Annoying Koruna Apologetics

This post is loosely based on this post by Paul Krugman.

Are there good arguments against the proposition that the Czech Republic keeping the Koruna was an epic mistake? Maybe. But the arguments I’ve been hearing lately are really bad. And they’re also deeply annoying.

An argument, is that the gains from greater integration are outweighed by the supposedly huge gains from greater flexibility. But where’s the evidence for these huge gains?

The chart shows a comparison I find interesting, between the Czech Republic and its neighbor Slovakia, which joined the euro in 2009. For both countries I use 1995 as a baseline; the first year for which IMF provides data after the Czechoslovakian breakup in 1993.



After that breakup, the Czech Republic experienced a long stretch of solid economic growth. But so did Slovakia.  Since 2009, on the other hand, Slovakia has done much better.

As I said, maybe there are good arguments against the proposition that keeping the Koruna  was a mistake. But pointing out that politics matters, and economies grow, doesn’t cut it.

Who to blame for Greece

  1. Syriza: They got elected by lying their heads off, went into negotiations insulting everyone and issued confusing statement after confusing statement about their plans. Finally, they called a dishonest referendum on nothing. But how come the Greeks were desperate enough to vote for this gang of clowns?
  2. IMF: A currency area close to the US in economic size which can borrow at almost 0% comes to them asking for help. Instead of replying “GROW THE FUCK UP” they agreed. This caused problems for the plan of hiding Greek debt indefinitely since the IMF likes to pretend debt is sustainable, and also since they believe (believed) large primary surpluses are a way to bring down debt.
  3. Jean-Claude Trichet: It’s impossible to know how much of the stalled euro zone recovery was due to the insane ECB rate increase, but surely SOME of it. Even a slight improvement in the recovery would have helped prevent the Greek mess.
  4. Germany: Their insanely large current account surplus is a large part of the euro zone problem. The easiest way to fix this would be to blast off a few hundred billion euro in fiscal stimulus. Now people say higher German wages would not help Greece since they export different things. Rubbish I say. For sure SOME products are similar. Also, surely some of the stimulus money / higher wages would have been spent on feta cheese / whatever.
  5. EC/Germany/Finland/Slovakia/Spain: Greek primary surplus as % of GDP has been: 2009[-10.2%], 2010[-5.2%], 2011[-2.9%],2012[-1.3%],2013[1.2%]2014[1.5% forecast]. So the euro zone deserves some credit for preventing a total collapse 2009-2010. But 2014 would have been the year to say: “Good job Greeks. You actually even overdid it. 0.5% surplus is enough. We’re sorry your economy collapsed but you have to unerstand it’s politically impossible for our taxpayers to fund you indefinitely.” They didn’t. Instead they called for higher surpluses.

Buffy The Eurocrisis

Season 2008

A hellmouth of debt opens in the Eurozone.

Season 2009


The Eurozone finds out that Greece has been lying to it. It’s furious: “Karamanlis got himself deeply into debt! He lied to me! He ran around behind my back and concealed debt with the help of Goldman Sachs!”




Season 2010
s2010The Eurozone starts to recover, possibly with the help of José Manuel Barroso although no one can remember anything he said or did.




Season 2011

s2011_1The tentative recovery is brutally interrupted by two supervillains.

Olli Rehn appears demanding cuts everywhere “Where is my austerity! I need my austerity!”




Even worse, the ECB (guardian of the magic in the eurozone) turns evil and not only refuses to act as lender of last resort, but actively tries to destroy the eurozone by raising rates.






Season 2012
s2012The ECB regains its sanity and promises to do whatever it takes to save the euro. Although publicly silent in private it is horrified by its previous actions.

“It’s horrible. That’s me in 2011? I’m so evil, and skanky”





Season 2013
s2013For a brief period it looks like Jeroen Dijsselbloem might restart the euro crisis:
“Well, how about this? We whip out the ouija board, light a few candles, summon some ancient, unstoppable evil, say the Cyprus deal on bank rescues is a template. Mayhem, mayhem, mayhem.”



Season 2014
The eurozone gradually recovers in spite of the actions of Wolfgang Schäuble, who hypocritically insists that other countries should follow rules, while Germany should be free to ignore the Macroeconomic Imbalance Procedure.



Season 2015
s2015The eurozone is recovering. Sure new villains; Tsipras, Varoufakis and Kammenos (“We’re your arch nemesis-es”) appear, but they do not seem to be able to do much harm.

Buffy the Eurozone has recovered from the dead, but somehow it’s not quite the same. She wanders off towards a closer union singing:

♫Sometimes I feel like I’m just going through the motions♫

The Swedish political drama


Socialdemocrats (S): Biggest party. Fairly conservative moderate leftists, used to be in power a lot. Lately moved to the middle.

Moderates (M): A conservative moderately rightist party. Have lately moved to the middle.

Greens (MP): Leftist green party.

Left (V):  Anti EU leftists.

Liberals (FP): Used to be centrists. Confused and squeezed by S,M moving to the middle.

Center (C): Used to be farmers party. Reinvented selves as centrists due to lack of farmers. Now also confused by S,M moving to middle.

Christians (KD): Conservative moderate rightist party. Talks about old people. Sometimes also about god.

Sweden Democrats (SD): Started out as neonazis in the 90s. Kicked out the skinheads and the nazis and became a more normal anti immigrant anti EU party. Not obviously political right althogh they hate V and MP.

September 2010: M,FP,C and KD have ruled together 4 years as The Alliance. Gains by SD in the election means they have to form a minority government. They do this and manage to govern, although with some difficulty, for 4 years.

Act 1
September 2014: The Alliance lose the election, M leader resigns. There is no left majority though.

