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.

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.

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.

And in real news today

The Greek government continues to try to borrow, yesterday its two year government bond rates were priced an at annual interest rate of just over 39%.

Great investment? No. It's the swansong before the funeral march.  Anyone lending the Greek government demanding such rates sees it as having a high risk of default.  A default that will reverberate loudest in Dublin, Lisbon, Madrid and Rome, but will buffet Brussels, Paris, Amsterdam, Vienna, Helsinki, Luxembourg, Nicosia, Valetta, Bratislava, Tallinn, Ljubljana and of course, Berlin directly.  However, the echos will go throughout Europe and be heard globally, for it will be the beginning of the end of the Euro as we know it. 

If journalism wasn't full of solipsistic onanists obsessed with News International, then there would be more than a smattering of well written articles hidden in papers about all of this. 

EU politicians are caught between two unpleasant facts:

1.  Politicians in the "south" of the EU have spent the past generation largely bribing voters with other people's money lent to them at preferential rates.  The other people have started giving up lending it, and the politicians haven't the courage or moral fibre to admit that the state largesse of recent years must end or that taxpayers will have to pay a lot more to get it.  The people in those countries are unwilling to accept either, and blame the lenders for the largesse, not the people they elected who borrowed it on their behalf.

2. Politicians in the "north" of the EU are concerned that if governments in the "south" default, it will be their lenders that lose out.  The banks, insurance companies, pension funds, private investors and businesses who saw lending to profligate socialist politicians in the south as being a "secure investment", risk losing billions.   However, voters and taxpayers in the "north" don't care.  They haven't elected politicians who have been quite so profligate in spending money that they had to borrow, and haven't had lifestyles and living standards substantively propped up by such blatant socialism as retirement ages in the 50.  They don't want to bail out the "south" nor do they care that investors in their countries will swallow the cost of it, as long as it doesn't affect their savings (it shouldn't) or their pensions (it might).

Politicians of the "south" have nothing left to offer, they are almost universally a disgrace, and their philosophy and attitude (and that of their predecessors) has produced a false golden age for their countries.

Politicians of the "north" want to bailout the governments of the south, to avoid bailing out the banks and investors who lent to them, but know that voters in their countries are not amused.   What they want is to control the spending and tax policies of the countries of the "south" in exchange for bailing them out - for otherwise, how can they be brought under control to behave better?

So Germany and France will seek to bring all Eurozone countries under central fiscal policy control, in other words, it wont be up to the Parliaments in Athens, Lisbon, Madrid, Rome, etc. as to levels of tax, or levels of spending, it will be up to either the one in Brussels/Strasbourg, or something new.   

Call it the Commonwealth of Eurozone States, or the United States of Europe, or the European Soviet Socialist Republics, or the Union of Eurozone States, but it will be a wholesale surrender of state sovereignty to a super-state.

Will the people of the countries of the "south" tolerate this?  They will be told they have no choice, it is either that or they are expelled from the Eurozone (which does not mean they cannot use Euros, but does mean they would have no role in formulating monetary policy). Ireland, in particular, will baulk at surrendering its highly competitive low company tax rate, which politicians in Paris and Vienna have been keen to attack, among others.

The bigger issue is not only will the countries of the "south" baulk at this, but also will others not in crisis.  Estonia, Slovakia and Slovenia may all wonder why they left the yoke of centrally planned economies to have joined a new ones.  Estonians and Slovaks will not want to have swapped control from Moscow (and for Slovenes, from Belgrade) for control from Brussels.  I suspect the Dutch too will be fed up.  France and Germany, and their virtual satellites Belgium and Austria, will happily go along with it as they will have the power in any central fiscal union.

Ultimately, it can only go one of three ways:

- A Eurozone bailout that creates a new fiscal union among Eurozone members, extracating sovereignty from national capitals to the EU and having to implement tax and spending policies in line with France and Germany;

- A Eurozone default, resulting in countries exiting the Eurozone, with dire consequences for their national banking systems, their creditors and needing to implement austerity policies on a grand scale because of the complete inability to borrow;

- Agreement to a massive austerity programme by the Greek government that cuts the budget deficit suddenly and dramatically, reducing the pressure on creditors.

All in all, the countries of the "south" face severe spending cuts and probable tax increases no matter how it goes.  

For countries outside the Eurozone, the biggest concern is managing the fallout from whatever happens, for it is likely to hurt.  As Allister Heath in City AM today says:

Osborne and his advisers ought to be working day and night on contingency plans in case the Eurozone collapses or the US defaults, not worrying about ex-tabloid journalists.

The British government should be ensuring it has no part in any bailout of the Eurozone, that it may be willing to re-accommodate Ireland seeking to abandon the Euro, in favour of the currency of its largest trading partner (if it so chooses) and to lead an effort to restructure and reform the European Union into a looser customs union, with a smaller central role, without grand vanity projects, without grandiose corporate welfare systems, without interference in national economic or social policies beyond basic rules on non-discrimination and freedom of trade and movement of citizens.  If some EU Member States want more control, let them have it, keep Britain out of it.  If the EU project is about to splinter, then let the UK lead efforts to recraft it into something worth salvaging, a basic treaty that keeps borders down and markets open, but does not demand that countries embark on grand unifying projects of statism.

