Stage Three for the Euro Crisis?

by J. Bradford DeLong

Project Syndicate
September 27, 2012

The first two components of the euro crisis – a banking crisis that resulted from excessive leverage in both the public and private sectors, followed by a sharp fall in confidence in eurozone governments – have been addressed successfully, or at least partly so. But that leaves the third, longest-term, and most dangerous factor underlying the crisis: the structural imbalance between the eurozone’s north and south.

First, the good news: The fear that Europe’s banks could collapse, with panicked investors’ flight to safety producing a European Great Depression, now seems to have passed. Likewise, the fear, fueled entirely by the European Union’s dysfunctional politics, that eurozone governments might default – thereby causing the same dire consequences – has begun to dissipate.

Whether Europe would avoid a deep depression hinged on whether it dealt properly with these two aspects of the crisis. But whether Europe as a whole avoids lost decades of economic growth still hangs in the balance, and depends on whether southern European governments can rapidly restore competitiveness.

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Data Points to Further Gloom in Euro Zone

New York Times
September 27, 2012

The outlook for the euro zone remained unsettled Thursday, as data showed that confidence among European businesses and consumers continued to fall in September.

The European Commission reported that its economic sentiment indicator for the 17-nation euro zone fell by 1.1 points, to 85.0, the seventh consecutive month of decline. For the broader, 27-member European Union, confidence fell by 0.9 points in September, to 86.1. An indicator above 100 shows more confidence than not about the economy in five sectors surveyed.

The commission attributed the weakening to slipping confidence in four of the sectors: services, retailing, industrial and consumer. The commission pointed to more optimism in the fifth sector, construction, as a promising sign.

The data “serve as another warning that the euro zone economy is sinking further into recession,” Jonathan Loynes, chief European economist at Capital Economics, wrote in a note, adding that it dashed hopes that the European Central Bank’s pledge Sept. 6 “to take more decisive policy action might have improved sentiment towards the broader economy.”

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Slumping Euro Dogged by Doubts

Wall Street Journal
September 27, 2012

After its biggest rally in months, some old doubts about the euro are creeping back in.

Investors cheered the European Central Bank's proposal to buy the debt of troubled euro-zone members, announced on Sept. 6. But the plan already has hit its first potential snag: Spain, the region's fourth-largest economy, hasn't yet requested aid, a key condition for setting a bailout in motion.

Some euro bears say the ECB's bond-buying plan, which many took as a sign Europe had turned a corner in addressing its debt problems, is turning out to be just the latest temporary jolt for a currency in the middle of a protracted slide against the dollar. Since hitting a four-month high on Sept. 14, the euro is down in six of the last nine trading days, ending New York trading at $1.2913 Thursday. The euro is still up 7% from a two-year low hit in July.

The crisis "is like a long-term illness that flares up periodically, and it's not over by any stretch of the imagination," said Nicholas Pifer, who oversees $7 billion as head of Columbia Management's fixed income group and has bet against the euro. "The history of the euro crisis so far has seen measures announced that looked good but whose implementation proved difficult."

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Greece's other debt problem

Reuters
September 27, 2012

The two main political parties in Greece are facing their own financial crisis. New Democracy and Pasok, the key members of the country's coalition government, are close to being overwhelmed by debts of more than 200 million euros, say rivals, as the big parties head for a slump in state funding because of falling public support.

In Greece's state-financed political system, parties that receive more votes get more funding. Relying on past good results, the big political parties have pledged future state funding as collateral for bank loans. But in the most recent poll their support collapsed, leaving them with big loans and facing much smaller incomes.

Banking sources familiar with the issue say that conservative New Democracy and socialist Pasok now owe a combined 232 million euros to Greek banks. Some of the loans are going unpaid, those sources say. The debts far exceed the combined 37 million euros the parties received in state funding last year - a figure set to decline.

The parties' debts raise questions about potential conflicts of interest because the government is in hock to a financial system that it also needs to reform. Athens is already struggling to implement spending cuts and reforms demanded by the European Union, International Monetary Fund (IMF) and European Central Bank (ECB) in return for the 130 billion euro bailout keeping Greece afloat. On Wednesday unions called a nationwide strike protesting against austerity.

