Greece is to collapse under the weight of its own reality evasion

Greek Prime Minister George Papandreao's decision to hold a referendum on the "bailout" plan agreed with other Eurozone countries has sealed the final act for Greece's democratic socialist attempt to live a life that it wasn't willing to pay for, and should serve as a warning for the economic catastrophe that the Euro project has become.

Let's recap what happened.

Since Greece became a liberal democracy in the 1970s, it has run policies that could broadly be called "democratic socialism".  A typical right/left democracy saw little difference between policies, but the Communist Party consistently would come third.  Progressively more generous welfare policies and a growing public sector, combined with a lackadaisical approach to tax collection, and feather bedding the armed forces.  Meanwhile, the Drachma devalued again and again.

Greece joined the EEC in 1981 and the money came rolling in.  As the poorest Member State it gained funding to build infrastructure, generous agricultural subsidies and access to markets in Western Europe.  The typical EU type deal was made.  Greece gained new markets for its goods and services, grew tourism and attracted investment, whilst the money flowed in from Brussels to prop up a burgeoning public sector, inefficient state companies (Olympic Airways being one of the perpetually near bankrupt ones). 

The delusion worked for a while, and then Greece got the next offer - get a Western European currency.  The Euro.  Greek governments lied their way into the Euro, not really having a 3% budget deficit (hiding defence and hospital spending) at all.  So out went the Drachma, and Greece borrowed - more and more.  Borrowing for the Olympics in 2004, and this time credit flowed freely.   The Euro was being loaned out at interest rates reflecting the economic environment of the dominant Euro Member States - Germany and France.  So Greece was receiving credit not on the basis of running large budget deficit and public debt approaching 100% of GDP, but rather running low budget deficits with a reformed economy - like Germany.

Greek government kept getting elected, by Greek voters, to give them their pork, at little cost to them.  Ridiculously generous pensions, a public sector where nobody could legally be fired under the constitution, a bloated armed forces that had not changed since the Cold War (nor since Bulgaria became an EU Member State rather than the front line of the Red Army), and a tax system that was a bit of a joke, saw Greece slip slide its way to bankruptcy, as banks in France, Germany and to a lesser extent Britain and elsewhere, lent to the Greek government believing all was well - because it was the Euro.  A currency those banks believed would be government guaranteed.

They didn't factor on a Eurozone government going under.

Greece is to all intents and purposes, bankrupt.  Its austerity programme of cutting spending and increasing taxes only slices off some of the overspending.  It cuts the budget deficit NOT the debt.  Think of it as you being on the brink of being personally bankrupt and you've managed to cut your spending to be only 5% higher than your income rather than 10%.  You still need to borrow.

So who is to blame?  Well, quite a few.  Greek voters, Greek politicians, Eurozone governments, the European Commission and Greece's creditors all carry some blame.

Greek voters

If you believe in liberal representative democracy, then Greek voters are to blame.  They voted for politicians who gave them public spending that was unaffordable.   They didn't support politicians who believed in containing the size of government or even increasing taxes to pay for their socialist state.   They benefited from the loans taken out in their name, they happily evaded taxes, but they didn't evade taking advantage of the money spent by their government.   Now they are unhappy about facing reality - the reality that they have been living beyond their means, or at least, supporting governments that have been doing so.   For so many they need only look in the mirror to find who to blame.

Greek governments

Many Greek voters and citizens obviously did not support the government, and were not public servants or major users of the profligate Greek state.  They can rightfully blame Greek politicians for lying.  Lying to join the Eurozone, lying about the state of the books and engaging in massive reality evasion at elections.   It is telling how so few Greeks are pointing fingers at past Prime Ministers and Finance Ministers for their combined failure to confront the public finances, and most of all in colluding with the state sector to lie - and I do mean lie - about the budget deficit to join the Euro.   That big lie is now costing lives and livelihoods.   Greek citizens should be baying for the blood of these lowlifes - lowlifes who now live off the back of generous political pensions.   Greek politicians didn't just evade reality, they denied it and covered it up - for shame.

Eurozone governments

Greek governments would not have been facilitated down this path had Eurozone governments not allowed it to happen.   They could have shown greater due diligence with Euro membership, but the Euro is a political project, driven by France, accepted by Germany, to bring European economies together.  It is not an economics project, but one driven by hubris, pushed by people sharing a democratic socialist vision of the EU being a fortress of common laws, taxes and generous business and personal welfare states.   They wanted it to be central to EU membership, and France itself has almost always failed to meet the Eurozone membership test itself, of a budget deficit no greater than 3% of GDP.   They supported lending to Greece, supported Greece's fiscal profligacy (given their own) and engaged in their own wilful blindness of both Greece and their own failures to meet their own disciplines.   Reality ignored

European Commission

The EC got Greece hooked on the corporate and state welfare of its subsidy programmes and cohesion fund.  It supported Greece's growth of the state and addiction to the European project as part of its political culture.  The EC is adept at covering up its own embarrassments and at pretending things are what they are not.  The EC wont admit failure, wont admit the inherent immorality of its project of transferring wealth from the earned to the unearned, and of power from Member States to the unelected Council and Commission.   The European Central Bank is, of course, central to this.

Greek creditors

The banks that loaned to Greece believed they were lending to a watertight debtor.  They believed German, French, Dutch and other Eurozone taxpayers would cough up, if anything went wrong.  They facilitated Greece's overspending and expected to make money out of making taxpayers pay up - whether they be Greek, or other Europeans.  They pretended governments couldn't go bankrupt, the "bailout" deal is based on them swallowing a 50% write off of the debt borrowed to date.

What now?

The bailout is doomed, quite simply because Greece is still overspending, its economy is on its knees and the banks that have loaned to Greece will be forced to face a larger than 50% cut in their loans.   It isn't enough and can't be enough.  France and Germany are pretending they can fool the markets into having confidence, through the construction of complicated derivative lending instruments, akin to those blamed for hiding risk before the financial crisis of 2008.   

However, the collapse will come from the referendum on the bailout.

If Greek voters choose yes, they face short and medium term pain, in the form of a vastly smaller state and longer term pain, by being hooked to the Euro.   They could take a bitter pill of reducing their failed democratic socialist state and become a reformed, free market economy that is competitive, following the reforms of its northern neighbours (e.g Bulgaria).   However, I wouldn't count on it.

If they choose no, as it widely expected, then Greece will default.  It will be unable to borrow, the government will effectively shut down many activities, and is likely to be forced out of the Eurozone, meaning it will have to either create its own junk currency, or operate in Euros independent of the European Central Bank.  The price of that will be severe in the short term.  Any Greek resident who isn't moving their money into a foreign bank in Euros is gambling, because Greek banks will collapse.  Greece will face an Argentine style default so will have no budget deficits after that, but then it could reawake and be revitalised.

The Greece experiment in profligate democratic socialism will have been dumped - and eyes will be on the Italian, Portuguese, Spanish, Belgian and French varieties.

Oh and despite the vapid plaintiff words of some protestors, most of the blame for all of this lies not with the private sector but the political classes, and ultimately, the majority of voters.

The Eurozone crisis is not a crisis of capitalism - it is the dying gasps of a grand project of democratic socialism, and the first - weakest - branch of that tree is about to fall off.