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Posts Tagged ‘Greece’

This isn’t intentional, but there’s been a European theme to this week’s posts. I wrote yesterday about economic chaos in France, and the previous day I wrote about the grim consequences of Italian statism.

Today, we’re going to look at Greece. In the past, I’ve explained that Greece is special, albeit in a bad way. But I’ve also asserted that Greece could be rejuvenated and could deal with its debt with the right reforms.

Heck, Greece could even renege on its debt and still enjoy an economic renaissance if it adopted the right policies. That’s the message of this short video narrated by Garett Jones of George Mason University

So the $64 question (actually, the $231,199,453,552 question according to the latest projection of Greek debt) is whether Greece will do the right kind of reform.

Unfortunately, it appears that all the bailouts have subsidized bad policy. Writing for National review, a journalist from Greece explains that his government is adding more and more taxes onto an overburdened private sector.

…the new austerity measures, which are often amusingly termed reforms, are for the most part tax increases — which may not be popular, but which conform to SYRIZA’s ideological creed. The new package agreed to by SYRIZA and Greece’s creditors is about 90 percent new taxes or tax increases and 10 percent reforms. The tax increases have the benefit of protecting SYRIZA’s core constituency, which is the public-sector employees. Despite the collapse of public revenue and the overall dismal economic outlook, the SYRIZA government plans to increase the salaries of public-sector employees (by as much as 8 percent) and carry on with 45,000 new hires in 2016. Meanwhile, in the private sector, SYRIZA has increased taxes on all sorts of things and is planning to double the taxation of farmers. It has increased business taxes and also demanded the pre-payment of business taxes. It has increased the VAT on almost all goods, and it is defining affluence down so as to increase income taxes for a greater number of taxpayers. And although Greece has probably the highest social-security contributions in Europe, SYRIZA is planning to increase these contributions even more, despite the fact that pensioners now outnumber those who are still employed in the private sector.

More pensioners that private-sector employees?!?

Wow, even I’m shocked by that factoid. There definitely are far more people riding in the wagon than pulling the wagon when you add up pensioners, bureaucrats, and welfare recipients.

So you can understand why Greece is almost surely doomed.

Especially when you consider that many of the people leaving Greece are the productive ones (i.e., those who normally would be pulling the wagon). Here are some passages from a story in the New York Times from last year.

From 2010 to 2013, about 218,000 Greeks emigrated, according to an estimate from the Greek statistics agency. Nearly half of them went to Germany. …Resentments against Germany — Greece’s most powerful creditor — quickly fade when it comes to the prospect of a regular paycheck. Many of those leaving Greece are highly educated professionals and scientists seeking greater opportunity and better pay. An estimated 135,000 Greeks with post-secondary degrees have left since 2010 and are working abroad, according to Lois Labrianidis, an economic geographer and official in Greece’s Economy Ministry. “We think this is human capital that is crucial for the development of the country,” Mr. Labrianidis told me recently, calling the departures a “major blow.” …While much of the attention on recent Greek emigration has focused on the highly educated, I’ve been surprised by the number of working-class Greeks I’ve met who left due to financial desperation.

But there’s one group of people who aren’t leaving.

You probably won’t be surprised to learn that they are the bureaucrats. As noted in this report from the U.K.-based Telegraph, their privileged position is zealously protected by vote-buying politicians.

The other thing most people in the area seem to agree on is that the biggest impediment to progress is the size of Greece’s public sector. The country has a population of 10 million, of which 2.5 million are pensioners, one million are government employees and two million work in the private sector. A further 1.7 million are unemployed. The rest are children or students. “So you can see why the current situation is unsustainable,” says Tryfon. “The only solution is for the public sector to be cut back. But every government since the crisis has chosen to raise taxes, while doing little to stimulate the private sector because they only want to protect votes.” “…Public sector employees and pensioners are the first to get paid and the only ones to get paid on time. We need investment into the private sector, but there is no motivation for companies to come to Greece…” a company would be nuts to invest in a politically unstable country, creaking under debt and crippled by an incredibly punitive tax regime. “What business will invest in a Greece when it takes six months to set up a company compared to Cyprus where it takes 15 minutes?” asks Dimitris Karkavitsas, an investment banker-turned-strawberry farmer. …the young engineer, says everyone who tries to make it in the private sector gets strangled. “The tax is killing us,” he says. …In the meantime, the public sector remains a massive beast.

Moreover, when you set up a company in Cyprus, there’s never a risk that you’ll be required to provide disgusting forms of DNA  as part of bureaucratic requirements.

Yet rather than be outraged by overpaid and meddlesome bureaucrats, I suspect most Greeks probably think how they can get on that gravy train. Which explains why, in an interview, I said the Greeks shouldn’t be allowed to “loot and mooch their way through life.”

Until and unless they learn that lesson, the nation is doomed to societal collapse.

P.S. Another sign of Greece’s moral and fiscal bankruptcy is that pedophiles can get disability payments.

P.P.S. To offset the grim message of today’s column, let’s also enjoy some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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For both policy reasons and narcissism, I wish the most popular item ever posted on International Liberty was Mitchell’s Golden Rule.

But that guide to sensible fiscal policy isn’t even in the top 70.

Welfare State Wagon CartoonsInstead, my most-read post is a set of cartoons showing how the welfare state inevitably metastasizes as more and more people are lured into the wagon of government dependency.

I suspect these cartoons are popular because they succinctly capture and express a concern that is instinctively felt by many people.

But instinct isn’t the same as evidence.

So I’ve shared various estimates of America’s growing dependency problem, though I’ve also warned that these numbers don’t necessarily tell the full story.

