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.
