What struck me this week....

Obama - slicing tall poppies down, you're not so smart... it's not your business, you didn't build that

This is likely to be as controversial as Hilary Clinton's famous "it takes a village to raise a child" statement, which many conservatives took as denying the primary role of families.  

Obama said this:  look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.  I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something—there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

So DON'T be proud, you're not an individual, success is always a collective effort.  Don't think you're clever, lots of people are.   You're success is because someone gave you help, you CAN'T be successful through your own hard work and intelligence.  Be grateful for the roads, because you wouldn't succeed without them (the fact others didn't do what you did is blanked out).

Presumably he thinks Olympic Gold Medals belong to lots of people, not the people winning the races.

Not PC wrote about it, and I concur.  I also like his post that includes satire about it.

Pure unadulterated anti-individualist, pro-collectivist drivel.  If Mitt Romney can't capitalise on this to grab the votes of most small business people, of indeed most Americans who strive and believe in recognising individual success when it happens, he doesn't deserve to be President.

Helen Clark gives an award to a tobacco entrepreneur

The warrior against smoking is hoisted by the petard of the profligate mega-bureaucracy she leads, not that she isn't a stranger to hypocrisy.  After all, few things are more hypocritical than a woman who has never created a business in her life getting US$500,000 a year, from global taxpayers, tax free, flying around the world flying first class (not just business class), staying in 5 star hotels, being chauffeured around telling the world that it should do more to address poverty.   Well done Helen, you cold, hypocritical, control freak.

Auckland's Mayor wants more taxes

Len Brown thinks that there is a "funding gap" of NZ$15 billion for Auckland transport.  Truth is that he can't convince users of government provided transport infrastructure or services to pay more to pay for his wishlist of totemic projects, especially the nearly NZ$3 billion Auckland CBD underground railway (given railway users already only pay a third of the cost of operating the existing trains, and not one cent towards the pending electrification and new trains).

He's arguing for a regional fuel tax (ignoring that it's unfair to those who don't use fuel on the roads, and those who wont use his totemic projects), tolls for new roads (all well and good, but there are few of those) and congestion charging (which Labour says is unfair, preferring regional fuel tax, and National rejects).

The real answer is to cut his spending plans to what fits within budget.  State highways are not Auckland Council's responsibility.  Maintain the local road network, pay out the existing public transport subsidy contracts and after that, bid to NZTA for new capital projects.  Understand that when ratepayers will throw you out for raising rates to pay for a railway, that means they don't want to pay for it so you shouldn't do it. 

Portugal's drug decriminalisation has worked

The number of drug addicts has halved since Portugal decriminalised all drugs in 2001.   Gutlessness prevails in mainstream politics in the English speaking world.

New Zealand continues the war on drugs
  

A report that 2573 people have been arrested en masse by the NZ Police for the victimless crime of consuming, selling and producing cannabis should have anyone with a liberal bent outraged.  The sheer scale of this is horrifying.  Of course it wont be the sons and daughters of MPs, lawyers, doctors, journalists, company directors and the like who are targeted, it will be largely lower class, brown skinned people and other reprobates who “deserve it” in the war on drugs.  Because, of course, the war on drugs doesn’t actually mean treating everyone who has drugs the same way – it means letting middle class successful people off the hook for dabbling in them whilst they wag their finger at the people who they don’t think are capable of making the same decision for themselves.

As Lindsay Perigo says, will the Police not stop until all 450,000 people who smoke cannabis are in prison?  

How Greece's government destroyed US$140 million of national wealth with one policy

You ban the government from selling surplus assets at less than 75% of their book value.  Meaning you're ultimately forced to sell them for 22% as the market collapses in the three years of prevaricating over the sale.

Romania's government slides towards authoritarianism

What do you call the EU's reaction to one of its newest Member States governing under emergency powers, politicising the entire public sector including the judiciary, making the state media an arm of the ruling party, overruled the Constitutional Court (so changing the constitution)?  Pathetic.  Why?  Apparently because so many MEPs are aligned to the socialists (successors of Ceausescu's communist party) who are annexing Romania's entire political system to suit themselves, and because the EU can't admit that it made a mistake in admitting Romania when it was subject to serious issues of corruption.  The EU COULD cut funding across many areas, immediately, such as agriculture and regional funding for infrastructure, but it wont.  The Party of European Socialists, including the British Labour Party, are keeping quiet. 

Greek voters do have rational choices - but they reject them (UPDATED)

The two main incumbent parties in Greece, although both supporting the necessary bailout plan, are both institutions that have led the country down a path of corruption, fiscal incontinence and reality denial for too long.  Beyond them, the Greek Parliament is polluted by the likes of Marxists who believe business should all be owned by the state, and fascists who preach bigotry and racism with their faux pride and proto-violent approach to government.

However, there are parties that can make a difference:

- The Liberal Alliance advocates the state withdrawing from business, abolishing permanent employment in the state sector, privatisation and replacement of the state pension with a privatised pension system, along with tax cuts. 

-  The Drasi party supports cutting government spending and free market reforms.

Both parties ran on a single platform in the May 2012 election, but only gained 1.8% of the vote.  This time they are running with the "Recreate Greece" party which is said to share a similar approach to economic policy although being more centrist.  The hope is that the combined support of all three will cross the 3% threshold for Parliamentary representation.

Democratic Alliance would have been another option.  It supports cutting the civil service by a third, abolishing permanent tenure and introducing performance pay.  It also seeks major tax cuts with a flat tax of 20% and negative income tax to replace welfare.   However, it has aligned itself with the incumbent New Democracy Party (the non-socialist one).  Will it have enough influence to make a real difference?  I doubt it.

So the best option appears to be the "Recreate Greece - Action – Liberal Alliance". 

Together they would embrace real austerity that does not include raising taxes, but does include cutting the state down to a size that is affordable, it does mean not scrapping the Euro in favour of a junk currency and means opening up the Greek economy to be more competitive and dynamic.

The two major incumbents support more taxes, the Syriza party supports putting its head in the sand and hoping that Greece doesn't go bankrupt.

In the meantime, wise Greek citizens will be emptying their bank accounts in Greek banks.  Opening German, French and British ones, and depositing their Euros as fast as they can, and holding onto just enough cash necessary to function.   Good luck to them all.