S, MP We will govern together, we will govern togeeether, but we need more support.

Looks at C,FP

S, MP Will you assist us? Look! We excluded V.

C,FP No! We will stay true to The Alliance!

V What about us! You cannot count on us.

S, MP We will throw you a bone, we will throw you a bone, a booooone, we will throw you a bone.

V Ok, we will vote for your budget.

Everyone thinks a weak right government will be replaced by a weak left government that will govern 4 years with some difficulty. However, things have changed regarding SD: They are bigger and bolder. In the previous government they would have to vote for a hated left budget to cause chaos, now they can vote for a slightly less hated right budget. Their leader is sick and more radical forces are in power.

Act 2

SD holds a press conference.

SD The immigrants, they are not like us. They are different! The immigrants. Look at Syria. The immigrants, the immigrants.

45 more minutes of this

SD The immigrants, the immigrants, the iiiimigrants! We will vote for the right budget, there will be chaos! You will have to make a deal with us, about the immigrants!

Act 3

SD is running around drunk on power. The Alliance is watching the chaos with ill concealed glee.

SD The immigrants, the immigrants, the immigrants.

The Alliance The left cannot govern, there is chaos!

SD The immigrants, the immigrants, the immigrants.

The Alliance The left cannot govern, we will not help them, they are useless.

SD The immigrants, the immigrants, the immigrants.

S FUCK THIS SHIT! We will have new elections.

Act 4

Chaos, everyone is running around in panic.

FP We will drop out of parliament.

KD We will drop out of parliament.

FP,KD We will drop out of parliament.

M We have no leader.

M,FP,KD,C We will make a deeeeaaaal!


S,MP,M,KD,C,FP strike a deal. The side that gets most votes govern. The losing side will lay down enough votes to prevent SD from repeating it’s stunt. The deal will last until 2022. The left gets to govern until 2018 (although with a right budget the first year). The right gets their budget for 2015 passed and will have a chance of a stable minority government 2018-2022.

How people vote should depend on business cycle

This post is inspired by the Swedish election campaign. More specifically on estimates about how the previous centre right governments actions affected unemployment. The main policies has been to reduce taxes and unemployment benefits. A lot of people claimed this reduced unemployment with no reference to the business cycle. This is absurd, surely the effect would be depend on whether the economy is demand or supply constrained. Something like this:

100% demand constrained economy: Reducing uneployment benefits serves no purpose. Employers don’t benefit from getting 300 instead of 100 applications. Shifting income from poor to rich is counter productive. The rich will just waste the money on socially useless savings while less money in the pockets of poor people mean less spending.

100% supply constrained economy. This will be just the opposite. Reducing unemployment benefits will lead to gaps being filled faster. The extra money the rich have will be spent on useful investments that will benefit everyone in the long run.

So which of these two cases has been closer to the truth? Looking at unemployment and inflation one could possibly make the case for supply side policies up until 2009. From then on though, Sweden has been demand contrained meaning government policies have had negative or no effect on unemployment.



Trapped in the SEK-Zone

This book (technically it’s not a book, it’s a blog post but I could make a pdf and then it’s a book right?) deals with the economic problems Sweden is facing due to its membership in the SEK-Zone. It is inspired by Hans -Werner Sinns upcoming book “Gefangen im Euro” (which from the look of it will be x pages of whining about foreigners). All numbers are taken either from the Swedish statistics agency or IMF.

A textbook case

Sweden has:

  • High unemployment: 8.5% in February 2014.
  • Strong public finances: The decifit 2013 was 1.1% of GDP and general government debt at the end of the year was 41% of GDP.
  • Deflation: Inflation rate of -0.2% in February 2014.
  • A monstrously large current account surplus: 5.7% of GDP in 2013.

If ever there was a textbook case for fiscal and monetary expansion, this is it. Yet the political parties all agree that doing nothing is the best course of action, except a small xenophobe party that wants to do nothing and blame the immigrants when it doesn’t work. Why is that? The explanation lies in the strict rules imposed by Sweden due to its membership of the SEK currency region.

20 years of failure

Sweden has been a member of the SEK-Zone since 1873 and the first 120 years it seemed to work relatively well. However, in the early 90s the country was hit by a severe banking crisis. The crisis was solved by letting the SEK float so that Sweden could export itself out of rescession. The crisis also led to treaty change in the SEK-Zone with members agreeing to:

  • An independent central bank with an inflation target of 2%.
  • A budget surplus goal of 1% over a budget cycle.

So have these policies been succesful? The short answer is no. The figure below shows unemployment in Sweden. One can see that unemployment recovered immediately following the crisis but then got stuck at a high level.


One explanation for the failure is that the central bank has been completely ignoring its mandate. Since the inflation target was introduced in 1995 average inflation has been 1.2%. Another explation is that the surplus rule means that the goverment sector will be a drag on the economy.

A bleak future

The future looks bleak for Sweden. With a gigantic current account surplus it can’t export itself out of the mess. Actually it’s more likely that Sweden will eventually have to stop being a drag on the global economy. Possible ways out could be:

  •  Euro membership: This would have the advantage of a more active central bank and free Sweden from the current “one size doesn’t fit one” regime. It would also give room for a substantial fiscal boost: Government expenses could have been 1.5% of GDP higher in 2013 and still fit within the Maastricht criteria.
  • Treaty change: In principle Sweden could dump its budget surplus goal and demand that the central bank explains what the hell it is doing. The problem here is that a treaty change would have to be approved by one parliament and there is little apetite for that, especially in an election year.

The only hope left is a global economic recovery. Sweden is, as usual, hoping that other countries will solve it’s problems.