Greece deal – Jargon Buster

A small number of the jargon used in reports coming out out the interesting movements across Europe as the Greek deal is struck for the next 4 months. I will add to the list over the next couple of days.

Feel free to comment with any questions regarding the jargon or deal.

GDP = Gross domestic product
This is a measure of national output and is used as an indicator for how big or small the economy is.

GDP per capita = Gross domestic product per head of the population.
The same as above but divided among the population to allow for differentiation of performance between countries with large or small populations.

Primary (budget) surplus = A national government in this case Greece is running a primary surplus because ignoring debt repayments they are bringing in more money than is being spent. This may not be the case with debt interest payments included however.

ECB = European Central Bank

The central bank is the institution in charge of monetary policy, such as Quantitative Easing (expanding the money supply) and interest rates. They have a board made up of the finance ministers that make up the Eurozone.

Eurozone = Euro using countries

QE = Quantitative Easing
The expansion of the money supply.

Trokia = The group of institutions setting the restraints on Greece via the bailout conditions. This consists of The IMF, the ECB and the European Commission.

IMF = International Monetary Fund

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Greece lays its gauntlet – The question is will it bring home any goods

After what hail as a victory against the Trokia, others a drastic climb down and for one disgruntled member of Syriza a ‘renaming of meat to fish‘.

There is at least some degree of sovereignty in Greece now where there was not before. Whereby the budget can be set and priorities sorted in Greece this is what is happening now and it is happening for the first time since the last ‘deal’ was struck in 2012 once again Greece is in the driving seat of its own country. Vitally there has been talks of a loosening of the primary budget surplus (a government’s fiscal budget surplus excluding debt repayments), of which the levels are not finalised. I predict that a deal will be struck with the new aim of a 2% budget surplus, rather than the current target of 4%-4.5%. Though this is closer to the 1% preferred choice of both Yanis Varoufakis and Alexis Tsipras this still represents a contractionary stance and is this still austerity in a loosened sense.

The only palatable target at home in Athens and the rest of Greece where the support for the government’s stance on the negotiations was nearing 3/4 of the population would be and is Tax avoidance and evasion coupled with a general clamp down on fraud and corruption at all levels and in particular at the top.

As I mentioned before, there is clearly space for help from countries that have more successful tax collection systems and from those that could help in order to replace the reforms in Greece, which sadly have only led to horrible results thus far. One way that Greece has tried this on their own was to attach tax collection to energy costs which ultimately led to thousands of people losing access to energy and subsequently little extra tax revenue.

It has been leaked that there will be a streamlining of the civil service, which may or may not be productive in Greece. If the help can be sought from the other countries in the short to medium run then there will be more people with experience running these things across Europe that can help with making the process work.

Another concession as I mentioned in my last piece was that we should expect the ‘European Investment Fund’ to become a big player in investment spending in not just Greece but all ailing economies from Italy, Spain and all countries that took issue to Greece’s concessions over the past weeks and going forward.

I’ll update you all as I know concrete details. Follow the blog and me on Twitter @rwscarter to stay up to date.

University fees – The big, but uninspiring debate around fees.

So far there is a clear but poor difference between the main parties on University education policies. We have the Tories proposing to raise the fees cap to £16,000 up from £9,000 as it is now while Labour continues to discuss whether to cut in the maximum fee from £9,000 to £6,000. I accept this is a big difference, but definitely not inspiring stuff from either of them. A fee cut comes with the added potential to cost Universities about £10bn according to their Vice Chancellors who wrote an open letter a couple of days after Liam Byrne spoke to Universities UK about their inflated pay.

Labour is due to make a policy announcement by the end of the month… Hopefully something that cannot be lampooned on day one as the £6,000 fee will be, having received criticism before its initial launch and missing the boom factor. 

There is a problem from the governments finances perspective that the unofficial subsidy that the state is set to take on from having fees at £9,000 may make the system cost more than a lower fee or alternative form of funding such as a graduate tax or direct funding through general taxation might. That the level of repayment is so much lower than expected is quite a worry from their prospective and could lead to unexpectedly raising of costs on already indebted students or an indirect state subsidy. It is worth noting that it is already causing a shortfall in the Business Departments books and this is why action is likely but in which direction the fees go depends entirely on priorities.

I look forward to giving the policies a thorough looking over but it is clear this system is neither working as it should for students, not for the state’s finances. As somebody who believes in ‘Free education’ and even if that is not possible which I doubt it will be considering the fiscal straight jacket the parties have set themselves a more equitable system must be placed forward for the next generation. I do not think it is good for our system or morally right that any change comes with the cost of social mobility, discouraging poorer potential students who are often faced with poor standard Apprenticeships and £9,000 fees for university have little choice in their own destiny. The loss of bright working class men and women being left in no-mans land is exactly why we need to change fees and why Apprenticeships need reform not just an increase in numbers as I have written before. 