UPDATE:  It looks like a binary choice between New Democracy (in favour of the bailout package including spending cuts, privatisation AND unfortunately tax rises) and the Green Party like Syriza Party which essentially expects to blackmail Germany into paying for its retention of socialist economics.   New Democracy retains a chance Greece remains in the Euro, Syriza is highly likely to see a complete default in late July if it can't convince the Germans to prop them up.

It is entirely plausible that neither could form a government.

That's why it remains the most principled choice to back the Liberal Alliance, for only it will support both less spending and lower taxes.  New Democracy may be less worse than Syriza, but if economic growth matters to anyone in Greece, they can't get it voting for for those who support higher taxes (let alone a bunch of reformed communists).

Greeks withdrawing cash

If anything demonstrates how far we are all removed from free market capitalism and an economic system based entirely on private property rights, one need only look to see the power the state has on the resource most people have as a medium of exchange and storage of value - money.

With speculation rising about the next Greek government quite possibly being led by a quasi-communist who thinks he can call the bluff of Eurozone governments in demanding that they lend the Greek government more money it can't pay back (having already received bailouts worth nearly a quarter a trillion Euro), fear is that the bluff wont work and Greece will be cast adrift, with the Greek government unable to pay its bloated public sector, unable to pay interest on its debt and pushed out of the Eurozone.

With all of that goes any talk of European solidarity, as quite rightly, Germans, Austrians, Dutch, Slovaks, Estonians and the like say no to their government funding Greece's fiscal incontinence, so Greece finds a new way to pay its bills - by printing worthless banknotes likely to be called a New Drachma.

What does the average Greek citizen do then?  Well, Greek banks get all their assets and liabilities redenominated into this junk currency, so the savings of Greek people get utterly destroyed, because of the Greek government.  Greek companies with debts with foreign banks in Euros face bankruptcy as they will be unable to pay debts using the junk currency.  

Many Greeks will seek to flee to live and work in the rest of the EU.

Except the EU has other ideas.  Greeks will be cast asunder, not only having their savings plundered and destroyed by their government, but having their fellow EU partners treating them as foreigners, not worthy of being able to live and work in other Member States.   The grand political project would be over as far as Greece is concerned.  This shameful treatment of people unfortunately stuck in a country that the EU embraced, subsidised and treated fraternally for decades, shows the real limits of the openness of the EU - when the going gets tough, they turn their back on you.

So Greeks are preparing.  With 800 million Euro exiting Greek bank accounts today, this will only accelerate.  Once they have their cash, they will deposit in foreign banks, convert it to gold or silver, or simply stuff it under the mattress.

For you see when it comes down to it, a fiat currency isn't a store of any real value if those who issued it declare it to no longer be so - for it is as easy to destroy that which you printed out of thin air.

For all the SYRIZA party is offering Greece is the promise that all can be made better out of the thin air of socialist economics.

UPDATE:  A former Socialist Defence Minister of Greece is facing charges of money laundering and is facing ongoing investigation for tax dodging.   Is it any surprise that so many Greek citizens actively avoid tax when then is corruption at the highest levels by those who want to spend their money, but make sure they use the state to enrich themselves?  Shame the political choices of Greeks are largely more of the same.

Spain's bailout for dummies

What's gone wrong?  A cluster of Spanish banks loaned money during the credit boom years of low interest rates in the Eurozone to a large number of investors whose investments have now proven to be worth far less than the loans.  Most of this is the property bubble in Spain which has popped, with property values dropping by 30-50% in some places.  The banks are facing insolvency because if they write off the bad loans they will fold.

It is not a sovereign debt crisis of the kind being witnessed in Greece.  In fact Spain's total national public debt as a proportion of GDP is less than Germany's (although it has had a serious budget deficit issue risking escalation of that debt) at 68.5%, although it was predicted to hit 78% at the end of this year.

Whose fault is it?  It takes three to tango this one.  None of these loans would be taken out if people or businesses hadn't borrowed to "invest" in the Spanish property bubble.  Nobody forced them to do this, so they bear responsibility for their own personal tragedy of poor choices and being lumbered with liabilities.  Of course, they wouldn't have received such loans if the banks had been more prudent about their predictions about the property market and had considered the risks of an inflated property bubble.  So the banks bear responsibility for lending money in circumstances that were overly optimistic.  Finally, the European Central Bank sets the interest rates for banks accessing its fiat currency.  As interest rates were set based predominantly on the dominant economic drivers in the Eurozone of Germany and France, this effectively created a line of cheap credit out of nothing at all.   Of course, since the European Central Bank makes money from thin air, it doesn't really bear any consequences of anything, as it is those who own and loan the currency that bear those consequences.

Why should governments get involved?  They shouldn't.  The banks should go bust.  Their shareholders and creditors should bear the losses.  At the most, if there is a deposit insurance scheme, then depositors up to a certain level should be protected, but there is no good reason for governments to do anything other than to have a framework within which bankrupt banks can wind down.   Of course, regional Spanish governments own a majority of the largest bank being bailed out - Bankia - which indicates that it going bankrupt means that those governments lose their "investments".   Naturally, none of them are very keen on this because they want their own decisions to be vindicated.

Why doesn't the Spanish government do it?  It can't afford to do so.  Whilst its relatively new government is eagerly cutting spending (and increasing taxes) to cut the rampant overspending of past governments, it is finding that interests rates on newly issued sovereign debt lie over 6%.   If it was to try to swallow the bankrupt banks it would see its debt as a proportion of GDP slide up by another 9% of GDP bringin it close to 90% (and 100% in 2-3 years' time).  It doesn't want to do that, and claims that Eurozone countries are like a big cozy club that look after one another (although German, Dutch, Austrian, Slovak and Estonian taxpayers might have a wry laugh at how one way that relationship is).

Where is the money coming from for this bailout?  Thin air.  It is part of the slow fiat currency issuing of the Eurozone called the European Financial Stability Fund, which is to become the European Stability Mechanism.   In both cases, they can only lend money to governments, so the Spanish Government will be effectively borrowing from its Eurozone supporters, adding to its public debt, pass on the money to the banks (presumably in the form of capital) and the banks will then pass on that money to the European Central Bank to provide liquidity in the face of their bad debts.  Of course don't think that making money out of thin air and passing it through a merry-go-round has no cost.

