Tuesday, May 11, 2010


With the events of the last few weeks one can easily think we are back to the gloomy days of early 2009. Unfortunately Marx’s famous dictum, everything in history is staged twice, once as a tragedy and again as a comedy, proved to be wrong. The tragedy of East-Central Europe was followed by the tragedy of South Eastern Europe: Greece and the unnoticed one, in Romania. The former literally collapsed (even if in an orderly way), one cannot perceive the measures adopted otherwise. The latter were and is on the verge of collapse, with decisions unheard of earlier taken. (25% cut in the wages of the public sector, 15% reduction of the pensions, closing down half of the existing hospitals, new taxes introduced and an overall tax hike is still not excluded.) Unfortunately no one will really revise his/her earlier views of the country as a rapidly emerging one, albeit the social costs of these measures (and coupled with the drying up of financial transfers from abroad, from workers in Spain, Italy etc. the economic ones) will hardly positive. Even if in a sense they were unavoidable.

Meanwhile, there are no signs of a vigorous recovery in the Baltics, where the strategy of internal devaluation – underway in Hungary, began in Romania and Greece - was fully implemented and hailed by some observers. Moreover, the  Estonian economy – seen as the first to emerge after a series of good signs in export – slipped back in the first quarter f 2010, albeit technically not in recession again. This is not spelling too much good for the new patients.

But the real problem is that it is still not certain that the decisions announced by EU politicians last weekend (a new bail-out fund worth between 500 and 750 billion euros) is the last act of the drama. First of all it is worth to remember: Europe stood here once, 14 months ago, when the idea of a 180 billion fund for the ECE countries – floated by then-prime minister Ferenc Gyurcsány was brusquely refused, most energetically by Angela Merkel. (Whose government, due to the problems I outlined in earlier posts suffered an important setback at last Sunday’s provincial elections in Nord-Rhein Westfalen.) It is not sure whether that amount would have been enough, but in a less strained environment, financial actors less focused on sovereign debt issues, it would have had a chance. Now – calculating with her share in the Greek package – Germany alone has to offer this amount.  And no one knows, whether it will suffice or not. Especially if the „markets” wake up from their excitement (driving them on Monday to exaltation) and realize: the offered solution is twofold and not exactly what they would like to see. It includes intensive monetisation of sovereign debt (something abhorring for monetarism, but a widespread practice throughout history) and bringing increased danger of inflation. (Albeit many, among them Paul Krugman, argue that under the present, deflationary circumstances this is not something one should be afraid of.) The other downside of the offered solution is that it is nothing else than issuance of new sovereign debt by countries already seen as heavily ladden with debt. (After the derivatives of the mortgage playing a role in the first phase of the crisis we can see the creation of sovereign debt derivatives – with what effect?)

I fear at the end the world have to accept the plain fact: the bubble has to be deflated and at the losses have to be distributed somehow, not just transferred from private books to state households. It will be painful, in the form of debt restructuring (in an orderly way) and probably through inflation and affecting everyone as a lot of savings and wealth of ordinary people were accumulated in financial vehicles and it will be accompanied by lower present day and possible future living standards. But at the moment the solution of taking over these debts by states seems not working in the long run and eliminating the burden with vigorous growth –while addressing competitiveness issues will need keeping costs( i.e. wages) as low as possible therefore dumping local demand – will eventually pose the question of where to export?

(Inflation is painful and can easily run out of control. But this process was underway for almost a decade, only outside our books. Anyway, the bubble blown on the financial market was the very sign of inflatory pressure, or even the inflation itself. A very dangerous, self-sustaining one, as the rise in share prices (less supported by growth output than by profit) was a form of inflation. Only as long as this mass of money was kept outside the „real world” its existence was not reflected in „real prices”. But why not apply some concept of inflation to financial market as well? Couldn’t it be a model case for inflation?)


Anyway, the new wave of crisis arrived, after more than half a year of restful period. Meanwhile the political landscape in Hungary was completely transformed (just as it was predicted on this blog when Gyurcsány resigned, with the painful campaign…) and we will have a chance to see the new government (pompously describing itself as a new regime born from a revolution) dealing with these issues. Hopefully they will be a bit different from their newly found ally in Romania, where the politicians (often implicitly portrayed as the courageous ones, compared to Hungary) postponed hard decisions and now have to announce a package they didn’t want. But they are almost immediately ready to give in to popular pressure….


And probably – If the events will speed up – I will return to posting…

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