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IMF, EU clash over Greece's bailout prospects

Reuters
September 26, 2012

Greece's international official lenders are at loggerheads over how to solve Athens' debt crisis, threatening more trouble for the euro.

Officials from Greece and the "troika" of European Union, European Central Bank and International Monetary Fund have told Reuters tensions have risen in recent weeks as negotiators wrangle over further budget cuts, with the IMF adamant that Greece reduce its debt further.

European officials say the IMF is also pushing them to restructure debts Athens owes them, an uncomfortable prospect for some of Europe's leaders who find the idea of their governments taking losses on the debt politically unpalatable.

"The problem is not between the IMF and Athens, it's between the IMF and the EU," one Greek official said, speaking on condition of anonymity. That view was confirmed by sources familiar with the thinking in Brussels and Washington.

Already facing an electoral backlash over bailouts and austerity budgets, and unsure what may be needed to defend the creaking public finances of heavyweight countries like Spain and Italy, EU leaders do not relish the idea of swallowing tens of billions of euros of losses on their official holdings of Greek government bonds.

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Europe's austerity protests: mad as hell

Guardian
Editorial
September 26, 2012

In all the dozens of summits and meetings held over the past couple of years about how to keep the euro show on the road, one subject has been notably absent. Amid all their talk of haircuts (on debt values) and tranches (of loans), European leaders have barely talked about the people who are bearing the brunt, first of the crisis and then of the throat-clearing that passes for firefighting in Brussels. This is not accidental. The euro project has relied upon draining the politics out of the inherently political: the very existence of a 17-nation economic union without a common treasury is testimony to that.

Especially amid austerity, however, it is impossible to ignore the politics. More than 200,000 demonstrators took to the streets of Athens on Wednesday. Thousands besieged parliament in Madrid on Tuesday. Last week more than half a million people marched in cities across Portugal to protest against cuts in social security. This is a pan-southern-European pushback against austerity, while the package is still being negotiated. The political strains are causing old regional fissures to re-emerge. One fifth of the population of Catalonia, 1.5 million people, marched last week in what can only be interpreted as a surge of separatist sentiment. For them it is not just the contract with Brussels and Frankfurt that needs to be renegotiated, but the contract with Madrid – in other words, the constitution. With regional elections coming up on 25 November, this is not something Madrid can ignore. Initially they wanted to collect their own taxes, which they would share with Madrid. When that was rejected, the price of peace escalated. Popular outrage over Catalan money going elsewhere, amid health and education cuts, is fuelling demands that the money stays put.

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Το πολιτικό σύστημα, συμπολιτευόμενο και αντιπολιτευόμενο, αντιπροσωπεύει τους «εντός»

του Φώτη Γεωργελέ

Athens Voice
26 Σεπτεμβρίου 2012

Είναι κάτι ξύπνιοι που λένε, πάνε χαμένες οι θυσίες του ελληνικού λαού. Είναι οι ίδιοι ξύπνιοι που λένε τα νούμερα δεν βγαίνουν, η συνταγή είναι λάθος. Αυτοί όλοι προσπαθούν να σβήσουν την πραγματικότητα, να μας κάνουν να ξεχάσουμε την ιστορία. Να ξεχάσουμε την τραγική τριετία 2007-2009, όταν το πρωτογενές έλλειμμα του δημοσίου έφτασε τα 24 δις το χρόνο. Τότε δεν ξέραμε τι σημαίνουν τα νούμερα, τώρα όμως που έχουμε καταλάβει τι κόπο, τι θυσίες και τι αίμα αντιπροσωπεύουν τα δις, πόσο δύσκολο είναι να περικοπούν 11,5 δις τα επόμενα 2 χρόνια, τώρα ξέρουμε τι παραλογισμός ήταν το ελληνικό δημόσιο να καταναλώνει 24 δις παραπάνω από όσα είχε κάθε χρόνο, να δανείζεται 24 δις κάθε χρόνο.