Who will pay?  Taxpayers directly in the solvent Eurozone countries (i.e. excluding the PIIGS) and all Euro currency holders indirectly, as they contributed involuntarily to a fund to socialise the losses of the banks.  Spanish taxpayers will be expected to pay too, as they guarantee the repayment of the "credit line", so ultimately will have to pay more unless miraculously the bailed out banks can be sold for more than the bailout funds.  Of course, given Spain's precarious budget deficit, public debt and national economic position, the real risk is that it lays the path for Spain to follow Greece - and so demand more money from Eurozone taxpayers.

Who will win? Creditors of the bailed banks (even if they face major writedowns in their shareholdings).  Owners of Euro debt in Spain.

Who will lose?  Taxpayers across the Eurozone, who collectively will see more of their future earnings diverted to save bad investments.  Ultimately this means the Eurozone economy being dragged down a small notch, again, for many years.  Holders of Euro currency deposits or cash lose as well, because it ultimately contributes to inflation.

What happens next? The markets will lemming like treat all of the propaganda around this bailout as gospel, and get a sudden shot of confidence, until the realise it helps to inflame a sovereign debt crisis in Spain.  The Eurozone economies will be no more better off.  Economic growth will not be facilitated.  The lunatic far-left parties in Greece (including the fascists) will clamour that Greece should get the same support, as will Irish politicians and those in other profligate Eurozone countries.  None will acknowledge that this is not about sovereign debt and actually increases Spain's sovereign debt.  People in France will have voted for a socialist Parliament, which will seek to continue the "print it and bail them out" philosophy that pretends that fiat currencies can be used to just print your way out of recession.  The ideological debate in Europe will continue between three groups:

-  Austerity and Integration:  Led by Germany, it is the view that things will get better if only the PIIGS would follow the policies of the 5 or so Eurozone countries that have budget deficits lower than GDP growth, improve competitiveness and then create a new European Treaty that harmonises budgetary, taxation and economic policies. Spain's current government has tended to share this view too.

-  Profligacy and Integration:  Now led by France, but also driven by leftwing and populist politicians in the Eurozone.  It is the view that the Eurozone should socialise its gains and losses.  In other words, Germany and others should pay for the debts and deficits of the PIIGS, and there should be extensive transfers across the Eurozone, as if it was a United States of Europe.  

-  Disintegration:  A growing view that the Euro is unsustainable in its present form, and the way to resolve the crisis is for it to split into two zones or multiple independent currencies, so that the PIIGS can devalue their way to "competitiveness", and the European project becomes a looser free trade association and customs union.  This is the view of Eurosceptics generally, although there are versions of this argument against any form of open Europe (from Marxists and fascists) or against new small fiat currencies (supporters of commodity-based currencies).

The one thing is sure, don't expects sun to rise and everything to be rosy.  For the Greeks have to vote again to decide if they want to swallow reality and take their medicine, or run away from it and truly see what it takes to become a tinpot backwater that makes Albania look good.

Austerity and the Euro need not hinder growth

So what if I said that there is an economy in the Eurozone that has embraced austerity and is experiencing economic growth.

You'd probably think I mean Germany, given it runs relatively low budget deficits and it is widely believed that the depressed value of the Euro is a boon to Germany's export driven industries.

However, I don't mean Germany.  This country grew by 7.6% in 2011, Germany grew by 3%.

Its public debt as a proportion of GDP is 6%, Germany's is 81%.

It has been a Eurozone member since 1 January 2011.

This is Estonia.

According to CNBC, its economy shrank in 2008-2009 by 18%, as the financial crisis hit hard.  Estonia having had its own credit bubble and property speculation bubble to go with it.  The crisis also made it difficult for Estonia to sustain ballooning budget deficits.  So the government there did what had to be done, it cut spending.

All public sector salaries were cut by an average of 10%, but cabinet Ministers had a 20% cut.  The age to receive the state pension was raised, and labour market reforms introduced.

Things are not all rosy, with unemployment at over 11%, growth is essential just to help pull Estonia up.   Estonia lowered and simplified taxation, with a flat income tax rate of 21% (down from 26% when first introduced in 1994).   Not for Estonia is the pseudo-austerity seen in France, the UK and Greece of raising taxes (taking money out of the hands of citizens and investors) to cut the deficit.  It was spending cuts, shadowed by tax cuts that shrank the state and boosted the economy.

The economy has picked up as technology firms have emerged, growing an IT sector that is thriving.  For an economy that was once based on being a colony of the USSR, Estonia now rates Finland and Sweden as its biggest export markets.

Estonia has thrived following real austerity, and it has thrived still even having moved from a minor fiat currency to a major one.  The Euro has not been a problem, as Estonia increased in competitiveness not by destroying the savings of its citizens by printing money, but by increasing productivity, reducing waste in the state sector and making it easier to do business.   

Let's remember that Estonia's economy has twice been decimated in the last 20 or so years.  First by independence from the USSR which saw most of its industry shut down for being inefficient and obsolete, and secondly by the bursting of its credit bubble in 2008.  In both cases the reduction in GDP was greater than that experienced by Greece today.  Greece, after all, put aside dictatorship in 1974, not 1991 (nor was Greece occupied for 50 years).  Estonia has had much less time to get its act together, and until 2004 it was not a member of the European Union either, so neither enjoyed the completely open market, nor the offer of subsidies for agriculture or infrastructure that Greece has supped from for many years.

Estonia has per capita GDP less than Greece, real wages lower than the Greek minimum wage and its farmers receive subsidies which are one-third of that, for the equivalent properties, of those in Greece (or indeed France or the rest of the EU-15 - those EU Member States that were never part of the Warsaw Pact or former Yugoslavia).  

So Greece ought to embrace real austerity.  Cut its state sector.  Don't hike up taxes, but rather reform them to simplify and lower them - minimise exemptions, but lower rates and fewer taxes.  

Secondly, talk of exiting the Euro would be unnecessary as an alternative.  For a bankrupt state that can't keep its spending aligned to its revenue can't manufacture a fiat currency that will be trusted by anyone.  It will be like remaking the Zimbabwean Dollar.  

