Greece is a financial basket case. And Greeks are mad as hell about it. I can understand both their anger and their concern. But despite the pundits on the left who say otherwise, their condition can be explained fairly easily:
But the beauty of Greece’s looming default is that it is a totally straightforward story of uncontrolled public spending and the determination of governments to run up impossible debts.
That’s it. That’s all. What has made Greeks so mad is government has lied about it all along.
No really. And not just one, but many of all stripes and persuaions. Cheap accounting tricks, double books, whatever you want to call it, Greek governments have been playing fast and loose with the truth:
Since getting on the euro in 2001, the Greek government has apparently been fudging its budget statistics, a practice countenanced by both conservative and socialist governments. To its credit, the current government kicked the current crisis into high gear when it released a deficit-to-GDP number of 12.7 percent — double the previously announced figure, and by far the highest in Europe.
And the truth will make you go bust – which is precisely where the country is headed without a bailout. Upon learning that their government has been running two sets of books as well as running up exorbitant debt – debt it can’t afford or pay back – and that big changes and cuts were coming under an austerity program, millions of Greeks took to the street:
“All of us are angry, very, very angry,” bellowed Stella Stamou, a civil servant standing on a street corner, screaming herself hoarse, a block away from where the bank had been set alight.
“You write that – angry, angry, angry, angry,” she said, after participating in one of the biggest ever rallies to rock the capital since the return of democracy in 1974. “Angry with our own politicians, angry with the IMF, angry with the EU, angry that we have lost income, angry that we have never been told the truth.”
Well I can understand the anger, but unfortunately Ms. Stamou is part of the problem. Fully one-third of all Greeks work for government. And I’ve never seen government produce anything except more government – which is precisely what has happened. The government sector has grown while the productive sector has been taxed. The problem is there wasn’t enough money – ever – to pay for the lifestyle to which Greek workers had grown accustomed.
“For 30 years the Greek people have been held hostage,” said Periandros Athanassakis, 48, a garbage collector in Piraeus, the port near Athens. “Those who stole the money should pay.”
It’s not clear who the protesters think “should pay” but they know someone should and it isn’t them.
Unfortunately even if they protest from now until doomsday, it is them – those protesting their innocence – who will pay because they are the ones stuck with the bill. All the screaming, shouting, rock-trowing and fire-bombing in the world won’t change that.
What’s to come? Well, reality. And with reality, some pretty tough conditions with which Greece gets a loan:
The new measures include an increase of two percentage points in the value-added sales tax, which is now 19 percent; a further increase in the fuel tax; increases of 20 percent for alcohol taxes and 6 percent for cigarette taxes; a new tax on luxury goods; and a 12 percent cut in supplements to wages for civil servants, Mr. Petalotis said.
They also include a 30 percent reduction in the bonuses given to civil servants as holiday pay, which amount to two additional monthly wages, he said.
Now you read through that description of the measures that have to be taken and tell me who has benefited from government’s shady accounting and profligate spending. No wonder Ms. Stamu and Mr. Athanassakis are in the streets and angry. They should only be paid for 12 months work instead of 14? Their supplements to wages are going to go down 12%? Whose idea is that?
Those that are going to bail them out, of course – and they don’t like it one bit.
Additionally it appears their jobs are on the line as well as government considers divesting itself of some properties:
The government will accelerate privatizations (€ 2.5 bill. budgeted for 2010) and may change its mind regarding majority ownership by strategic (foreign/EU) investors of types of assets / industries that have been protected under the existing social /political model, including utility/infrastructure, transport or special state (monopoly) assets. Examples might include the railway company, water distribution companies, the electricity grid or the power company (PPC), as well as the soccer betting company (OPAP), gambling Casinos and the remaining stake in Hellenic Telecom (OTE), which will probably be sold to Deutsche Telekom. Other interesting candidates for privatization might include airports and seaports and enhanced PPP/PFI models will be considered for infrastructure investments.
In other words, state run industries will be privatized and my guess is this means competitive wages – matched to private industry. Not government wages pegged to, well, nothing.