We have some of the best universities in the world, it does need to be financed somehow and politicians and a large proportion of society agree education is a merit good. Something that as consumed benefits the whole of society, but these same people also believe universities should at least in part be financed by students themselves. While the obvious rebuttal is that in a progressive tax system the more you earn the more you pay and considering that university is an investment in human capital, it should lead to a higher wage from a more productive worker.  University education had costs introduced in and since they went up to £3,000 nine years ago have increased quite drastically since. A cut in the fee, a graduate tax, filling the gap in public finances needs to be done and in a visibly more progressive way, even though the fees are predominantly covered by ‘soft loans’ the headline figure puts people off from lower-income backgrounds. I should know, I saw considerable parts of my class at college originally dreaming of university decide to do anything but. 

If Germany, Sweden and Norway can have free education, if Chile and others can be heading that way, so can we can do it too. We jut need to get the ball rolling and start using our power by showing our willingness to vote going forward! 

Consumer Socialism – Using Your Economic Vote

A copy of my piece from last year (with minor grammatical changes) which was originally posted on the 15th of April, 2014 for the Institute of Opinion Consumer Socialism – Use Your Economic Vote : http://www.instituteofopinion.com/2014/04/consumer-socialism-use-your-economic-vote/

Lets break it down, consumers are people, businesses and the collective purchasing of the state locally or nationally. Socialism, a word often used as a broad but vague expression of  ‘for the masses’, or ‘via the state’ or ‘fairness & redistribution’. Consumer socialism therefore is using the collective voice of consumers.

Accepting that the system needs to be fixed for consumers by using all agents available to get the best for the majority. Trade Unions and organised labour are used to bargaining for their members’ rights to get a ‘fairer’ share of the profits for the labour that goes into the production of goods and the provision of services. So too do consumers need a collective voice to get the best practice from the market.  For a long time the cooperative movement has been about organised members as consumers, as a workforce and as shared owners and stakeholders in a cooperative venture. In a way consumer socialism has its natural home in the cooperative movement. It should be pursued more strongly than  it currently is by the Cooperative party and its sister party Labour thereafter. The days of getting the state out of the way and letting what happens be, the state must now be the driver of the economy and not merely the passenger.

We face a scenario where there is little or no real consumer choice. The public cannot always switch to an ethical or cheaper provider, not due to lack of information lack of alternatives.  We face a situation where there are considerable barriers to switching it is not made easy, quick nor cheap for people to move in a a market that operates under contracts. The market is concentrated and small providers cannot easily compete astonishingly, many small providers cannot provide the ‘warm home discount’ schemes or payments meaning it is literally not an option for many of the most vulnerable in society to change to more ethical or sometimes cheaper alternative providers.

Another example of an area we need the state to act as a collective consumer is with regard to the ‘Big Six’ banks. These banks have over 80% of the UK’s current accounts on their books alone, and at a time when small business lending is concentrated between a few providers it is evident to see why the existential threat of another ‘bust’ is such a big worry. With this concentration of lending small and medium enterprises access to finance is limited. George Osborne’s ‘Project Merlin’ aimed at boosting small business lending has so far been a failure because the Big Six, when faced with the prospect of increased lending, felt that it was easier to lend greater amounts to a smaller number of businesses rather than smaller amounts to a larger number of businesses. We need a government who understands, and who is willing to clamp down on the anti-competitive behavior of the large banks; a government that will deliver the reckoning and push for community-based banking and a system that work for not against the economy.

The lack of choice also means there is effectively a cartel leading to fees, interest-bearing accounts and mortgage rates. Small and ethical competitors find it hard to enter the market, are bought out or destroyed or fall short of exposure. Building Societies and credit unions are also more strictly regulated than banks and therefore cannot compete. An important factor missed here is that ethical and community-based banks would be unlikely to want to pursue the same practices as investment banks such as high-risk lending and ‘casino banking’ because that would threaten their members interests. Their members are more likely to be listened to than in a large multinational bank, where a few shareholders will not directly feel the side effects if all goes wrong, but would reap huge rewards if it went well. This sort of moral hazard was I believe a key factor in the last crash.