Finally, the Cato Institute has rightfully fisked Paul Krugman's misuse of statistics to claim Estonia was hit by austerity, when the recession it faced was prior to any austerity.  The President of Estonia, Toomas Hendrik Ilves, has since called Krugman "smug, overbearing and patronising".

So isn't it about time that journalists took the over-quoted prick on some more?

Check out Mr Ilves's wonderful tweets damning Krugman in this Huffington Post article - bear in mind this is in English and not Mr Ilves's first language, but he runs rings around any current leaders of English speaking countries I know of.   Bear in mind also that he is a centrist in Estonian political circles.  He is no libertarian, he is no radical, but the mainstream of Estonian politics is fiscal austerity, low tax and low levels of regulation.

Finally, Mr Ilves wrote convincingly on the Hoover Institution (Stanford University) website about how his country got to where it is, with some damning of those on the left in the West who thought people in the USSR simply loved living under the authoritarian yoke of the CPSU (point fingers at Sue Bradford and friends).  He points out the issue that countries like his are being expected to contribute to bailouts for countries with higher per capita incomes than Estonia.   How long will taxpayers in those countries tolerate that?  The answer is that they shouldn't.

In short, the clear point is that there are European countries that had it far harder for far longer than Greece, have "followed the rules", and have been reaping the benefits of the hard work involved in rebuilding a productive economy with much less government.

If eastern Europe gets it (and not all of it does), does it mean that in future, the term "southern Europe" will be a synonym for stagnation, corruption and economic malaise, more than the east?

Furthermore, what does it mean when voters in Greece and France choose governments that essentially campaign on forcing voters in other EU countries to pay for their profligacy?

UPDATE: Anonymous below points out that income tax in Estonia is not all it seems as employer social security contributions are 33% on top of income tax, which is obviously a heavy burden.   See more on Estonian tax here.

France's Presidential election wont save the French from themselves

Politically France is more of an enigma than many will think. It could be said to be the cradle of democratic socialism in the Western world. With a ridiculously generous welfare state (unemployment benefit is paid at 70% of the salary of the previous job), spending over 28% of GDP on welfare, a relatively interventionist industrial policy and retention of state owned companies operating major services, it is seen by many on the left as a model. 

France of course has also long been at the vanguard of support for closer European integration. Its unalloyed support for the European Union would suggest that the people of France regard it as critical to their economic future. Yet the truth would appear to be a bit more subtle than that. Whilst the Common Agricultural Policy gives France 10 billion Euro a year in subsidies for its farmers (and indeed it was creation of this policy that was critical to France delaying the UK’s entry into the EEC – because France wanted Europe to pay for its own ruinous subsidy scheme), French voters clearly have mixed feelings about the EU. The main selling point of the EU to them has been a fortress Europe mentality. EU laws to set minimum employment standards, to regulate competition and to keep out imports and foreign competition are what they want. Compare that to the UK which has seen the European project as one about lowering borders between countries and liberalising markets.

Indeed it is this clash of ideologies that is at the heart of the European project battles. Guess which view took hold in Greece, Spain, Italy and Portugal. Late last year France briefly looked like it might fall victim to the sovereign debt crisis, but austerity measures were introduced that bear little resemblance to those elsewhere. It almost entirely involved raising taxes, and French voters hardly blinked. Indeed, the socialism ingrained in French popular thinking has been seen in the popularity of the socialist candidate for President, Francois Hollande, who has sought to bribe voters with more welfare, earlier retirement, more subsidised jobs all paid for by higher taxes (top rate of 75%!) and the tooth fairy of future sovereign debt default paid for by German taxpayers. The reality evasion has been delusional, but he has been ahead. Until now. 

Whenever anyone blames the US for a lack of political sophistication, they should pause for a second. For what else can explain the sudden rise of Nicolas Sarkozy in the opinion polls, as he switched tack so profoundly and cynically it would destroy a similar politician elsewhere. An objective view of Sarkozy is that he has been, by and large, a status quo President. He did undertake some modest reforms around pensions, but by and large has made little effort to reform the French socialist state. His largest profile has been in supporting the revolution in Libya, in banning the niqab and his partnership with Angela Merkel in dragging out the Eurozone crisis. However, he found new life in campaigning as if he wasn’t President, but a new candidate. 

His new policies include:

 - Withdrawing France from the Schengen agreement (which means France has no controlled land borders) if other members did not adequately control illegal immigration; 

- Saying there are “too many foreigners” in France, demanding immigration be cut from 180,000 a year to 100,000 (which of course France can’t control whilst it is in Schengen); 

- Demanding a “Buy European Act” requiring EU governments to buy EU goods and services, and if not agreed he’d establish a “buy French Act”; 

- Opposition to halal meals at schools or swimming pools having separate hours for men and women to meet demands of Muslim users; 

- Demanding all kosher and halal food be labeled so consumers can avoid it if they wish.

 In short, he is seeking to take votes from ultra-nationalist candidate Marine Le Pen, who believes in strong state ownership of strategic businesses, radical protectionism, withdrawal from the Euro, boosts for subsidies for French business and agriculture, a looser EU, withdrawal from the Schengen area, a moratorium on immigration, withdrawal from NATO and a closer relationship with Russia. The result, he is now ahead in the polls. Let’s be clear, he can’t implement most of what he said without effectively withdrawing France from key EU provisions on freedom of movement and open markets. So if he is re-elected, he wont actually do most of this. France wont leave the Schengen area and France wont be able to introduce a “buy European” law, because it will be opposed by Germany and the UK. However the support gained for a “fortress France” suggests that even French voters are not too warm to the EU. 

What is most striking though is how French voters are not as cynical as one would have hoped. Sarkozy could have held these positions for years and could have done something about it. He didn’t, and now he is remodeling himself to be the nationalist “with reason”. Presuming it will be him up against Francois Hollande, it is clear neither has any solutions to confront France with its decades of reality evasion. For France’s economy remains anaemic, its best and brightest leave because of taxation.

Its much vaunted manufacturing sector is, in fact, no bigger as a proportion of GDP than manufacturing in the UK (the difference is UK manufacturing largely involves rather smaller firms, with a few exceptions, whereas France relies on larger firms with high profiles). Meanwhile, public debt in France is creeping ever higher above 85% of GDP, and France has not had a budget surplus for over 30 years. For all of the Airbuses (which are propped up by the EU and have a significant part of their componently manufactured in other countries), TGVs, Renaults, nuclear power plants and armaments, there are precious few service industries that export and few IT startups. 

