Wednesday, May 16, 2012

Greece's tragedy should be lesson to all

Greece's radical leftwing party, Syriza, has one policy I agree with - the prosecution of the politicians and bureaucrats who are the architects of Greece's current tragedy.

That is all though - the policies to "reject austerity" are so demonstrably absurd, that they will demonstrate the simple failure to learn the lessons of the past couple of decades of Greek reality evasion.

As much as Syriza, the Communist Party (truly communist, in the Marxist-Leninist - Soviet model was the way to go sense) and the fascists want to paint it, Greece is not in an economic crisis because of foreign bankers or even the European Commission.

It is in a crisis because perpetual budget deficits are unsustainable.

This will continue, even if Greece exits a fiat currency supported by large economies for one supported by its own incompetent government.  For let's be clear, Greece is no more likely to be able to reject austerity with a currency that will be as trusted as the Zimbabwean dollar than one trusted like the Deutschmark.

There is literally no alternative to austerity in one form or another.

So what are the options?

1.  Greece follows the deal previously done with it.  That means reducing its budget deficit to ultimately balance spending with revenue within the next few years.  Bear in mind this deal already includes 80% of its debt being written off by the creditors.  Not exactly wealthy bankers demanding their pound of flesh when most of what they loaned Greek governments is being written off.   Of course what this means is shrinking the Greek state, less welfare, pensions at ages similar to other EU countries,  less subsidies, privatising trading enterprises (e.g. railways, broadcasting, postal services), cutting the public sector and streamlining the tax system so that it is at a level people may be prepared to pay.    If Greece accepts a public sector that it is willing to pay for, it can stay in the Euro and live within its means.

2.  Greece rejects the deal and defaults.  That means simply being unable to pay its way.  The state can't overspend because it can't borrow (who will lend to it outside some German led guarantee?), so it stops paying wages to public servants, stop paying other bills and essentially shuts down.  It becomes interesting if the military can't get paid. In effect it is instant austerity.  Instead of the Eurozone deal lending, lending ends, so the budget deficit is wiped out - instantly - because you can't spend beyond your income if you have no credit.   In this context, the Euro takes an enormous hit because of perceptions that Eurozone sovereign debt is no longer "safe", so it devalues somewhat.   The Syriza party effectively thinks that Germany will be forced to lend to Greece to cover it - in other words that the Eurozone becomes like the United States - with the richer parts transferring money to the poorer parts.   However, if Germany refuses (why should German taxpayers prop up an ungrateful, previously fraudulent Eurozone country that doesn't think the rules apply to it), then Greece truly faces a hard time, and will be tempted to take the next step...

3. Greece rejects the deal, defaults and announces a new sovereign currency.  As easy as some commentators think this is, it is almost inconceivable.  It is option 2, but with the printing presses coming out to issue a New Drachma which would be the new state currency to pay public servants and pay bills, and new debt is issued in the new currency.  The effect will be collapse of Greek banks as Euro deposits are withdrawn en masse, and millions of Greeks open up new Euro accounts in non-Greek banks.  All Greek businesses and citizens with debts in Euro face default, but suddenly Greek exports and tourism to Greece becomes remarkably cheap because of the new dud currency.   Yet without austerity, Greece will rapidly face hyper-inflation from the government printing money to cover its deficits, plus a massive increase in the prices of imports, such as oil.  In short, Greece turns into the stereotypical tinpot third world country, with a non-convertible currency that makes the Bulgarian Lev look like a safe bet.   

4. Greece rejects the deal and gets a German led bailout with surrender of sovereignty.  It isn't far removed from what was previously agreed, but this time it will be more thorough.  The deal to keep Greece in the Euro includes direct government to government lending, but with surrender of Greek sovereignty in the meantime.  You can just guess the attitude of the Marxists and fascists in Greece to the spectre of this.

Unless taxpayers of wealthier Eurozone countries let their government bail Greece out (which I doubt they will do), Greece faces living within its means.  It will have to do so within the Eurozone or without it.  At the very worst, Greece will put its head in the sand, default, be unable to pay for the army and it will stage a coup - seeing Greece kicked out of the EU and NATO and become the new laughing stock of Europe.  Then the people of the former Yugoslav Republic of Macedonia, the people of Cyprus (especially northern Cyprus) and other neighbours might fear what a new militarised Greece will be like.   

The lesson from all this is astonishingly simple.   

Government's cannot evade reality forever.  

They cannot borrow endlessly from creditors, especially ones that have already written off many of their past debts as bad debts.

They cannot borrow from other governments, accountable to taxpayers who want to know why their money is being loaned to a government that no one else will lend to, because its taxpayers refuse to pay for the state they demand.

They are not better off if they can just print money to cover spending - because people are not so stupid to believe there is real value in a currency manufactured by the government because nobody else will lend to it.

Austerity is not a policy choice on a whim, it is, as I have said before, just living within your means.

The tragedy in Greece is that the lives of millions are now being hit because past governments pretended this was not necessary, facilitated by public servants and facilitated by past creditors.  They have been hit by the fraud of the profligate deficit spending state.   They gained a welfare state more generous than most of western Europe, and state health and education systems they didn't have to pay for - and now face losing much of it all.

The real insanity is from the hard left, who believe that bankers should be forced to lend the Greek government other people's money, or the German government should force German taxpayers to do so.    They have bemoaned profligate lending by banks that needed bailing out, but now want the same banks to lend to a feckless government that can't control its spending.   They are deluded and use language that claim those demanding Greece face reality as "murderers", when it was their own welfare state philosophy that has brought Greece to its needs.