All of this is just too much for Jeff Kaye at FireDogLake who cries:
So goodbye living wages, goodbye state-run utilities, transport, and telecom.
Yeah, “goodbye”. They’ve worked out real well in government hands so far haven’t they?
Oh, and when is a “living wage” not a “living wage”?
When you can’t freakin’ afford it!
Next? A rousing rendition of “California, here I come”.
UPDATE: It should be kept in mind that Greece is simply the tip of the European insolvency iceberg:
Virtually every country in the EU spends more than it takes in and has made long-term fiscal promises to an aging work force that it can’t keep. A little over a year ago, economist Jagadeesh Gokhale, writing for the National Center for Policy Analysis, produced a pithy – and scary – summation of the fiscal challenges faced by Europe. Don’t read it if you have trouble sleeping.
“The average EU country,” he concluded, “would need to have more than four times (434%) its current annual gross domestic product in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”
In other words, Europe would have to have the equivalent of roughly $60 trillion in the bank today to fund its very general welfare benefits in the future. Of course, it doesn’t.
Things haven’t changed much since that study was done. So suppose they don’t put aside all that money. What then? By 2035, Gokhale reckons, the EU will need an average tax rate of 57% to pay for its lavish welfare state.
Today, Greece is only the tip of a very large iceberg. Portugal, Spain, Italy and Ireland together owe $3.9 trillion in short- and medium-term debts, an amount larger than their combined GDP, estimated last year at $3.3 trillion.
California would need half a trillion in the bank to cover it’s state pension promises right now and of course we know about the trillions upon trillions necessary to fund the future promises of Social Security and Medicare which aren’t even close to being available. Europe will most likely get to its end much more quickly than we will, but not by much, unless drastic changes in entitlements are made and made soon.
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The bailout of Greece may not work. Spain is teetering on the edge of serious financial doom. The Euro is taking a beating. And the banks of Europe are not looking too healthy overall. Meanwhile, here in the States, unfunded government debt, already expanding at an unprecedented rate, is set to explode. What do all of these things have in common? They are the direct result of expanding the welfare state without any means of actually paying for all of it.
In truth, there is never a way to pay for expanding the welfare state because, while wealth creation isn’t a zero-sum game, the population of wealth-creators is; after all, not just anyone can create electricity, telephones, heart medications, MicroSoft, Wal-Mart, or even pencils without some know-how, sweat and inspiration. If that were possible, then wealth creation could never be retarded, regardless of the impediments. Some wise, noble, and completely selfless individual would always emerge to drive the economy forward. Alas, self-interest trumps all, without which wealth-creation is for the horses.
No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.
Does that mean that we are in for another Great Depression? Not necessarily. In fact, I predict that no such thing will occur. For starters, we have many institutions in place today that didn’t exist in the 1930’s such as the FDIC, Social Security, Medicare, the IMF, and the World Bank. Some of these things are arguably beneficial in that they smooth out the rough patches that economies inevitably encounter. The U.S. economy, for example, may not have realized the devastation it did if old people, like McQ, could have survived without taxing their families’ resources so much, or the FDIC had been in place to quell bank runs. Maybe. But more importantly, in this day and age our politics and law-making bodies (and those of every democratic society) are dominated by those whose own self-interest is firmly grounded in the ability to buy votes. That ability is highly dependent upon feeding the welfare state, since the vast majority of votes are bought from those who don’t create electricity or heart medications. This is why politicians of all stripes won’t take steps that would decrease the welfare state, because to do so will cost them votes — to the politician who promises more largesse at the expense of whatever hated rival is being villainized at the time. Accordingly, the odds are rather stacked against wealth-creators continuing to employ their skills in service of the very state that punishes them.