Αυτό που αποσιωπούν οι ξύπνιοι είναι ότι ο υπόλοιπος πλανήτης έπαψε να μας δανείζει. Θέλουν να κρύψουν ότι αυτά τα 24 δις, μέσα σε λίγα χρόνια, με οποιονδήποτε τρόπο, έπρεπε να τα εξοικονομήσουμε. Γιατί κανείς πια δεν μας τα δάνειζε. Αυτή ήταν η πρώτη μεγάλη απάτη της αντιμνημονιακής ρητορικής. Όλα τα κόμματα που συμμετείχαν στις κυβερνήσεις και όλα τα υπόλοιπα που αντιπολιτεύονταν, αυτή τη σκληρή πραγματικότητα προσπαθούσαν να κρύψουν. Αντιστέκονταν, δέχονταν πιέσεις, όρθωναν το παράστημά τους στις τρόικες, διαπραγματεύονταν, απέρριπταν, καταργούσαν, για να μην πουν την αλήθεια: Δανεικά τέλος. Κάτι πρέπει να κοπεί. Το τι ήταν το ερώτημα.

Σκέψου μόνο για ένα λεπτό πόσο διαφορετική θα ήταν η ιστορία των τελευταίων χρόνων, αν το πολιτικό σύστημα έκανε αυτή την παραδοχή, αν έλεγε την αλήθεια. Αν έλεγαν δηλαδή, ναι, τέρμα τα δανεικά, πρέπει να περικοπούν 24 δις το χρόνο και ο καθένας λέει την πρότασή του, λέει από πού θα γίνουν οι περικοπές. Εκεί αμέσως θα ξεχώριζαν οι δίκαιοι από τους άδικους, απ’ αυτούς που προσπαθούν να κρατήσουν ανέγγιχτο το χρεοκοπημένο σύστημα της διαφθοράς και της σπατάλης. Αυτό, σύσσωμο το πολιτικό σύστημα που εκπροσωπεί το κατεστημένο, το αποσιώπησε με μαεστρία. Οι Συντηρητικοί «αντιστέκονταν στις επιταγές της τρόικας» και οι Πολύ Συντηρητικοί ήθελαν ακόμα μεγαλύτερη αντίσταση: να μη μειωθεί κανένα έλλειμμα, να μη θιγεί ο δημόσιος τομέας της σπατάλης και της διαφθοράς καθόλου.

Ποιοι ήταν αυτοί που δεν ήθελαν μειώσεις, που αμφισβητούσαν την πραγματικότητα; Αυτοί που δεν ήθελαν να χάσουν οι ίδιοι τίποτα. Την πραγματικότητα όλοι την ήξεραν. Οι μειώσεις ήταν αναπόφευκτες. Γιατί απλώς δεν μας δάνειζαν πια. Το παιχνίδι ήταν εις βάρος ποιων θα γίνουν οι μειώσεις.

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Μπρος-πίσω για τη διαφθορά

του Πάνου Καζάκου

Τα Νέα
26 Σεπτεμβρίου 2012

Η πολιτική και διοικητική διαφθορά έχει εξελιχθεί σε μείζον θέμα της δημόσιας συζήτησης. Μας την υπενθύμισαν πάλι πρόσφατα επεισόδια («λίστα των 32», συντάξεις-μαϊμού κ.ά.) που δηλητηριάζουν το πολιτικό κλίμα. Πρέπει επομένως να δούμε την ευρύτερη εικόνα χωρίς κυνήγι μαγισσών.

Η διαφθορά αποτέλεσε μέρος της παθολογίας που οδήγησε σε τόσο βαθιά οικονομική κρίση και εμποδίζει σήμερα τις προσπάθειες για προσαρμογή της χώρας στις νέες διεθνείς συνθήκες. Σύμφωνα με πρόσφατη διαπίστωση της Global Financial Integrity «μόνο μεταξύ 2003 και 2011 βγήκαν από την Ελλάδα 261 δισ. δολάρια παράνομου χρήματος που προερχόταν από εγκληματικές ενέργειες, διαφθορά και φοροδιαφυγή» (εφημερίδα Το Βήμα 2.9.2012).

Το κόστος της πολιτικής και διοικητικής διαφθοράς για το σύνολο είναι τεράστιο. Συνήθως φαίνονταν οι μεγάλης κλίμακας περιπτώσεις υποβρυχίων κ.ά. Τώρα έρχονται ολοένα και συχνότερα στην επιφάνεια οι μικρής και μεσαίας κλίμακας περιπτώσεις (π.χ. δωροδοκίες για μικροεργολαβίες του κράτους κ.λπ.). Συνολικά βαραίνουν το ίδιο: Η μικρή διαφθορά έχει ως πρότυπο ή άλλοθι τη μεγάλη, η μεγάλη χρειάζεται τη μικρή για να έχει και πολιτικούς συμμάχους.