In the meantime, can people simply remember that the Liberal Democrats, Tony Blair, the BBC and the Independent were all wrong on all of this?  (and yes, Gordon Brown was right, along with William Hague, Margaret Thatcher, Nigel Farage, the Daily Telegraph and the Daily Mail were right).

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.

Heath says:

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.

Hedge fund manager puts socialists on the spot

Last night on BBC's Newsnight, a hedge fund manager, Hugh Hendry participated in a discussion about how he is speculating on Greece defaulting on its debt. He was joined by Joseph Stiglitz, a US economist, and Spanish Ambassador to the UK, Carles Casajuana.

Many on the left blame the likes of him who in speculating on Greece's public finances, when what he actually is doing is exposing the real risk. He is doing it with his own money and money of those who have chosen to trust him to manage.

That is the fundamental difference.

He has bet millions on the Euro, betting on it dropping if Greece defaults. As he says, if he is wrong, he and his investors lose. He expects nobody to bail him out. If he succeeds, it will be because he is right.

Why is he in a position to do this? Because the Greek governments, democratically elected for years, have been both lying about the public finances and been lax about getting those who elect them to pay for what they want.

However, the discussion on Newsnight last night was simply beautiful.

Stiglitz claimed there should be more borrowing and spending, and it is "absurd" to bet on a default. Hendry said simply:

"Look what happens - you get into difficulty and these guys over here [pointing at Stiglitz and Spanish Ambassador to the UK, Carles Casajuana] say, "hey we don't like it."

"Suddenly the truth hurts! Suddenly we want to abandon the truth. Suddenly speculation becomes a pejorative term!"

In other words, the politicians and some economists want reality evaded, the truth of the Greek government's inability to see that constant borrowing is unsustainable, is something they don't want to know - because what it really means is that spending must be cut, drastically.

Then he got threatened by the weasel who is the Spanish Ambassador who said "we're coming to get you".

He replied: "I see you champagne socialists when I travel business class, and the reason you're up in arms now is because you've got yourself into a crisis and cannot get out of it. So you're looking for scapegoats".

Indeed. The unaccountable reality evaders, statists both on the left and right, wont confront the truth that they are trying to defend mortgaging future taxpayers with their profligacy of today.

If the European Union decides to pillage taxpayers to save its members from default, then it will deserve the backlash that will be inevitable. Blaming entrepreneurs for betting with their own money for the failings of government is a lame attempt to cover up massive incompetence and failure by governments to spend within their means. Indeed, it would demonstrate once and for all the anti-business, anti-capitalist and pro-statist agenda of the European Union, except this time taxpayers are unlikely to stand for the machinations of those who like to spend their money for them.

Let Greece default, let Portugal, Spain and others follow.

Meanwhile, watch Hendry's excellent performance here and see the difference between someone who has made a success of his life and taken risks, compared to those who have spent their lives living off the back of others:



UPDATE: Here is Hendry again, for UK viewers only (through BBC iPlayer) pulling apart Poul Rasmussen, leader of the Party of European Socialists. The start is 22 minutes into the programme...

http://www.bbc.co.uk/iplayer/episode/b00rdynp/Newsnight_09_03_2010/

Greece's socialism catching up

The sovereign debt crisis with Greece has a long history. It isn't just about the Greeks lying about their budget deficit.

The symptoms of Greece's current fiscal crisis tell a story of such inept economic management and performance that few should be surprised. Only those with their heads up the short term goals of financial markets (and so untrained and uninterested in the wider context), the proponents of the Euro, and what appears to be most of the Greek political class (and bureaucracy) didn't notice the progressive bankruptcy of what was the cradle of European civilisation.

The roots of the political culture behind this go back to World War 2 and the Greek Civil War. After the Nazis were pushed out of Greece in 1944, the Greek government in exile faced the communist "Democratic Army of Greece" supported by the Soviet Union through communist Bulgaria, Albania and Yugoslavia.

The subsequent five years of fighting (which played no small part in encouraging Greek emigration to the likes of Australia, New Zealand and the USA) divided Greek society enormously. The communists lost in part because of the split between Tito and Stalin that saw the Greek communists side with Stalin, which spelt an end to Yugoslavia's ample support.

However the cost of the civil war was immense in slowing reconstruction after the previous Nazi occupation. Between the civil war and EEC membership in 1981, Greece was politically divided. The military coup in 1967 was due to some fears of a far-left wing takeover by some forces, that junta was one reason Turkey gave for invading and occupying northern Cyprus in 1975, even though the junta was overthrown some months before.

Greece's governments have been dependent on aid since the end of the civil war. The influence of leftwing politics has been strong, with the communist party coming 4th in 1974 and 1977 and 3rd in 1981 with between 9 and 11% of the vote during this time, with more moderate socialists winning power in 1981. Since then the socialists have won a majority of Greek elections, and the communists have come third in all but one of the elections in that time. In other words, Greece is used to being governed with the principles of big government and socialism. The current Prime Minister, George Papandreaou might consider how his father, Andreas, when he was Prime Minister, ran enormous budget deficits in the 1980s when he was PM. Greece has been living beyond its means for a very long time.

