Slovakia compares well to other eurozone countries in terms of debt

Wall Street Journal interviews Slovak Prime Minister Iveta Radicova on the reasons why Slovakia refuses to bail out Greece with further loans

Wall Street Journal interviews Iveta Radicova on the reasons why Slovakia refuses to bail out Greece with further loans




http://online.wsj.com/video/slovak-pm-wants-rules-on-defaults-for-euro-area/27574DAA-D4C6-4FE8-B835-89E4A58BDE29.html 

Iveta Radicova is clearly an intelligent leader, and she explained that Slovakia is participating in an Eurozone insurance policy for the protection of the euro due to unforseen and unavoidable future circumstances.

However she politely suggested that the greek situation is not justifiable as a bailout, because it was hardly an unavoidable situation and that the indirect beneficieries of such bail-outs (often rich investors and banks) need to accept the risk of their investments and the tax payer cannot be there to pick up the pieces if the investor does not do their due dilligence. This is a point made by several economists over the years when bailouts started with Asia & Mexico under Clinton.

In other words the PM of Slovakia noted her and her country's aversion to a development model largely based on ever increasing borrowing. She expressed her solidarity with the greek people but not with the practices of their governments in the last 20-30 years in relation to debt.

This is not just words, Slovakia has a tiny national debt as a % of GDP which is even smaller than Finland and about half that of Germany at around 35%, moreover this is likely to decline further. One cound say that Slovakia is a very debt averse country culturally, and seems to be baffled by the prevalence of the credit card and other forms of indebtedness in the anglosaxon world.

The Slovak Prime Minister called for stronger regulation of euro-zone financial markets and for allowing overly-indebted countries to undergo and orderly default rather than throwing them new credit lifelines.

Earlier this year Slovakia, the newest and poorest of the 16-rich-nation currency group, caused a stir around Europe when it refused to be part of a EUR110 billion bailout for Greece, agreed on in May by euro-zone member countries and the International Monetary Fund. However it should remembered that Slovakia's share is fairly small as it is a small country of only 5 million people.

Why is Germany booming in a time of weak and state supported growth in the rest of the western world?

Something quite extraordinary is going on, the values of the ageing baby-boomer generation have hit the brick wall of debt (also known as leverage). 

The characteristic of most western societies from the 1980es onwards has been that  a rise in living standards for some has become increasingly reliant on borrowing from tomorrow's (fewer and poorer) taxpayers. This has been true particularly of countries like Greece, Britain, Ireland, Spain, Italy and of course the USA. Their formerly "dynamic economies" now seem to have been largely based on accumulating debts and boosting spending unsustainably. The recent world financial crisis simply brought forward the day of reckoning to affect some of the perpetrators.

Meanwhile Germany took a pragmatic view during the years of euphoria, it exported the consumer goods everyone else wanted now while keeping its own consumption moderate and its already high wages in check during this period. It didn't join the party, it just served the drinks for those that were demanding the high-tech machinery and automobiles and other manufactures that germans excel at.

Clustered around germany are a number of economies that in varying degrees followed the policies of Germany. Chiefly countries like Slovakia (more than the Czechs), Poland, Sweden, Denmark etc. They are also closely linked to germany through trade. Slovakia has and is benefiting from German and Austrian investment, and in turn it has become a good customer, in the crisis the Slovak economy almost mirrored the sharp german slowdown and swift recovery

Reading now old articles carrying scathing criticism of europe in magazines such as the economist, or the Financial Times during most of the decade from 2000 up to 2008 makes illuminating reading. With hindsight teutonic/continental economies seem to shine through now as sustainable, socially responsible, and intergenerationally fair systems, and are not suffering the long-term consequences the debts have brought about and anglo economies will feel for decades. Back then the anglosaxon press at best would characterise europe slow or ageing or not as fast growing as the USA. I see no grovelling apologies for these misguided opinions of the past. It seems that Germany's policies but also its admirable investment in the east is in the best tradition of building up the future not only for its own citizens but also for its neighbours. 

To back up my ideas about the lack of debt see the article below by one of the top US economists.

(Why is Germany doing well?) It's the lack of leverage

This contribution was authored by Carmen Reinhart and Vincent Reinhart.

Germany’s relatively robust comeback obviously requires a multi-part explanation. The very important dimension of its resilience in the current environment, where recoveries from the crisis, notably in the advanced economies, on the whole, have been disappointing.

Carmen M. Reinhart is Professor of Economics and Director of the Center for International Economics at the University of Maryland. She received her Ph.D. from Columbia University. Professor Reinhart held positions as Chief Economist and Vice President at the investment bank Bear Stearns in the 1980s, where she became interested in financial crises, international contagion and commodity price cycles.

We explored the experience of economies surrounding severe financial crises in a paper, After the Fall, presented at the Federal Reserve Bank of Kansas City’s Jackson Hole Symposium. As we pointed out, Germany was a notable outlier in the now-notorious credit and debt boom of the decade prior to the onset of the subprime crisis. Credit relative to nominal GDP fell about 11 percentage points during 1997-2007; during the same period, credit/GDP rose 80 percentage points for most of the advanced economies. Germany’s gross external debt/GDP fell about 5 percentage points during 2003-2007, while that ratio climbed by about 50% for other advanced economies. Germany’s property market cannot even be loosely characterised as part of the global bubble. In fact, real house prices fell 11% from 1997 to 2007. Unlike Japan, which was the other notable outlier during the credit boom, it did not have the burden of a high public debt. As a consequence, despite rapid increases in government debt since the crisis, Germany does not have a private or public debt overhang of the historic proportions confronting most other advanced economies. It follows that a long and painful deleveraging is not on the horizon. 

In this regard, Germany is the advanced economy counterpart to emerging markets in Asia and Latin America. Those economies also deleveraged during the tranquil booming years (as discussed in Reinhart and Rogoff, 2010). These emerging markets are not only recovering robustly—some are showing signs of overheating.