Πιο συστηματικά, η πολιτική και διοικητική διαφθορά επιβαρύνει τις τιμές εις βάρος του κοινού (π.χ. των φαρμάκων), γεννά τη φυγή κεφαλαίων, χειροτερεύει την ποιότητα των υπηρεσιών και προμηθειών, πράγμα που συμβολίζουν καθαρά τα υποβρύχια που γέρνουν, μειώνει τα φορολογικά έσοδα λόγω της εκτεταμένης συναλλαγής στις εφορίες, προκαλεί αδικαιολόγητα χρέη. Μέρος του χρέους που συσσώρευσε η χώρα οφείλεται στον ιδιωτικό πλουτισμό μέσω της διαφθοράς.

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Υπόγειες διαδρομές

του Ναπολέοντα Μαραβέγια

Τα Νέα
26 Σεπτεμβρίου 2012

Η συνεχιζόμενη πίεση προς την Ελλάδα από τους εταίρους και δανειστές μας, σε συνδυασμό με την αδυναμία των ελληνικών κυβερνήσεων να εφαρμόσουν όσα έχουν υποσχεθεί, φαίνεται να «αποδίδει» περισσότερο στο επίπεδο της δημιουργίας αρνητικών αισθημάτων σε ευρύτατα κοινωνικά στρώματα απέναντι στο ευρώ και στην ευρωπαϊκή προοπτική της χώρας και λιγότερο στο επίπεδο της δημοσιονομικής προσαρμογής, εφόσον δεν έχει ακόμη επιτευχθεί πρωτογενές πλεόνασμα στον προϋπολογισμό (δηλαδή θετικό υπόλοιπο εσόδων-δαπανών χωρίς τους τόκους), ούτε και στο επίπεδο του ελλείμματος τρεχουσών συναλλαγών, εφόσον ακόμη βρίσκεται περίπου στο 9% του ΑΕΠ.

Οι υπόγειες διαδρομές των ρευμάτων του αντιευρωπαϊσμού μπορεί ακόμη να μην είναι αισθητές στην επιφάνεια, δηλαδή στο επίπεδο των κομμάτων που έχουν σήμερα την πλειοψηφία, αλλά αυτό δεν σημαίνει ότι αν συνεχιστεί η αφόρητη πίεση πάνω στην ελληνική κοινωνία από τους ευρωπαίους δανειστές και εταίρους μας δεν θα υπάρξει σύντομα ορατή πολιτική μεταστροφή προς άλλες κατευθύνσεις, ενδεχομένως επικίνδυνες για τη γεωπολιτική θέση και τη δημοκρατική πορεία της χώρας μας.

Οι εταίροι και δανειστές μας δεν έχουν ίσως συνειδητοποιήσει ότι η διαρθρωτική και δημοσιονομική προσαρμογή που απαιτούν, και πρέπει να γίνει, δεν μπορεί να πραγματοποιηθεί μέσα σε ασφυκτικά χρονικά όρια και με αγανακτισμένους κρατικούς υπαλλήλους από τις συνεχείς περικοπές των μισθών τους και υπό την απειλή απολύσεων.

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The price of saving the eurozone

by Robert Peston

BBC News
September 26, 2012

A few things have happened in the weeks since I was last here, so there may be some merit in reflecting - briefly - on where we find ourselves at the beginning of the new school term (so to speak).

On balance, the biggest risk to our prosperity, total meltdown of the eurozone, has diminished, though it has not been extinguished.

As you'll know because I've bored you to tears about it many times, there is a compelling argument that the long-term survival of the eurozone requires its national members to cede considerably more autonomy than they have hitherto done on the management of their economies and public finances: it requires the eurozone being transformed from pure currency union into a political union that looks more like a federation.

So what was most important over the summer is that there have been greater moves in that direction than at any point in the eurozone's inglorious history.

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Former Greek Prime Minister Papandreou on Euro

Bloomberg

September 25, 2012

Former Greek Prime Minister George Papandreou talks about the prospects of Greece leaving the euro and the impact of the euro-zone debt crisis on the country. He speaks with Betty Liu from the Clinton Global Initiative in New York on Bloomberg Television’s “In the Loop.”