Instead of the Great Depression, Part Deux, I would predict that the elites (those, and their friends, who hold the power to dole out goodies for votes) will shuffle the deck just enough to ensure that they stay in favor, while allowing the overall health of the economy to softly fade into oblivion. They are like Dr. Kevorkian administering to capitalism. The ability to create wealth will slowly continue to be arrogated to the governors and “experts,” while the welfare state expands in decrescendo. Eventually, we will be left with something akin to the Ottoman Empire: all power and glory in name only, inside a rotting shell, harkening back to a time so dissimilar as to be unworthy of the title. What’s left will be hopeless, farcical and cruel, and will not have the slightest ability to nurture the welfare state that started it all. Perhaps the “Long Morose” would be a better title.
Irrespective of my gloomy predictions, there simply isn’t any question that, at some point, the beneficiaries of the great welfare state will have to take a bath. Most likely, that day will come when everyone jumps in the tub together. Until that time, prepare for the politically powerful to loot the wealth-creators out of existence in order to pay off the welfare beneficiaries. Eventually the only ones left to take that bath will be the filthy and the unwashed.
You have to wonder how far we’ve slipped when the financial wreck that is Greece is assured that its situation isn’t so unique – look at the US. And the example is made by none other than America’s best friend – Vladimir Putin:
Russian Prime Minister Vladimir Putin played down Greece’s economic woes on Tuesday, telling his visiting Greek counterpart that the United States were no better than Greece in handling its debt and fiscal deficit.
“As we all know, the global economic crisis started neither in Greece, nor in Russia, nor in Europe,” Mr. Putin told a news conference after talks with George Papandreou. “It came to us from across the ocean,” he said in a clear reference to the United States.
“There (in the U.S.) we can see similar problems – massive external debt, budget deficit,” Mr. Putin added, suggesting Russia and Greece should concentrate on the “real economy” to weather the economic crisis.
It’s not clear what the “real economy” means. However it is clear that for Greece and the US, what they are doing isn’t sustainable and at some point the “real economy” or at least the laws of economics are not going to be denied – for both countries.
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In this podcast, Bruce, Michael and Dale discuss the Republican desire not to be seen as the “Party of No”; China, the Euro, and the Dollar; and what seems to be a fundamental shift in the assertions of the AGW crowd. The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.
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In a little noted Financial Times article yesterday, it reported:
The European Union’s public debt could by 2014 rise to 100 per cent of gross domestic product – a year’s economic output – unless governments take firm action to restore fiscal discipline, EU finance ministers will be warned on Monday.
The EU claims that the measures the countries of the union took to “rescue Europe’s financial sector and combat recession” are to blame.
But then, 7 or 8 paragraphs later, we get to the real “tip of the iceberg”:
The Commission identifies five countries as at particular risk – Greece, Ireland, Latvia, Spain and the UK – because their public finances will come under strain from large increases in pension and healthcare costs, and high deficits triggered by the financial crisis.
This is particularly the case for Greece, which faces the second-highest increase in age-related expenditure in the EU, while its high debt ratio adds to concerns on sustainability.
Pension and health care costs? Translated into US lingo – Social Security and Medicare. You know the two programs with 50+ trillion in unfunded future liabilities? So tell me again why we want to go even further off this debt cliff by enacting government run health care?
Now I know you’ve been led to believe that Euro socialism is magic and that their health care delivers amazing care at much less cost than ours. But in reality, it doesn’t do better on either measure. The 5 countries listed above are only those in the “worst” shape. Any guess what they’ll have to do to bring their “free” health care costs in line, so, like Greece, they won’t see the cost at 135% of GDP next year?
Cuts in spending. Cuts in benefits. Cuts in care. Rationing.
And for countries like the UK, where the medical workers work for the government, what options or choices will medical consumers be left with? There is no real private market. Government killed that decades ago.
Is that really what we want here? My goodness, the evidence is out there and many of us seem to want to remain willfully blind to the consequences of what we’re considering here in countries who are now doing it. The arrogance and hubris of that is simply mindboggling. Want to see the economy killed and debt skyrocket? Hope the Senate passes “health care reform” then. We can race Greece to see who can run up the biggest percentage of debt vs our GDP. And given the way this Congress and President think, we’ll “win”.
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