ECB official: Greece must deliver ‘100 pct’

Greece must fulfill the targets of its austerity and reform program “100 percent” to stay in the euro, a top European Central Bank official said Sunday — offering little hope of substantial wiggle room for Athens and questioning whether it can be given more time to comply.

Greece’s new government wants to lower some taxes, freeze public sector layoffs and extend by two years the mid-2014 deadline for austerity measures demanded by creditors in exchange for loans that are keeping the country afloat, conditions that are hugely unpopular in the country.

But ECB executive board member Joerg Asmussen told Germany’s ARD television that there can be no departure from the aims of consolidating Greece’s budget and restoring its competitiveness.

“The so-called mix of measures — in other words, how do I reach the target — one can talk about that,” he said. But that, he added, means that “if the government intends to lower a tax, it will have to increase another tax by the same amount.”

Asked whether Greece would get more time to comply, Asmussen replied: “I don’t think so.” He noted that any extension would lead to a need for more external financial help — “that means that the other 16 eurozone states and the IMF would then have to provide more financing.”

The ECB is part of the so-called “troika” of debt inspectors overseeing the Greek program, along with the European Commission and the International Monetary Fund. On Monday, the inspectors are expected to start their review of the country’s finances and meet with the new government. Their conclusions will be critical to whether Greece will be able to renegotiate parts of its international bailout conditions.

“My preference and the preference of the ECB is very clearly that Greece remain in the eurozone,” Asmussen said. “For that, the country must implement 100 percent the program targets that were agreed.”

An exit, he said, would make things economically difficult not just for the country leaving the eurozone but also for all the others.

Other eurozone countries — in particular Germany, the bloc’s biggest economy — have appeared cool to giving Greece much of a break on its targets or timeline.

“From Germany’s point of view, a substantial loosening of the program, of the reform agreements, does not come into consideration,” Foreign Minister Guido Westerwelle said Sunday. He insisted that Greece must implement those agreements “step by step, solidly and reliably.”

At a European Union summit last week, German Chancellor Angela Merkel made concessions to Italy and Spain — notably agreeing to allow countries that pledge to implement reforms demanded by the EU’s executive Commission to tap rescue funds without having to go through the kind of tough austerity measures demanded of Greece.

But officials insist that help to struggling countries and banks will still come with strings attached, and that Germany has no intention of agreeing to share government debt through jointly issued eurobonds in the foreseeable future. Berlin fears that would cut struggling countries’ borrowing costs at its expense and also take pressure off them to get their finances and economies in order.

Westerwelle, a member of the pro-market Free Democrats — the junior partner in Merkel’s coalition — insisted Sunday that eurobonds should stay off the table permanently.

“Too little solidarity endangers Europe, but too much solidarity does not endanger Europe any less,” he said.

“Even if we already lived in a European federal state, I would be strictly against us Germans taking on liability for all debts in all of Europe.”


Spain and Greece are no steal for travelers

Economic chaos and mass unemployment are bad news. But to the curious traveler, they are an opportunity for a bargain. So it’s only natural for a cost-conscious American reading headlines about economic catastrophe in Spain and Greece to wonder: Is there a cheap vacation there for me?

The answer is: not really. The reasons why underscore the difficulties the euro is creating for the continent’s hardest-hit countries. A comprehensive comparison of travel prices is difficult to undertake, of course, but thanks to the rise of international hotel chains we can at least approximate the cost of staying one place rather than another.

A late May booking at the Madrid Airport Hilton rang up at a bit more than 100 euros, or about $128, a night. That was a lot cheaper than the listings I saw for the De Gaulle Airport Hilton near Paris. Prices there were 50 percent higher for some May bookings. But the Madrid price is about the same as the $130 or so that the O’Hare Airport Hilton wanted in Chicago. The Hilton in downtown Miami had rooms last month from $159 a night, while the hotel in downtown Barcelona started at 201 euros, which works out to just over $255. Downtown Athens was 179 euros, also more than $200 a night.

The point isn’t that Spain is an egregiously expensive place to visit. Certainly it’s cheaper than economically stronger Western European tourist destinations. But given the incredible weakness of the Spanish economy, it’s hardly the bargain of a lifetime.

And currency dynamics are the key reason. When the euro was introduced, the conversion rates from legacy European currencies were deliberately pegged to try to create rough parity with the dollar. Exchange rates would fluctuate, of course, but the idea was that one euro would equal approximately one dollar or 100 yen. If the euro and the dollar were at parity, Spain would be considerably cheaper for Americans (and all else being equal, Japanese and Brazilians and Chinese, too) to visit. And indeed over the past 12 months, troubles in the European economy have brought the euro and the dollar closer to parity. But compared with where things stood five years ago, the American economy — for all its struggles — has grown a bit, while Spain’s has collapsed. The exchange rates in some sense “should” have moved a lot, turning Spain into an American tourist’s paradise.

But they haven’t, because Spain is only a small part of the eurozone. The exchange rate dynamics reflect the overall conditions throughout the currency area, most of which is doing much better than Spain or Greece. Because of Germany’s strength, the euro doesn’t fall across the rest of the continent (just as a recession in Florida doesn’t pull down the dollar in the rest of the United States).

Tied to the euro

Still, given the dire conditions in Spain or Greece, you might wonder why prices there don’t fall even in the absence of currency adjustments. Why don’t Spaniards and Greeks start charging a lot less for their goods and services? It turns out that prices are “sticky” (i.e., resistant to change) and especially sticky in the downward direction. Some price stickiness derives simply from what are called “menu costs,” in reference to the fact that it would be expensive for a restaurant to print up a whole new set of menus to reflect a minor shift in prices driven by a small increase in the price of food.

And think about how you would act in your own life if you suddenly needed to decrease expenditures by 5 percent in response to some bad news. You couldn’t just phone up everyone to whom you owe a fixed sum — your bank or landlord, your cellphone company and cable provider — and try to bargain them down 5 percent.

Rather than diminishing expenditures proportionately, you just need to lop some stuff off. Brew your coffee at home instead of wasting money at Starbucks, start packing your lunches and generally buy less stuff. The problem for an economy in which a whole bunch of people are doing this is that your spending is my income. Individuals cut off whole categories of purchases, and declining companies try to cauterize wounds by shutting entire factories. The growing army of the unemployed does tend to prevent wage increases, but in general the quantity of economic output declines much faster than the prices charged for the remaining output.

The tourist economy is mostly made up of other people’s labor, and in Spain labor costs are rising more slowly than average but not actually falling. What’s more, though wage cuts would certainly help bargain-hunting American travelers, it’s not clear how much good they’d do for the Spanish economy as a whole because they would make the burden of existing debt even greater.