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Why exit is an option for Germany

by Martin Wolf

Financial Times
September 25, 2012

Should Germany leave the euro? It is, after all, the big country with an obvious exit option. The question becomes more pertinent after the decision by Angela Merkel, Germany’s conservative chancellor, to support Mario Draghi, president of the European Central Bank, against Jens Weidmann, her appointee as head of the Bundesbank, over plans to buy bonds of governments in difficulty. The president of the Bundesbank, Germany’s most respected institution, has now become a spokesman for conservative German eurosceptics. The ECB, Germans realise, will not remain a reincarnated Bundesbank. Once again, we are reminded that the eurozone is set to be a miserable marriage. Might a separation, however disruptive, be better?

If we are to address that question from a German perspective, we must distinguish false arguments from valid ones. As Paul de Grauwe, the Belgian economist, now at the London School of Economics, shows in a recent co-authored article, it is easy to find examples of the former.

This paper asks whether the accumulation of net claims within the European System of Central Banks means that Germany would lose a great deal if the eurozone were to break up. Its response is: no.

First, Germany has accumulated net claims on the rest of the world – and on other members of the eurozone – not because of internal central bank accounting, but because it has large current account surpluses. Germans have been running two businesses: exporting goods, at which they are excellent, and importing financial claims, at which they are not. In brief, Germany’s surpluses have exposed Germans to financial risk. But balances inside the eurosystem are not a good indicator of that risk. They have exploded, argues the paper, because of speculative financial flows, not current account imbalances (see chart).

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Inequality and the euro zone: Coincidence or cause?

Economist
September 25, 2012

Inequality is one of the great issues of the day and a key inspiration for the Occupy protesters. The bottom 10% of the US population has hardly seen any gain in real incomes over the last 25 years and this has been accompanied by a decline in social mobility; it is harder to escape the circumstances of your birth than it used to be. But this is a phenomenon that has occurred across the western world; an OECD report last year showed that, since the mid-1980s, the real incomes of the top decile have risen from 1.9% a year while those of the bottom decile have risen just 1.3%. The average Gini coefficient (a measure of inequality where 0 means income is equally shared and 1 means that one person has all the wealth) has risen from 0.29 to almost 0.32.

But looking through the data, one factor leaped out. Here is a rearranged version of the OECD's table 1, with the countries ranked by the gap between bottom decile and top decile income growth. So countries which have reduced inequality are at the top, those where inequality has increased are at the bottom.

The four countries at the top of the table are four of the PIGS which have been at the heart of the debt crisis. Is this a coincidence? The OECD report doesn't really discuss the reason for inter-country differences except to say that there may be a general convergence of Gini coefficients (Chile and Turkey are becoming less unequal, while the Scandinavian countries are becoming less equal).

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Euro Zone Considers Central Budget to Fix Cracks

Wall Street Journal
September 25, 2012

Euro-zone governments have begun discussions about creating a central budget for the currency union aimed at smoothing over some of the region's economic divergences, after Germany indicated support for the idea, European officials say.

The discussions are part of a push toward a limited "fiscal union," after the economic crisis revealed fatal flaws in the setup of the common currency. Those limitations have manifested themselves in the recessions that have engulfed countries such as Greece, Portugal and Ireland after the 2008 financial meltdown, while strong economies such as Germany have recovered much faster.

Until now, much of the fiscal-union debate has focused on the prospects for issuing joint euro-zone debt—so-called euro bonds—but that idea has been blocked by fierce opposition from Berlin and the fact that it would contravene a central element of European Union treaties.

It is partly because of that resistance that the debate has now shifted to a centralized budget for the euro zone that could be financed by rerouting a slice of national taxes, such as corporate tax or value-added tax, to Brussels, rather than issuing euro bonds, according to European officials.

The idea was included in a paper on the overhaul of the euro zone prepared by European Council President Herman Van Rompuy, which formed the basis of talks between the council and member states in Brussels last week.

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Learning from past crises: Into the safety zone

by Caroline Van Rijckeghem and Beatrice Weder di Mauro

Vox
September 25, 2012

Lessons from the past suggest democracies with strong economic fundamentals do not default on their debt. This column suggests high growth and low deficits are key but that growing discontent as the result of austerity may be the most important factor yet in influencing the probability of default. Eurozone countries, therefore, need to build a higher safety buffer of good fundamentals to ensure safety from default.