France may provide final assembly for nearly half of the world’s jetliners, make some trains and cars, weapons and satellites, but in all but one of those markets, it faces serious competition in export markets. Meanwhile, its own media is gagged by laws on privacy that make it difficult to take on politicians, despite the extraordinarily lavish lifestyle and corrupt practices that appear to be the norm at the top. France’s socialism does have a semblance of the totalitarian personal aggrandisement of Marxist-Leninist regimes. 

Ultimately, when France faces reality it will probably be overwhelmed by a belief that it is capitalism and free markets that have brought the country down. It will seek to demand the EU save it, somehow, by shaming the Germans into thinking they owe France because of the war. It will dabble with the idiocy of economic nationalism, and find it sliding further into stagnation. France wont abandon the EU, because no politician has the courage to take on the lobby of the largest group of corporate welfare parasites in the EU – French farmers. A group French taxpayers can’t afford to prop up on their own. The question French voters ought to be answering is this. Do they vote to hurry along this inevitable confrontation with the unsustainability of French socialism, by voting for Mr. Hollande? Or do they keep it decaying at a steady pace with Mr. Sarkozy? 

In either case France's future looks like Greece does now.  I suspect by then that Germans will be rather fed up being made to feel guilty for a war that none of them remember, and which they have long expressed penance over.   They also wont think their own taxes should go to pay for a country that has stubbornly resisted restructuring, true austerity and liberalisation for far too long.

Greece for dummies. Austerity = living within your means

So, once again, the taxpayers of prudent Eurozone countries are going to mortgage their future income and savings because the taxpayers of an imprudent lying Eurozone country are unwilling to pay for the bureaucracy and socialised services and welfare state they voted for.

The latest 130 billion Euro is 406 Euro for every resident of all of the other Eurozone countries, unless you want to remove the others in trouble (Ireland, Portugal, Spain and Italy) in which case it becomes 660 Euro. 

I've written before about the chain of events that led up to it, but here is a summary:

1. Greece joined the European Economic Community in 1981.  It proceeded to receive considerable sums of money from it through structural funds from European taxpayers to pay for new infrastructure, as well as gaining subsidies from the Common Agricultural Policy.

2. The Greek government ran continuous budget deficits since then, although for much of the time it had the drachma and so inflated/devalued its way out of trouble.  Greek politicians would buy off groups of voters by increasing the size of state employment, increasing pensions, funding specific projects and essentially running a patronage state.  By the mid 90's public debt as a proportion of GDP was greater than 90%.

3. In 2001 it finally dropped the drachma in favour of the Euro, having gained Euro membership after lying about its fiscal position.  It did this by hiding the true size of expenditure on defence and healthcare, this was not discovered until 2010.  For nine years Greek governments had paid Goldman Sachs to cover up its systematic fraud towards financial institutions.

4. Since 2001, Greece was able to borrow at very low interest rates reflecting the low inflation and relatively buoyancy of the wealthier Eurozone countries.  Year by year public debt would rise as Greek politicians continued their behaviour of bribing voters with borrowed money.  This growing state of subsidies saw little reform or restructuring as Greeks could import more freely with the higher valued Euro, but found it more difficult to export as productivity hardly improved.

5. The 2008 global financial crisis, catalysed by sub-prime mortgage lending mostly in the US, but also parts of Europ.  Greece was hit by a downturn in tourism and shipping.   This exacerbated shortfalls in tax revenue, which were in part due to systematic tax evasion over many years.   Similarly, Greece was experiencing reductions in funding from the European Commission as cohesion funds were transferred to the poorer new Member States from the former Warsaw Pact.

6. In 2010 the fraud of the Greek government was revealed, with budget deficits 2.5 times what was being reported.  Increasingly, it became more and more difficult for the Greek government to rollover its debt and to borrow to cover its persistent overspending.

7.  In February 2010, the Greek government gained a special loan of 80 billion Euro from the International Monetary Fund and European Central Bank conditional on an austerity package that froze state sector salaries, froze state sector employment growth and cut expenses.

8. In March 2010, the Greek government agreed to cut public sector bonuses, a 7% cut in public sector salaries, increased VAT and fuel tax and taxes on new cars.  The intention was to reduce the budget deficit by 4.8 billion Euro.  This was the second attempt to

9.  In April 2010 it was clear this wasn't enough, so the Greek government asked the IMF and EU to bail it out as was unable to rollover existing debts due in late May 2010.   In May it was decided to implement further austerity measures including further cuts to public sector bonuses and public sector pensions, increases in the retirement age from 61 to 65 and a wide range of tax increases, as well as consolidation of local authorities to reduce administration costs.  110 Billion Euro in loans were agreed as part of this deal with the IMF and other Eurozone countries.

10. In 2011, it was clear the deficit cutting targets were not going to met, so further austerity measures were introduced.  Higher income taxes and VAT were introduced, along with a promise to privatise 50 billion Euros worth of state assets.  Yet in August it was revealed that spending was continuing to increase overall, while tax revenue continued to decline.  In October, the EU promised Greece another 100 billion Euro loan conditional on it meeting austerity targets.  The Greek Prime Minister sought a referendum on the deal, causing panic among lenders fearing default.  He resigned and was replaced with a technocrat (former Governor of the Bank of Greece Lucas Papademos) to negotiate a package before elections in April 2012.

11. The latest deal has been struck, including a cut in state sector employment of 150,000 by 2015, cuts in state pensions, cuts in defence and health spending, liberalising various sectors of the economy by abolishing statutory monopolies, and 15 billion Euro of privatisation by 2015 (the 50 billion had not been achieved.

In the deal just agreed, lenders are expected to write off 53.5% of the debt they loaned.  The Occupy activists might pause for thought that this represents a massive transfer from the financial institutions they hate to Greek public servants, recipients of public services and welfare recipients.  In one swoop, market signals (i.e. a debtor unable to pay) effectively saw market players take the risk and give up on recovering their money from a feckless borrower.   

