interview, the politician explains why he hopes the fund will fail and what he sees as the only way to save the euro.
SPIEGEL ONLINE: Mr. Sulik, do you want to go down in European Union history as the man who destroyed the euro?
Richard Sulik : No. Where did you get that idea?
SPIEGEL ONLINE: Slovakia has yet to approve the expansion of the euro backstop fund, the European Financial Stability Facility (EFSF), because your Freedom and Solidarity (SaS) party is blocking the reform. If a majority of Slovak parliamentarians don't support the EFSF expansion, it could ultimately mean the end of the common currency.
Sulik: The opposite is actually the case. The greatest threat to the euro is the bailout fund itself.
SPIEGEL ONLINE: How so?
Sulik: It's an attempt to use fresh debt to solve the debt crisis. That will never work. But, for me, the main issue is protecting the money of Slovak taxpayers. We're supposed to contribute the largest share of the bailout fund measured in terms of economic strength. That's unacceptable.
SPIEGEL ONLINE: That sounds almost nationalist. But, at the same time, you've had what might be considered an ideal European career. When you were 12, you came to Germany and attended school and university here. After the Cold War ended, you returned home to help build up your homeland. Do you care nothing about European solidarity?
Sulik: If we now choose to follow our own path, the solidarity of the others will also crumble. And that would be for the best. Once that happens, we would finally stop with all this debt nonsense. Continuously taking on more debts hurts the euro. Every country has to help itself. That's very easy; one just has to make it happen.
SPIEGEL ONLINE: Slovakia's parliament is scheduled to vote on the bailout fund expansion on Oct. 11. How do you predict the vote will turn out?
Sulik: It's still open. The ruling coalition is composed of four parties. My party will vote "no"; the other three coalition parties intend to say "yes." What the opposition says is decisive.
SPIEGEL ONLINE: The Social Democrats have offered your coalition partners to support the reform in return for new elections. Do you think the coalition is in danger of collapse?
Sulik: I don't see any reason why it would.
SPIEGEL ONLINE: What will you do should the EFSF reform pass despite your opposition?
Sulik: For Slovakia, it would be best not to join the bailout fund. Our membership in the euro zone, after all, was not conditional on us becoming members of strange associations like the EFSF, which damage the currency.
SPIEGEL ONLINE: If the euro only causes problems, why doesn't Slovakia's government just pull the country out of the euro zone?
Sulik: I don't see the euro as the problem. It's a good project. Everyone involved can benefit from it -- but only if they stick to the ground rules. And that's exactly what we're demanding.
SPIEGEL ONLINE: Which ground rules should we be following?
Sulik: We have to observe three points: First, we have to strictly adhere to the existing rules, such as not being liable for others' debts, just as it's spelled out in Article 125 of the Lisbon Treaty. Second, we have to let Greece go bankrupt and have the banks involved in the debt-restructuring. The creditors will have to relinquish 50 to perhaps 70 percent of their claims. So far, the agreements on that have been a joke. Third, we have to be adamant about cost-cutting and manage budgets in a responsible way.
SPIEGEL ONLINE: Many experts fear that a conflagration would break out across Europe should Greece go bankrupt and that the crisis will spill over into other countries, including Portugal, Spain and Italy.
Sulik: Politicians can't allow themselves to be pressured by the financial markets. Just because equity prices fall and the euro loses value against the dollar is no reason for giving in to panic.
SPIEGEL ONLINE: But do you really believe that politicians can calm the financial markets by stubbornly sticking to their principles?
Sulik: Let's just ignore the markets. It's ridiculous how politicians orient themselves based on whether stock prices rise or fall a few percentage points.
SPIEGEL ONLINE: You're not afraid that a Greek insolvency could mark the beginning of the crisis instead of the end?
Sulik: No. There's not going to be a domino effect along the lines of "first Greece, then Portugal and finally Italy." Just because one country goes broke doesn't mean the other ones automatically will.
SPIEGEL ONLINE: Nevertheless, banks could run into significant problems should they be forced to write down billions in sovereign bond holdings.
Sulik: So what? They took on too much risk. That one might go broke as a consequence of bad decisions is just part of the market economy. Of course, states have to protect the savings of their populations. But that's much cheaper than bailing banks out. And that, in turn, is much cheaper than bailing entire states out.
SPIEGEL ONLINE: Does one of your reasons for not wanting to help Greece have to do with the fact that Slovakia itself is one of the poorest countries in the EU?
Sulík: A few years back, we survived an economic crisis. With great effort and tough reforms, we put it behind us. Today, Slovakia has the lowest average salaries in the euro zone. How am I supposed to explain to people that they are going to have to pay a higher value-added tax (VAT) so that Greeks can get pensions three times as high as the ones in Slovakia?
SPIEGEL ONLINE: What can the Greeks learn from the reforms carried out in Slovakia?
Sulik: They have to make cuts in the state apparatus. The Slovaks could also give them a few good ideas about the tax system. We have a flat tax when it comes to income taxes. Our tax system is simple and clear.
SPIEGEL ONLINE: One last time: Do you honestly believe the euro has any future at all?
Sulík: I believe the euro has a future. But only if the rules are followed.
Interview conducted by Maria Marquart