Since the lost decade of the 1980s a rich literature on financial crises has evolved, including a theoretical literature which emphasised the potential for self-fulfilling expectations within a zone of vulnerability (e.g. Krugman 1996). The empirical counterpart of this literature focused on the probability of crisis given fundamentals, but did not try to delineate the zone of vulnerability, or the complementary safety zone.

Our contribution to that literature was to focus on the border of the safety zone for sovereign debt. In particular we investigated conditions under which default on external and domestic sovereign debt never happened in low and middle income countries from 1974-2001 (see Van Rijckeghem and Weder 2009, which builds on the methodology of Osband and Van Rijckeghem 2000).

Defaults on external debt were defined based on Standard & Poor’s classifications while defaults on domestic debt were defined based on Standard & Poor’s or a large increase in credit to the government. Near-defaults which were only avoided through external assistance were not considered as defaults. We considered democracies and non-democracies separately. We found that default never occurred in parliamentary democracies with broad money nine times smaller than foreign-exchange reserves or in democracies with less short-term debt than reserves and with growth over 3.4%, for example. For domestic debt, no democracies entered into default with inflation below 7%.

These results did not mean that debt crises would never be observed under these configurations in the future, but did indicate that if a default were to occur under these configurations, it would be a very unusual event. In fact, it was possible to calculate the probability of a default occurring under these or better fundamentals using simple non-parametric statistics. With 39 external debt defaults between 1974 and 2001, the 40th external default had a 2.5% chance of occurring at fundamentals better than those in the past.

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Eurozone should fix its banks US way

by Philipp Hildebrand and Lee Sachs

Financial Times
September 24, 2012

Mario Draghi, European Central Bank president, has reduced the risk of a eurozone break-up by undertaking to buy unlimited amounts of sovereign bonds in the secondary market. ECB purchases will require deep budgetary and economic reforms by participating nations. Angela Merkel, German chancellor, is right to insist on these reforms over time. But a genuine solution to the crisis also requires shoring up Europe’s banking system to restore the flow of credit to businesses and households.

Europe must ultimately grow its way out of its crisis. Economies cannot grow unless banks have sufficient capital to lend and businesses have the confidence to borrow to expand their operations. As was the case in the US in 2008 and 2009, central bank intervention cannot succeed on its own. Then, actions by the US Federal Reserve were bold, creative and necessary to help put a floor beneath a crumbling credit system. However, the Fed was limited in what it could achieve on its own. In the US, the end of the banking crisis required private capital investment, encouraged by incentives and financial commitments from the government. The same must happen in Europe.

Now is the time to rebuild confidence in Europe’s weakened banks through an accelerated introduction of robust, credible capital standards and the injection of new private capital. Banks will begin to lend only when they have sufficient capital and liquidity. The conventional wisdom that more robust capital standards constrain lending is borne out by neither economic theory nor the facts. In the US, where the largest banks were compelled to raise capital in 2009, business loans at commercial banks have increased significantly since.

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Crisis shuts a third of shops in Athens city centre

Reuters
September 24, 2012

Greece's deep recession has forced almost a third of businesses in the capital's commercial district to close down as shrinking incomes and frequent strikes drive Athenians away.

Tens of thousands of small businesses, which make up a big chunk of the struggling economy, have shut since Greece secured a 110-billion-euro bailout package in 2010 in exchange for promises of painful austerity measures.

On the capital's cobbled pedestrian shopping streets, long lines of shops are boarded shut while others have "Everything must go" signs plastered across their windows. Some arcades, once bustling with activity, are empty and enclosed by derelict buildings.

In the city's "commercial triangle", where generations of merchants had run successful businesses a stone's throw from the central Syntagma Square, an August census by retail lobby group ESEE found 31 percent of shops had closed.

That was up 13 percent from August 2010, just months after the government secured the first of two multi-billion euro international rescue packages.

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Troika Nearly Doubles Estimate of Greek Shortfall

Spiegel
September 24, 2012

Greece's budget shortfall now totals 20 billion euros, according to preliminary estimates by international lenders, SPIEGEL has learned. Prime Minister Antonis Samaras has asked public-sector creditors to forgive some debt. Meanwhile, Berlin and the European Commission are divided over when the decision on Greece's fate should be taken.