However, it wont be enough.  I've said before that Greece ought to default.  Why?  Because it will finally confront banks and other lenders with the reality of lending to governments that they cannot rely on the taxpayers of other countries to rescue them.  They quite rightly should stop seeing sovereign debt as 100% safe.   It is only as safe as governments are able to force money out of the hands of their citizens and/or devalue the currency by printing it.  In Greece, the government can do neither.  The problem is that default would likely mean Greece exiting the Eurozone.

So if Greece was actually allowed to default, several things would occur.

1.  The Greek government would be unable to borrow, forcing it to cull its bloated state back out of sheer necessity.  It would have to amend its absurd constitution that prohibit making state workers redundant.  In other words, reality would be confronted full on.

2.  The Eurozone would face choices.  One is to keep Greece in, and face a significant depreciation of the Euro and increase in interest rates for all of its members (this is what the current pillaging of taxpayers in Germany is designed to avoid), another is to eject Greece meaning it may create its own near worthless fiat currency ("New Drachma") and a third would be for the Eurozone to split into two currencies.  One for the poorer economies another for the richer, effectively doing away with the purpose of the Eurozone in the first place.

3.  Greek people would vote in governments that would force them to make stark choices, such as remaining within the Eurozone or leaving.

Yet default is probably incompatible with remaining in the Euro, and I don't believe leaving the Euro will make Greece better off.  The choice is about more austerity or default.   There are no easy answers.

You see the path taken by Greek government has been, as I said before, a massive exercise in reality evasion.

Greek politicians who were in government since the 1980s and especially since 2001, are fraudsters on a grand scale.  By rights, they should be have been lynched by Greek citizens for they have destroyed the country's economy.   They took the country into the Eurozone through lies and they continued to lie for nearly a decade about the true nature of the country's finances.   Accomplices with them are Greek state officials and Goldman Sachs.  By rights there should be several of them getting prosecuted for fraud and face having their assets stripped to the bone, and to go to prison.

Even today, Greek politicians and state servants are resisting and proving next to useless to implement austerity measures. Almost no privatisations have been carried out and the unemployment in Greece is entirely from the private sector.  State sector employment has not shrunk, it simply has not grown.   They are inept to the point where it is hardly surprising so many Greeks don't bother paying taxes.   They would see it as being wasted.

However, politicians are not the only ones to blame.  The Eurozone countries, European Central Bank and European Commission were negligent in enforcing the Euro deficit rules and completely neglected to punish France or Germany for breaching them.  They all at least deserve to face some culpability in not being scrupulous about the accounts.  Eurostat did not act in response to queries from Goldman Sachs about its derivative swaps by looking after the interests of an EU Member State.  If the European Commission is expected to be a guardian of the Eurozone today, why wasn't it so when it could have flagged an issue some years ago.

Greek voters are also complicit in this reality evasion.  Many of them, particular state servants, have happily gone along with ever increasing salaries, benefits, pensions and "bonuses" extracted from future taxpayers.  Greece's public debt and deficits were no secret, just the size of the deficits were.   Greek voters would vote for the corrupt politicians who would sustain a system of patronage socialism that has bankrupted the country.  Yet whilst some took from the state, most refused to pay it.  Many Greek citizens opted out of paying taxes because they didn't think it was worth it and it was easy to evade.  How long they thought this would last is unknown, but it is fair to say few Greek voters really thought twice about stopping the gravy train.

Finally, lenders who expected the Greek government to pay up and indeed other Eurozone countries' taxpayers to do so whilst they treated Greek sovereign debt as "safe".  Lending money to governments has long been seen as "safe", yet it is only so as long as two things happen.  Firstly, the government can forcibly extract money from taxpayers to pay you back with interest.  Secondly, the government doesn't devalue your loan by printing more money.  Greece has been unable to do the first and can't do the second.  As I said above, those lenders are rightfully taking a slightly over 50% cut in their debts.  It should be more.

Margaret Thatcher said "the problem with socialism is that eventually you run out of other people's money".

That's what has happened.  The Greek government has always been spending more than it collected from its own people, so has been borrowing other people's money to cover the difference.  Now it has all come to an end.

Greece has tried decades of socialism, with a highly regulated and protected economy, financed by lenders and more recently taxpayers' from other countries, and it has failed.  

The latest bailout will fail too, because it is only starting to confront the regulatory environment that strangles the Greek economy.   The austerity measures are half about increasing taxes, which is strangling the economy as well.  Greek governments have done little to really cut spending, but done much to increase taxes.   Socialism is still the way in Greece and the EU is still embracing such an approach, negligent to the costs that higher taxes are imposing on the productive - perhaps because bureaucrats don't accept that it is the private sector that grows economies.

I do not share the view that Greece should opt out of the Euro, because all that would do is destroy the savings and contracts of the smallest businesses and least well off in the country.  Everyone else would transfer their bank accounts to foreign banks and transfer contracts to other jurisdictions.  Shifting from one flawed fiat currency to another is an easy way out that will only benefit exporters, but will decimate the average person.  

What needs to happen is clear, and it needs to be presented to Greek voters in the upcoming election.   There is a choice:

Reject socialism:  Austerity should be about cutting spending.  No more tax increases, indeed Greece needs serious tax reform to simplify taxes and lower them to levels where people will be more willing to pay.  Taxes need to be competitive with Bulgaria, its only bordering EU Member State.   Privatisation should be carried out of all enterprises that can easily face competition, others should be privatised by issuing shares.  The economy needs restructuring, with statutory monopolies and complicated licensing arrangements abolished.  It should be made far easier to set up businesses, for contracts to be agreed and enforced, for property to be transferred.  In short, Greece needs its entire business, employment, taxation and property regulatory environment gutted and reformed, as what happened in the former Warsaw Pact countries.  This requires acceptance that the welfare state as it stands is unaffordable, that health and education will be at least in part user pays and that retirement incomes are to be self funded.  It also means rooting out corruption tooth and nail, which will be much easier without subsidies and favours to be granted through officials and politicians.  There is less to be corrupt about if there is a free market and a small government that focuses on its core functions.

The alternative is bleaker.