We need a government willing to drive small and medium sized enterprises, stand up for the little man and push for the economy that society wants. The text books say that we decide as rational consumers where the economy goes, what is produced and how. This may be the case with the outrage over Primark and the Bangladesh garment factory tragedy, or farmers and battery hens but it is not enough to only have the information to act. You need the extra capacity in your wallet to shop more ethically and start making positive and permanent dents in the economy. There are, frankly, large swathes of society who do care about ethical trading, ethical lending and ethical consumerism that cannot make a choice to go ‘organic’ or ‘fair trade’ when they are struggling to make ends meet. The government at all levels must be a leader in an economy, through procurement, through purchases and through its distributional balances. Unless you direct money to where society wants it to go, then people will not see the difference in their wallets or the economy.

Whats the deal with Greece : Yanis Varoufakis’s potential toolbox

Alexis Tsipras the new PM has taken a hard-line on the Troika and Yanis recently threw the Troika into the fire by refusing to negotiate.  While the current deal means the level of interest Greece have to repay on their debt is 2% not far above Germany’s level of debt financing and far lower than the market rates would be,  they need room to grow without creditors demanding money they have not got. The risk of contingency if a deal is not struck in Greece to countries such as Portugal, Spain and Italy have not been missed by Merkel. The growing despair at Europe or at austerity have been and risks further being blurred as austerity has not delivered for people and does not look set to. There is over 25% unemployment in Greece which gets worse still for young people with 50% looking for work they cannot find. There has also been a prolonged spike in suicide rates of around 35% so it is no wonder people have turned to Syriza and taking a hard-line.

As negotiations over Greece’s debt pile and the Troika’s apparently immovable stance on the conditions of the bailout agreement agreed by the last administration. Yanis Varoufakis the new Greek finance minister has brought his plan, I have not seen this plan and I am not saying if any of these tools will or will not be in the plan, or that any of these are going to happen but here are few ideas of what might conceivably happen.

Let’s look at what might be included in Yanis’s toolbox:

 

Debt restructuring and or an Interest holiday:

Debt restructuring often in the form of moving short term debts to long term debt either through re-financing or through prolonging the contract on debt obligations is one way in which all debts could be re-paid. This would allow Greece to focus on its problems domestically now and allow the space in the budget to spend more getting the economy growing and meet its election promises.

This movement away from the shorter bonds such as the shorter T-bills and extending the use of long bonds typically between 10 and 30 years to bond to which lengths approaching double that as they are between states and institutions who are thinking more long term than banks, companies or individuals. Another option used previously by many countries following the world wars or financial collapse is a rest period where you do not have to pay interest for a period of time or until a certain criteria is met.

 

Debt haircuts/forgiveness:

Literally accepting a bad debt and writing off debts. This as a process is not uncommon in Greece or elsewhere in the Euro-zone, Germany had it’s debts written off after the 2nd world war for example after the previous experience of forcing measures on Germany. We also saw with the Millennium Development goals a writing off of many developing countries debts. So these aren’t uncommon and a degree of bad debt is expected among the majority of companies so it’s not impossible to imagine the same happening here.

 

Tax collection assistance:

Greece has famously always struggled to collect taxes suffering worse than many from a tax avoidance and evasion gap that makes playing for any government spending hard to measure and any growth harder to benefit the treasury.

 

GDP linked bonds:

The use of bonds that mean performance linked returns and would have a higher rate of interest on maturity the better the economy did. This would enable Greece to borrow cheap in slumps to promote growth through investment and payback as the economy improves. A policy that would not harm Greece and that would enable the state to spend money on investments that like traditional investments give you a return linked to performance. This would generate a much better scenario in the country currently suffering from staggeringly high unemployment rates if they can convince the lenders that they will not cheat them or fiddle figures.

 

Maybe some FDI ( Foreign direct investment) promises mixed with the  European Central Bank (ECB) and investment led asset purchases:

Draghi and the ECB have started QE (Quantitative Easing) expanding the money supply by 1 trillion euros which will hopefully help with the competitiveness of Greece and other countries as their products become cheaper to export however as the majority of trade in Europe is with Europe itself this wont be the silver bullet that it hopefully will be for beating the increasing threat of deflation.

Syriza may have put a halt to privatisation but that does not mean all avenues of investment are dead. A new green energy plan could be developed and part owned by another state or the European investment bank. There is also the European investment fund supporting SME’s (Small to Medium Enterprises) which could double the amount currently being spent not just in Greece but across many struggling European member states. Time limited or permanent investment deals are also a good idea as it is clear to me investment is a must both for domestic demand now to reduce unemployment and promote productivity going forward.

 

These are of course only some options available and I am sure Yanis has a toolbox of options far broader than my ad hoc ramblings here have provided. I will post again when it becomes clear of what the deal, if there is a deal, may look like.