Fed Watch: How This Gets Even Uglier

Tim Duy:

How This Gets Even Uglier, by Tim Duy: At this risk of beating a dead horse, I reiterate that I don't see how the European situation comes to a happy conclusion. Conditions in Greece appear to be deteriorating rapidly. Via Athens News, retail sales are in freefall:

Retail sales by volume fell 8.9 percent year-on-year in November after a 10.8 percent drop in October, statistics service data showed on Tuesday.

Households, burdened by austerity measures to plug deficits and rising unemployment, have cut back on spending.

Consumer confidence has also been hurt by a climb in the jobless rate to 17.7 percent in the third quarter.

Officially, hope springs eternal:

"Increasing unemployment and austerity are likely to continue weighing on disposable incomes and consumer demand in the first months of 2012. However, a positive conclusion of the PSI deal and the approval of the second bailout package could provide a kind of positive shock to business and consumer sentiment," he added.

Right, good luck with that, as the next agreement is only about tightening the screws even more. How exactly will consumer confidence get a boost given an acceleration in wage cuts, a late holiday gift from the Troika. An interview with the IMF's Poul Thomsen, via Kathimerini:

Are you advocating wage cuts?

Let me begin by saying what I think we all agree on. Greece still has a large competitiveness gap. Closing this gap will require actions on many fronts, not only wages, but it is clear that wages for the economy as a whole are too large compared to Greece’s productivity. One could hope to magically raise productivity to levels that will justify the current wage level. We are trying, but there is a limit to this. Thus, part of the adjustment must come by more closely aligning productivity in individual enterprises with wages. Reforms to the wage setting mechanism, to the system for collective agreements could help in this regard. I think that most of us agree on what I have said so far. Where we need to be more convinced, is that such reforms can deliver results in the foreseeable future. If not, we believe that the government should consider more direct interventions for a temporary period, until reforms become effective. These could include limitations on the minimum wage and possibly the 13th and 14th salaries. We are still discussing this. It is too early to say. We need to better understand what kind of reforms the government has in mind.

Under conditions of never-ending austerity with no exchange rate release valve, what exactly is the half-life on any new plan to reduce Greece's debt to GDP ratio to 120% by 2020 (itself a questionable goal)? 3 months? 6 months? Back to deteriorating conditions, via Kathimerini:

Archbishop Ieronymos, the head of the Church of Greece, has taken the rare step of writing to Prime Minister Lucas Papademos to express serious concerns about the effectiveness of the government’s fiscal policy and the effect it is having on Greek people.

In his letter, Ieronymos also raises doubts about the role of the European Commission, European Central Bank and International Monetary Fund – or troika – in the country and whether Greece should agree to further austerity measures to receive its next bailout, suggesting that they are “larger doses of a medicine that is proving deadly.”

Ieronymos expresses concern about the impact of the crisis, describing a rise in suicides, homelessness and unemployment and the desperate state that an increasing number of Greeks find themselves. He warned that this was creating a dangerous social situation.

“Greeks’ unprecedented patience is running out, fear is giving way to rage and the danger of a social explosion cannot be ignored any more, neither by those who give orders nor by those who execute their deadly recipes,” he wrote.

Meanwhile, Germany appears to have underestimated the possibility of resurgent nationalism in the periphery. Via Athens News:

Twenty-eight MPs tabled a proposal in parliament on Thursday requesting a debate on the so-called occupation loan paid by the collaborationist government to Germany during the Second World War as well as the issues of reparations for victims of Nazi atrocities and looted treasures...

...The MPs stressed that the now united German state owes Greece, a Second World War victor, roughly 54bn euros before interest, underlining that Greece was the victim of unparalleled cruelty inflicted by the Nazi forces.

The signatories stressed that Greece has been the subject of an obvious injustice because it is the only country to which Germany has not paid reparations.

Reopening the wounds the Euro was meant to close.

Call me a pessimist, but I can't help but conclude that unless Greece gets real relief more quickly, the cost of being in the Euro will outweigh the costs of leaving. At this point, I am starting to wonder what was the bigger mistake - to allow Greece into the Euro in the first place, or to force them to stay?