Embrace devaluation:  Greece would default and seek to leave the Euro.  The Greek banking system would collapse as Greeks would use Euros and other currencies in foreign bank accounts for savings and transactions, and the drachma becomes the currency primarily for state workers.  The effect of this is a massive pay cut in the public sector and for contractors to the government.  The government would face embracing an inflationary printing of money to pay for its persistent deficit, resulting in further devaluation and the fleeing of skilled people and entrepreneurs, as property prices skyrocket in response to inflation and devaluation.  Exporters find themselves competitive purely on price, but it becomes increasingly difficult to obtain foreign exchange to import energy and capital goods.  Ultimately, Greece faces up to finding socialism unaffordable, but after several years of pain.

I fear the latter will happen.  Already Greek banks have seen a 25% reduction in deposits in the past year as businesses and savers forecast this scenario.

What else could happen is of course far worse.  Greece does have traditions of communist and fascist parties keen to extract themselves from the EU and the Euro and become isolated.  

Let's hope Greek voters are not tempted by that, and may actually look to their ancient past as a nation of people who embraced reason, science and reality.   They have a lot of pride.  That pride has been hurt by some in the Eurozone accusing Greeks of being lazy.  That's unfair.  Some are, some are not, as in any nation.   Greeks in response have unfortunately used Nazi slogans and symbols to depict the German government.  That is grossly vile, insensitive and unfair, especially since German taxpayers have been bankrolling the past two years.  Yet running a country from Brussels will result in such analogies being applied.  Eurozone countries cannot completely neglect democratic mandates.

The greatest pride for Greece will be to live within its means and to rebuild an economy devastated by pessimism, higher taxes and socialist economic policies.  The only way that can be done is by agreeing to a future without such state dependency for money, services or regulatory privilege.

It need only look north to the most recent EU Member States, such as Romania, which in 1989 opened up their devastated, ruined economies, people, societies, industries and environment to an outside world willing to help.   Romania then was far far worse off than Greece today, had to scrap virtually its whole industrial sector, most of its entire public sector, its law and even its culture and start again, the hard way.   Half of Europe needed rescuing, rebuilding and re-educating in how to function in the 1990s, and most have succeeded, all those that did implemented free market reforms.

The solution is capitalism.  It isn't devoid in Greek people as can be seen in the 7 million of so Greeks who live, work, own businesses and succeed in other countries.   Now if only that spirit, culture and attitude could be applied to their home country by their countryfolk, Greece would once again be a country they can all be proud of.

What's going on in the EU? Part One - What's good

Finally, the UK government's rejection of a pan-EU treaty to create effectively an EU megastate, has started debate, albeit with many European politicians pointing fingers at British PM David Cameron for not playing ball.

Quite right, it is about time.

The tensions and politics around the EU are complex, so do try to resist the inevitable efforts of journalists across the political spectrum to over-generalise about what is right and wrong about the EU.  It isn't all bad and certainly isn't all good.  The Euro is not the key source of the problems facing the southern European states, but the EU is also not the source of peace in Europe since World War 2.  The EU does have several very good features that have promoted freedom and prosperity in Europe since the 1950s, but it also has carried some that have done the opposite.

What the terrible twosome of Angela Merkel and Nicholas Sarkozy are trying to do is paper over the tensions created by a union and project that has positively protected those governments which have embarked on decades of deficit spending.  It is seeking to combine the political goals of both Germany and France in a new EU - one that does not fundamentally accommodate the economic policies of many EU Member States and which replaces the flawed, limited but still real democratic accountability of Member States with an EU/EC/Council of Ministers led accountability.

In the next few articles I hope to present a step by step explanation of the EU - the good, the bad and the ugly, and present an alternative for the UK, and any other EU Member State that doesn't want to be part of a pact of central control, with socialism running right through it.

To outsiders the EU can look quite marvellous.  After all, if you produce goods in one part of the EU you can sell it anywhere else, with no customs barriers, tariffs or import restrictions.  Well, except for alcohol, tobacco, audio-visual services, literature subject to censorship, oh and quite a few services.  Free trade within Europe has promoted prosperity since the internal barriers to trade started tumbling down in the 1960s, and most recently the massive expansion from 15 to 27 Member by incorporating all of the former Eastern Bloc states, plus Slovenia and three former occupied Soviet Republics, has done wonders to improve competitiveness, create new markets and spur growth.   No Eurosceptics I know of want that to change, except the far left in the union movement and the British National Party.

Free movement of people has produced similar benefits, albeit with greater controversy.  Citizens of any one EU Member State can live and work in any other, creating a massive labour market and massive education market as people live, work, learn wherever they choose.  The controversy has been that this has allowed many from lower income Member States to work in higher income ones undercutting local labour.  For overpriced builders and plumbers in the UK, the arrival of hard working enthusiastic Poles has not been good for them, but it has been good for the Poles and their customers.   

Thirdly, with these measures have come the means for the European Commission to force countries to abide by rules to ensure open borders and competition between countries remains so.  Domestic markets in services such as telecommunications, bus services, banking, electricity, insurance, supermarkets, postal services, airlines and the like have been required to be opened up to create a single European market.   Low cost airlines would not have succeeded in Europe had the likes of Ryanair and Air Berlin not been able to open bases in other countries and fly from wherever to wherever in the EU in competition with national carriers.  Attempts to subsidise, regulate or otherwise interfere with some sectors have faced European Court action.  

If it all stopped there, then I'd be very happy with the EU.  Breaking down barriers and markets, enforcing deregulation and even stopping national governments from offering subsidies to protect domestic businesses (but not if the subsidies are available to any EU businesses) is a good thing.  To be fair, efforts in some of the newer Member States to tackle corruption, organised crime and the like in those countries at government levels have also been positive (although Bulgaria is hardly a model of government without links to organised crime). 

The thing is that you don't have to be in the EU to get most of that. Three European countries are not in the EU, but have free trade and free movement of people with it.  Iceland, Norway and Switzerland all have almost the same freedoms with the EU and each other, as Member States of the EU.  Their own domestic reasons for rejecting EU Membership are unimportant (protect fisheries from subsidised EU competition, protect oil incomes from funding EU transfers to poor countries, protect national sovereignty and independence), but notable for being inconvenient to EUphiles.  The European Free Trade Agreement (EFTA) which paralleled the EU, has provided a treaty bound mechanism to enjoy freedoms within Europe without the bureaucracy or the commitment to fund he EU.  Remember that, because it is important.  There is an alternative to the EU to get most of the benefits of the EU.