When it joined the then European Economic Community in 1981, it was one of the poorest new members. Its membership ushered in a period of 20 years when it, along with Spain and Portugal, got the bulk of the subsidies for infrastructure and development that the EU now lavishes upon the likes of Romania and Bulgaria. Greece was one of the biggest recipients of Western European aid. This helped to bolster Greece's addiction to debt and budget deficits.

With membership of the Euro this gave Greece a high value currency with low European Central Bank interests rates that it could borrow with. It took advantage of the ability to issue sovereign debt in Euros to continue spending up large.

Now the chickens have come home so to speak.

The current government is starting to face fiscal reality by announcing spending cuts, and of course, on cue in a country beset with socialist attitudes, the public sector is going on strike. It doesn't think it is to blame, yet it might look at how its wages and operations have been getting funded for decades - it's been a lot of borrowed money.

However, Greece's problems are not just about spending too much money. It is about the deliberate lying about its accounts, and the lack of transparency of many areas of public spending. For example, Greece has long claimed its expenditure on defence to be a "state secret". The truth is that to placate the army, and evade a risk of a coup, Greek government have taken a blank cheque approach to defence. The current level of spending might have been justified in the Cold War, when Greece was very much on the front line with Bulgaria on its doorstep (Yugoslavia and Albania were not Soviet aligned from 1948 and 1960 respectively).

The airforce has 33,000 personnel and 477 aircraft, the navy 30,000 personnel and 84 warships, whilst the army has 100,000 personnel. This is similar in number to Israel, although Greece has a smaller population. The Netherlands, another NATO member, with higher population, has only 68,000 active members of the military. 5% of GDP is spent on defence it is estimated.

Furthermore, according to Spiegel Greece rigged its accounts to hide its budget deficit, with help from Goldman Sachs, by excluding some military spending and hospital spending. Similarly, Goldman Sachs participated in off balance sheet lending, by using fictional exchange rates to engage in sovereign debt swaps. These are the actions you'd expect of a tinpot sub-Saharan dictatorship, not an EU member state in the Eurozone. Right?

This sort of behaviour should be punished, the politicians who have been a party to it held up for all to see, but also the snivelling useless public sector managers who have ignored basic practices like double-entry accounting, and have participated in enormous fraud, should be shown up for what they are - the shysters that have borrowed and wasted money on behalf of Greek taxpayers.

However, some of the EU wont want that, because they want to protect the consequences of their own failures.

When the EEC accepted Greece, Spain and Portugal it was about looking forward to countries that had only recently turned their backs on military dictatorship, with the European project to pour mountains of European taxpayers' cash into lifting their incomes to levels commensurate with others in Western Europe. The same happened with the former Warsaw Pact countries, most recently with the inclusion of Bulgaria and Romania, both countries still besotted with corruption, organised crime and distinct paucities of transparency in their government accounts. European taxpayers are plundered to subsidise enormous EU funded infrastructure projects and of course the massively inefficient and environmentally disastrous Common Agricultural Policy.

The single currency across a range of economies with wildly varying levels of wealth and development has been a disaster for the poorer economies, who face a highly valued Euro which makes their relatively lower value commodity exports (and tourism sectors) relatively expensive, whilst now also making their mountains of debt unaffordable. Greece's sovereign debt is barely above junk status. Bear in mind that France and Germany have both run budget deficits beyond the Euro rules, but then they set the rules don't they?

So there are strong expectations of some credit being offered to Greece to avoid a default, it will no doubt be at the expectations of massive reductions in the budget deficit (Greece is claiming to cut the deficit from 12.7% in 2009 to 2.8% in 2012, but none of its plans show any sign of meeting this), which will mean accepting strikes, possibly riots and enormous political cost - the cost Greece should and would have faced in the 1980s and 1990s had it not been propped up by EU aid.

Of course what SHOULD happen is that Greece should default - its foolish creditors, who took a risk on a series of lies should suffer for their foolish decision to take up Greek debt. The Greek government, unable to borrow, will then face confronting the socialism and incompetence that has bankrupted itself. The Euro would rightfully suffer, as it should bear the devaluation of one of its participants failing to meet its obligations.

Allister Heath in City AM puts it plainly:

"Regardless of which plan is agreed upon, a rescue would fill the City with joy in the short-term – but would cause huge damage over time. There should be no bailout: it is high time that countries and investors learn to live with their mistakes."

Unfortunately, when you have the ability to plunder the pockets of future generations through taxation, there isn't much incentive to do that.

That, you see, is when the phrase "taxation is theft" so clearly comes into its own.

Unless the role of the state is constrained so that it cannot ever be used to bail out foolish investments or the governments of liberal democracies that vote themselves bankrupt, the easy option - which politicians never truly even start to face the cost of (what is being voted out when you put people in debt for years?) - will be used and the only loser is the taxpayer.