Monday, June 20, 2011
Greek crisis is taste of things to come
So says City AM editor, Allister Heath in his latest column.
You see Greece is ultimately going to default. The alternative is for the hard-working taxpayers of Germany, France and other wealthy Eurozone countries (and possibly non-Eurozone) to be ransacked by their own politicians to prop up the profligacy of the Greek public aided and abetted by the politicians they voted for over decades.
The real problem is that the Greek public doesn’t really want to change and simply doesn’t accept economic reality – and that the EU has been too slow to learn the lessons of the crisis of 2008. One poll found that 47 per cent of Greeks reject the austerity plan and want new elections – and just 35 per cent back the measures. The Greek public is in denial: it doesn’t want to start living within its means – and yet ordinary hard-pressed taxpayers in other countries are being called upon to stave off Greece’s total collapse. There is no justice in that.
A default would be right, because not only are the Greek public unwilling to balance their budget, but the financial institutions who loaned money to the Greek government to continue its unsustainable way banked on Greece being bailed out. That bet should fail. The banks (mostly Greek, German and French) should bear losses as a result, but the inevitable will be more painful.
Is there an alternative? Well there was. The Greek public could have voted for politicians who promised to balance the books, but they voted for politicians who promised Western European style socialist welfare, health and education systems paid for by borrowed money. The fact that Greek politics is dominated by thieving socialists speaks volumes. Of course ordinary Greek citizens think that they are not to blame, after all they couldn't have borrowed as the state did, or spend other people's money so flagrantly. However, they did sit by and let it happen. In a democracy (Greeks shouldn't need reminding of this), power is meant to reside in the people, and in this case they don't want the responsibility of their casual blindness to what the last few decades has been built on - borrowed money.
So Greece will default. Its banks will collapse, it will leave the Eurozone, and the savings and incomes of its population will be wound back around 15-20 years. There will be more riots on the street. Foreign investment will flee and the Greek economy will be rebuilt on tourism and low value exports in a highly devalued currency.
Meanwhile, EU politicians will try to evade reality for a little longer, for fear their own banks will face collapse once more. That shouldn't scare them, as long as depositors up to a certain level are protected, the banks should fail. It will be an object lesson to the Europhiles that their federalist economic experiment is a failure. Ironically, but unsurprisingly it will be under the watch of supposedly centre-right governments in Germany and France, though there should be no delusions that it would have been different had the left been in power in either country.
However, there is more to come. Yet it is important to note how much of this crisis is NOT about the privately owned banking sector being profligate, but about government evading economic reality.
As Heath says:
the biggest error is the establishment’s inability to accept that increasingly, the biggest systemic risk will come from states, not private financial institutions. It is not just Greece, Portugal and Ireland – Belgium is in real trouble, while Spain and Italy are also in the frame. At some point, something will have to change in Japan, a country with an exploding national debt and a weak economy. America is also in terrible trouble, and not just because of short-term issues over debt ceilings.
During times of austerity and cutbacks the left thinks it has an advantage, as it typically promises to spend other people's money on the things that give comfort, like pensions, health, education and subsidised pseudo-employment. Yet it is failing to capitalise on it, because enough of the public actually understand that governments cannot perpetually run budget deficits and accumulate debt. Even 35% of Greeks support serious levels of austerity, not a majority, but a significant number are facing the truth.
The obvious biggest accumulation of problems is in the Eurozone, where even France has a longer term issue of sustainability with its finances. The ramifications of a Greek default and break up of the Euro will be profound. In the long run it will be good for Europe, but the casualties along the way will be high. Those are casualties caused directly by the failure to face austerity and controls on government spending in the past. The people who benefited from profligacy will, in many cases, not be facing the cost of it.
Yet Japan and the USA on top of this are more worrying. Japan has been engaging rampant Keynesianism for well over a decade now, and failed miserably to restart its economy. Given it is on the doorstep of China this is scandalous and shows just how featherbedded and corrupt the Japanese state became under the good years, with the Liberal Democratic Party so deeply entrenched with protectionist business (and indeed the Yakuza). The USA at least has some facing reality, although that doesn't include the President. Sadly the forthcoming Presidential election shows little sign that the Republican Party can lay old ghosts to rest in favour of a candidate who actually believes in the economy first.
No doubt some time will be bought for Greece with other people's money. The bigger question is how long is the inevitable going to be delayed, for the longer it is, the more painful it will be - and very few politicians elected in liberal democracies like having to face up to spending less of other people's money.