For all of the hype yesterday from the politically (not democratically) appointed European Council President, and the cheers and handshakes from Presidents Merkel and Sarkozy, you might think there is reason to breathe a sigh of relief. The use of the term "Marshall Plan" to describe what has been done is so wildly far from the mark that it continues to confirm my view of how malignant the European Union, Commission and Council actually are. It is an institution as addicted to lies as any politician could be. The big driver for Merkel and Sarkozy can be seen on this graph on the BBC news website. Both French and German banks and governments are by far Greece's biggest creditors.
The immediate reaction to the announcements was the usual lemming like attitude of the currency and sharemarkets as many suddenly had confidence where there was no confidence before. Some of that will be the attempt to make some short term returns from the bubble of optimism, for that is all it would be. All the Eurozone leaders have done is buy some time, by pilfering the bank accounts, wallets and purses of their children and grandchildren - fiscal child abusers like so many politicians.
As I predicted yesterday, a bailout solution will involve a form of fiscal union. It was confirmed that details of how Eurozone countries will integrate tax and spending policies will be forthcoming. Nothing has been said as to whether taxpayers in Eurozone countries will be asked whether such a fundamental constitutional shift will be put to referenda, for that is not in the style of the European Union. It wont let democracy or public opinion get in the way of "the project". Even the Guardian admits it is the "democratic deficit".
Yet that isn't my biggest concern, for whilst it is easy to assert that if asked, it is unlikely European voters would see sovereignty transferred wholesale to Brussels, it is more fundamental that it is quite simply immoral for people in one country to be forced to bail out the fiscal profligacy of those in another.
The plan is as follows:
- A tranch of Greek public debt will be transferred to the European Financial Stability Facility, effectively "EUising" the debt, with the maturity extended to about double the current average period. The interest rate will also be cut to 3.5%. In short, Greek debt is being transferred to primarily German, but also Austrian, Dutch and French taxpayers.
- Greece will "temporarily default" as private lenders will be effectively blackmailed into accepting a 20% writedown on the loans. In effect the loans will be transferred to the European Financial Stability Facility (EFSF), with extended maturity periods and lower levels of interest. Greece will effectively be unable to borrow from private lenders in the foreseeable future. Private lenders will take a hit of around 13.5 billion Euro as a result, but will contribute up to nearly 50 billion overall.
- New EU bonds (debt) will be issued with a AAA rating. In effect, Germany will be borrowing on behalf of Greece. German taxpayers will be forced to use their hard work and savings to prop up the profligate and spendthrift Greeks.
- The EFSF will have new powers allowing it to buy sovereign debt from countries held by private creditors and cutting the interest rates on that debt. In short, German taxpayers subsidising lenders to profligate countries.
Greek public debt will be cut by 12% of GDP, albeit from the current level of 140%. This should make it easier to service. The overall value is 159 billion Euro. However, it doesn't deal with the fundamental problem.
Greece is still overspending, on a rampant scale.
If Greece cannot cut its state sector back and radically reform its economy, it wont meet the deficit reduction targets that have been conditional for this and the previous bailout. All this is doing is buying time. It was made clear that Greece is a "special case". There is no capacity to do the same for any other of the countries known as the PIIGS (Italy being added to Ireland recently). Although it was noted that Spain and Italy have both committed to major austerity programmes to cut their deficits, which may just save them from a similar crisis.
Moreover, the Eurozone countries have agreed to "legally binding national fiscal frameworks" by the end of 2012. That means surrendering sovereignty over tax and spending policy to the EU.
If Greece's announced austerity measures are actually implemented, it may well be the end, but it has failed to do enough to date. Greece needs to drastically cut and eliminate its budget deficit in the next two to three years so that it need not borrow anymore - for it is about to default, and will be unable to do more than is provided for. This really is the last chance, unless other Eurozone governments are willing to rob from their children and grandchildren some more.
If Greece fails to cut its deficit there may well be another bailout, but with the French Presidential elections in April 2012, and German Federal Parliamentary elections in September 2013, Sarkozy and Merkel will be keen to avoid being seen to sell their people out to the Greeks.
Ireland, Portugal, Spain and Italy are also on the horizon. All have announced austerity plans, but of those Portugal looks the weakest. The thing to watch is whether in the next tranch of borrowing (which all of these countries must do), is whether there is enough confidence in the markets to allow it, and at what interest rate. This bailout will raise confidence somewhat, but for the likes of Spain and Italy, few will be convinced that the Eurozone countries could afford to duplicate the Greek deal. Their budget deficits will need to be dramatically slashed in the next two years to avoid risk of default.
However, watch blood to be spilt in forthcoming months over fiscal policy. Central to Ireland's economic fundamentals has been a low corporate tax policy, which has encouraged many firms to locate there in preference to the UK and other Eurozone countries. If the forthcoming "fiscal framework" does away with this, then Ireland will face a choice of abandoning this tax policy - in order to remain in the Eurozone, or doing away with the Euro. Ireland's debts are due to it foolishly promising to provide 100% guarantees for bank deposits and then bailing out banks that lent into its overheated property sector. It is NOT due to rampant domestic overspending.
Further out, Belgium and France face big fiscal bubbles. France's public debt as a proportion of GDP is 84%, Belgium's is around 100%. Governments all over the world are having to face up to reality that they can't overspend forever.
However, for now attention will shift to the United States, where the most limp wristed efforts at addressing rampant overspending are now being presented as a "solution". As the Cato Institute says, the so called "Gang of Six" plan is lousy. A detailed assessment is here, and while it does see some tax reform, it also increases taxes by US$1 trillion, does nothing to address the looming Medicare/Medicaid overspending and "cuts" by reducing the rate of increased spending to below the rate of estimated economic growth and doesn't see a balanced budget in the foreseeable future. Obama likes it, which speaks volumes. Cato has a far more ambitious, but still quite cautious plan here, which would balance the budget by 2021, without any tax increases. It reduces government spending from 24% to 18% of GDP, to match tax revenues which will be at that level. Don't expect Republicans to spend much time supporting that, for they are almost as bad as Democrats in their addiction to fiscal child abuse.