The downside of all of this comes with certain obligations which I will write about later.  These are:

- Welfare tourism.  Don't like the housing, health care, education or welfare benefits in your own country within the EU?  Move to another EU Member State and enjoy all it has to offer, without having had to pay for it.

- Fortress Europe.  Try getting goods or services into the EU from outside the EU/EFTA area.  Tariffs, import controls and other mechanisms means the EU has raised walls around itself as much as it has destroyed them internally.

- Common Agricultural and Fisheries Policies.  Call it, how to sustain the grossly inefficient farming practices of France and Spain (and fishing practices of Spain) using British, Dutch and German taxes, whilst impoverishing farmers from poorer countries in Latin America, Africa, Asia and Australia/NZ.   Nothing quite like having European taxpayers subsidising the properties of the British Royal Family though, especially when it is so unaffordable that farmers in the newer Member States are only offered one-third of the equivalent subsidies of those in the West.  There ARE walls within Europe, including the one that means a Greek farmer doing the same as a Bulgarian farmer gets three times the subsidies of the Bulgarian one.

- EU common regulatory framework.  The number of laws Member States must pass to meet EU wide obligations on everything from labour laws to protecting "human rights" (which are not all bad to be fair).  Micro-managing domestic legislation to iron everyone flat.

- Joining the EURO.  Other than Denmark and the UK, other Member States joined or are committed to joining the EURO.  That's a whole other story, for although it is much maligned, it is more a problem for being a transnational fiat currency than being a single currency.   Think of why Greece felt it could borrow endlessly from a high value low interest rate currency that was largely supported by German economic productivity.

- EU vanity megaprojects.  The EU has pursued more than a few large scale multi-billion Euro vanity projects to put Europe on a level with the US and other very large economies.  These have all proven to be wealth destroying political projects driven mostly by the Franco/Latin bloc of countries seeking to outdo the US.

- EU wealth transfers.  The massive set of subsidies, funds and loans from richer EU Member States to poorer ones, to lift them up to wider EU income levels without actually making them be more productive and to buy subservience from relatively low tax, open, ex. communist bloc countries to accept the socialism promoted by France and Germany. 

- EU arrogance.  Time and time again the European Commission and those pushing the EU project have implicitly recognised they could never get consent for the project from voters directly, so have resisted referenda or even making the European Commission or Council accountable to the European Parliament (which cannot actually initiate new laws itself).  If voters say no, the EU expects them to try again and give the right answer.  The entire project reeks of bureaucratic insistence of its own superiority over its subjects.  Those who reject what it wants are wrong and must be made to submit.   Worst, those who reject the EU are painted as wanting out of everything, as being nationalistic, narrow minded, parochial, even risking war and conflict.

In a later article I will also write about why things are the way they are, and what national interests and drivers motivate the biggest players, but also why it should be possible for the far more numerous others to get things to change, if they weren't all being bribed implicitly by the system that will ultimately harm their interests. 

Calling the Euro project for what it is

On BBC's Newsnight, the Daily Telegraph's Peter Oborne confronts a European Commission bureaucrat (Amadeu Altafaj-Tardio) for his defence of the Euro being a great success, because it is a "political project" not an "economic project". Calling him an idiot, and then he proves it.

He said the UK had a budget deficit the same size as Greece, yet ignored that Greece's public debt was already two-thirds greater (per capita) than the UK, and the Pound had devaluated during the recession allowing exporters to become more competitive and reducing imports.  Greece had no such devaluation.  The comparison is meaningless.  He claims the Euro has "protected" economies, even though it has clearly damaged the prospects for the poorer southern economies.

Then former editor of the FT, Sir Richard Lambert is confronted for having supported Britain joining the Euro some years ago, claiming "the facts changed" when it was France and Germany breaking the rules in the first place (as if Britain would have been able to respond to that).   Peter Oborne then gets his back up because he is confronted with a book about the mistake it would have been to join the Euro by claiming that the title "Guilty Men" means Peter Oborne equates Angela Merkel with the Nazis - an emotive non-sequiter.   Then Lambert proves Oborne right by saying Germany should support Greece withdrawing from the Euro.

Oborne calls the bureaucrat idiot enough times that he storms out of the studio in Brussels.  

It's rather simple, the bureaucrats in Brussels, and the primarily French and German politicians pursuing their grand political project, have caused immense damage and they are unwilling to do what is needed to fix it.  Their only answer is more tax, fiscal union and to print more good money after bad to prop up a failed single currency project.

Watch and if you're not from the UK, note how television journalism can be professional, can have people with wildly differing views and be compelling.

Eurodelusion

Greece is going to default.  It is absolutely inconceivable that it is able to cut spending and raise taxes sufficiently to give confidence to lenders that it can service more debt.

The likelihood that German or French governments will make their taxpayers prop up the Greek profligacy is low, with Angela Merkel simply trying to bluff her way into ensuring there should be confidence in Greece.   Finally, the Free Democrats in Germany have started talking about alternatives to bailouts - whilst the CDU/CSU remains wedded to bailouts and the parties of the left can't think outside the box of European solidarity.

Greece will default, it may leave the Eurozone (as other Euro states fear contagion of the Greek effect), and will face a painful few years as its public sector is shrunk, its economy shrinks, lots will be out of work, then it will export, tourists will come and it will start to grow a real economy.

Allister Heath at City AM is blunter:

EUROPE is in a phoney war. The establishment is still in a denial about the inevitability of a Greek default; the markets don’t believe the politicians. The result is ever higher yields on Club Med debt, growing fears, extreme volatility in the pricing of banks’ securities, tensions in the money markets and a constant and destructive war of words. This chaos, and the dramatically lower share prices of many financial stocks demonstrates the uselessness and idiocy of the short-selling ban in parts of the Eurozone. It achieved absolutely nothing at all. The Eurozone needs to learn that grand gestures and propaganda don’t work. It should listen instead to the former president of the Argentinean central bank, Mario Blejer, who took over in the then devastated country in 2001 after its $95bn default. He thinks Greece, if it ever wants to salvage its economy, “should default and default big. You can’t jump over a chasm in two steps.” Argentina’s GDP collapsed by 10.9 per cent in 2002 before bouncing dramatically back.

A Greek default will be cataclysmic – but attempting to delay the inevitable threatens an even greater catastrophe.