The Greek government's budget deficit is bigger than expected and currently amounts to some €20 billion ($26 billion), according to preliminary estimates by the so-called troika made up of the European Commission, European Central Bank and International Monetary Fund, SPIEGEL has learned. The figure is almost double previous estimates.

The next tranche of EU aid can only be paid out to Greece when that budget gap has been closed. The government of Prime Minister Antonis Samaras is believed to have made several requests for government creditors to forgo debt repayments. He is also hoping that lenders will give his government two years longer to fulfill his austerity program. In that case, Greece would probably require an additional €20 billion in aid.

Meanwhile a row has erupted between the German government and the European Commission over when the decision will be taken on whether Greece will get any fresh money at all.

The Commission wants a decision to be reached at the next EU summit on Oct. 18-19. But Berlin says there won't be reliable figures available until November at the earliest.

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Democracy’s Burning Ships

by Luigi Zingales

Project Syndicate
September 24, 2012

Since the late 1970’s, the academic diffusion of game theory has led macroeconomists to emphasize the importance of “commitment,” a strategy that aims to enhance long-term economic outcomes by restricting policymakers’ discretion. The idea seems counterintuitive: How can less produce more?

While not historically accurate, one of the best examples of a strategic commitment is provided by the legend of Hernán Cortés, according to which, in his quest to conquer Mexico, he decided to burn the ships that had brought his expedition from Spain. At first, this might seem like a crazy move: Why intentionally destroy the only possible way out in case of defeat? Cortes allegedly did it to motivate his troops. With no escape route, soldiers were highly motivated to win. Alexander the Great is said to have done something similar when conquering Persia.

To produce its benefit, a commitment strategy should be credible – that is, it cannot be reversed quickly. In this sense, Cortés’s strategy was perfect: in case of defeat, the Spanish would have no time to rebuild the burned ships. To work properly, a commitment strategy should also be costly in case of failure: had Cortés lost, no Spanish soldier would have escaped alive. It is precisely this cost that helped motivate his soldiers.

The problem is that we are bound to hear about only the successful historical examples of such a strategy. Had Cortés’s strategy failed, he would have gone down in history – if he was remembered at all – as an arrogant fool who thought that he could defeat a great empire.

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Europe Plans to Leverage Euro-Zone Bailout Fund

Spiegel September 24, 2012

Officially, the ESM permanent euro-zone bailout fund is worth 500 billion euros. That, though, might not be enough, which is why euro-zone governments are now planning to introduce levers that could mobilize up to 2trillion euros, SPIEGEL has learned. Finland, though, is skeptical of the idea.

With the launch of the permanent common-currency bailout fund, the European Stability Mechanism (ESM), just around the corner, euro-zone member states are looking into ways to leverage the €500 billion ($647 billion) available to the fund, SPIEGEL has learned. But with Finland still concerned about the leveraging plans, it is unlikely that they will be initially included when the ESM is launched on Oct. 8.

The plan envisions the continuation of leverage instruments currently in use in the temporary euro bailout fund, the European Financial Stability Facility (EFSF). Should they be applied to the ESM, the permanent fund could be able to mobilize up to €2 trillion instead of the €500 billion lending capacity it currently has -- a size that would make it easier to provide emergency aid to countries as large as Spain and Italy, for example.

The leveraging proposal was a focus of last Friday's meeting of euro-zone finance ministers in Cyprus. German Finance Minister Wolfgang Schäuble is in favor of the plan, sources told SPIEGEL. But Finnish Finance Minister Jutta Urpilainen is worried that such a change is dramatic enough that it would require the ESM to be resubmitted to Finnish parliament for approval.

Plans for leveraging the ESM envision creating a vehicle to attract private investors as was created for the €440 billion EFSF last year. For the temporary fund, the plan called for protecting investors against the first third of losses they might sustain on purchases of EFSF bonds. In addition, to attract additional private funding, potential investors were promised that the euro zone would cover the riskiest portion of, for example, purchases of Spanish government bonds. Private investment would cover the rest of such purchases.

Finland, however, is worried that adopting such a plan for the ESM would conflict with the ESM's preferred creditor status, which stipulates that the fund be paid back prior to other creditors.

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