It is the peculiar brand of statist politics that has ruined Greece - the idea that government can offer more and more without producing more, without getting more money to pay for it.  The idea that better healthcare, education and more generous pensions can just be given, not saved for and earned.

The big question is not whether Greece has austerity or not - it will have it, whether it comes from choosing to cut spending, being forced to cut spending or cutting spending in real terms by shifting to a new nearly worthless fiat currency.

Hard working productive people in other countries are not going to pay for Greece's bloated state sector, and they wont do it whether it is as it is now, or some Marxist or fascist version of the same.   Greek citizens either have to hunker down and work within their incomes today, or leave.  If they choose the chimeras offered by the far left, whether they be Marxists or nationalists, then the austerity deals of today will look like paradise compared to the ostracism their country will face.

UPDATE (since I'm in NZ for now):  Idiot Savant still doesn't get it either.  How can it be a bailout for German banks when it is the Greek government that needs borrowed money to function?  This rhetoric is not dissimilar to the banker bashing that the Greek far-right/far-left is employing.  What do the reality evading statists think will pay for the massive gap between what Greek governments spend and what they collect in revenue? There is NO repayment of debt under the bailout, just a government guarantee for deficit financing.  The gap in understanding is palpable.  The willingness to excuse rampant deficit spending is surreal.   The belief in flat earth economics is expected though, because it's how Greece has been run for the last three decades.

6 comments:

Anonymous said...

You still don't get it.

if Germany refuses...

Gemany is constitutionally prohibited from "helping out" Greece by its Basic Law - which demands balanced budgets and permits Germany to grant power to the European Central Bank only so long as that banks goal is to "promote price stability". If the ECB goes rogue, Germany would have to leave - but a couple of constitutional court cases have already established that the ECB cannot print money for Greece. Similarly the Basic Law requires Germany to run balanced budget. (OK it also mandates welfare, it's not perfect).

Greek citizens either have to hunker down and work within their incomes today, or leave.

Once Greece goes down - could be as soon as the end of the week - the borders will be closed. The Greeks won't be able to leave. They also won't be able to "work within their incomes" because the country hasn't got any income. Tourism to Greece is basically over because they now have running battles between fascists and communists most friday and saturday nights.

So there is a third option: starve in the gutter. That is what Greece has chosen and that is where they will end up.

Jeremy Harris said...

The last two years we have seen a socialist bubble coming to its end in Europe. The governments in Europe have borrowed and credit has been created to finance that borrowing. It is now apparent that that credit cannot reasonably be paid back. Since much of this debt was created by the European private sector both the Eurozone governments and the Eurozone banks are facing busts.

It is now abundantly clear that if we are to have any significant global growth in the next decade the Euro must be disbanded. Countries and companies that are insolvent must default and be liquidated. Currencies tied to individual economies are needed to allow them to increase and decrease in value as market forces demand. Government must dramatically reduce spending and taxes, decrease labour restrictions and regulation and allow the economic engine to kickstart again.


Replace Euro/Eurozone with Greece and that is my take.

libertyscott said...

Greeks can leave, the borders can't be closed and Bulgarians will welcome them. After all, Greeks have citizenship of 26 other countries, and foreign airlines will continue to fly there - not least because the money they bring in will be sought after.

Jeremy - My view is that Germany would leave the Euro and re-establish the Deutschmark if it were not for the events of the 1930s and 40s!

Right_Wing_Dad said...

Sadly French voters have not learnt the lesson (not that they had a serious Objectivist candidate to vote for). What staggers me is the media breathlessly reporting European voters as "Rejecting austerity, embracing growth" as though borrowing and spending somehow magically results in meaningful increases in quality of life.

As Scott mentioned, good quality education, healthcare and other services cannot simply be bought; they must be earned.

Right_Wing_Dad said...

Sadly French voters have not learnt the lesson (not that they had a serious Objectivist candidate to vote for). What staggers me is the media breathlessly reporting European voters as "Rejecting austerity, embracing growth" as though borrowing and spending somehow magically results in meaningful increases in quality of life.

As Scott mentioned, good quality education, healthcare and other services cannot simply be bought; they must be earned.

Anonymous said...

Greeks can leave,

For the rest of the week, yes.

the borders can't be closed and Bulgarians will welcome them.

The Bulgars might, no-one else will.

After all, Greeks have citizenship of 26 other countries

For another week or two. Not thereafter.

, and foreign airlines will continue to fly there - not least because the money they bring in will be sought after.

Foreign airlines won't touch a country where the can't be sure of a reliable supply of avgas.

One Greece goes, it's only a matter of time before Italy, Porgual, Spain, and France end up in the same mess.

We're not just talking about the end of the Euro, or the end of the EU, but conceivable about the end of first-world "civilisation" from Brussels south to the med.

Unlike Russia, France/ Spain/ Greece /Italy/ Portugal/ Ireland have no natural resources and no real export commodities. They lived to the end of the cold war on the US Dollar, and til now on the Deutschmark.

The money has run out - and there is no conceivable economic use for the land and populations in those countries that would support anywhere near the "first world" lifecycle to which they've been accustomed. Anything Greece (France, Italy) can do, China can do better and faster and cheaper.

But don't feel to smug: NZ is in exactly the same situation --- well we have our own currency which will tide things over for a while, but other than that, it's only a matter of time.

NZ's economy works for about 500,000 nett exporters - who just happen to be the only nett taxpayers in NZ. Once the tap is turned off, the rest of the country, like the entirety of Greece, France, Spain, etc, are nothing but mouths that must be fed.