Given my dissatisfaction with the current estimates, I was very interested to see a new attempt to measure the degree to which nations are undermined by ever-expanding redistribution. Writing for the Mises Institute and using Greece as an example, Justin Murray analyzes the dependency problem.

…without understanding how Greece got into this problem in the first place and identifying the root cause of an over-indebted society, any plan or solution has a high probability of failure. …Greece, being a nation with a high tax rate on production and a high subsidy rate on public assistance, will generate a population that finds greater preference toward public assistance and away from productive labor.

Mr. Murray puts together a new statistic called “implied public reliance,” which is designed to measure how many strangers each worker is supporting.

…we must identify a nation’s currently employed population. Next, all public sector employees are removed to obtain an adjusted productive workforce. …this productive population is divided into the nation’s total population to identify the total number of individuals a worker is expected to support in his country. …the average household size is subtracted from this result to get the final number of individuals that an individual must support that are not part of their own voluntary household. In other words, how many total strangers is this individual providing for? …Greece…is currently expecting each employed person to support 6.1 other people above and beyond their own families.

And here’s a chart from his article, showing the IPR measures for 18 countries.

I’m not surprised that Greece has the worst IPR number, and it’s also no surprise that nations such as Italy and France do poorly.

Though I am surprised that Canada scores so highly. And Denmark’s decent performance doesn’t make sense considering the data I shared a few months ago.

Mr. Murray then looks at this data from a different perspective.

To demonstrate how difficult it is to change these systems within a democratic society, we just have to look at the percentage of the population that is reliant on public subsidy.

And here are those numbers.

Wow. It’s hard to be optimistic after looking at these shocking numbers.

Moreover, I suspect we’ll remain pessimistic even if Mr. Murray’s initial numbers are revised as he refines his methodology.

And here’s the most depressing part of the analysis.

The numbers imply that 67 percent of the population of Greece is wholly reliant on the Greek government to provide their incomes. With such a commanding supermajority, changing this system with the democratic process is impossible as the 67 percent have strong incentives to continue to vote for the other 33 percent — and also foreign entities — to cover their living expenses.

From a public policy perspective, here’s the real challenge: How do you convince voters to back away from the public trough?

In my humble opinion, the only possible solution is to reject any and all bailouts and force Greece to balance its budget overnight. With luck, that may be such a sobering experience that the Greek people might learn that a society based on mooching and looting doesn’t work.

Not that I’m optimistic. Which is why I’ve been worried for more than five years that we’ll eventually see a loss of democracy in some European nations.

P.S. The second-most viewed post of all time is a parable about buying beer, which is actually a lesson about the dangers of so-called progressive taxation. And the third-most viewed post is a parable about applying socialist principles in a classroom, which is a lesson about the dangers about the dangers of redistribution.

P.P.S. On the topic of dependency, here’s what nursery tales would look like if they were written by statists.

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I wrote last month that the debt burden in Greece doesn’t preclude economic recovery. After all, both the United States and (especially) the United Kingdom had enormous debt burdens after World War II, yet those record levels of red ink didn’t prevent growth.

Climbing out of the debt hole didn’t require anything miraculous. Neither the United States nor the United Kingdom had great economic policy during the post-war decades. They didn’t even comply with Mitchell’s Golden Rule on spending.

But both nations managed to at least shrink the relative burden of debt by having the private sector grow faster than red ink. And the recipe for that is very simple.

…all that’s needed is a semi-sincere effort to avoid big deficits, combined with a semi-decent amount of economic growth. Which is an apt description of…policy between WWII and the 1970s.

Greece could achieve that goal, particularly if politicians would allow faster growth. The government could reduce red tape, which would be a good start since the nation ranks a miserable #114 for regulation in Economic Freedom of the World.

But Greece also should try to reverse some of the economy-stifling tax increases that have been imposed in recent years.

That may seem a challenge considering the level of red ink, but good tax policy would be possible if the Greek government was more aggressive about reducing the burden of government spending.

And if that’s the goal, then the Baltic nations are a good role model, as explained by Anders Aslund in the Berlin Policy Journal. With Latvia being the star pupil.

…austerity policies have not been attempted most aggressively in Greece: all three Baltic countries pursued more aggressive fiscal adjustments, especially Latvia. The Latvian government faced the global financial crisis head-on. …The Latvian government carried out a fiscal adjustment of 8.8 percent of GDP in 2009 and 5.9 percent of GDP in 2010, amounting to a fiscal adjustment of 14.7 percent of GDP over the course of two years, totaling 17.5 percent of GDP over four years, according to IMF calculations. Greece did the opposite. According to the IMF, its fiscal adjustment in the initial crisis year of 2010 was a paltry 2.5 percent of GDP, and in 2011 only 4.1 percent, a total of only 6.6 percent of GDP over two years. Greece’s total fiscal adjustment over four years was only 11.1 percent of GDP.

In other words, Latvia (like the other Baltic nations) did more reform and did it faster.

And it’s also worth noting that the reforms were generally the right kind of austerity, meaning that expenditure commitments were reduced.

Whereas Greece has implemented some expenditure reforms, but has relied far more on tax increases.

Better policy, not surprisingly, meant better results.

In 2008-10 Latvia suffered an output decline of 24 percent, as much as Greece did in the six-year span from 2009-14. However, thanks to its front-loaded fiscal adjustment, Latvia was able to restore its public finances after two years. The country has shown solid economic growth, averaging 4.3 percent per year from 2011-14, according to Eurostat. …The consequences of tepid Greek fiscal stabilization have been a devastating six years of declining output, even as the Latvian economy has revived. In 2013 Latvia’s GDP at constant prices was 4 percent lower than in 2008, while Greece’s was 23 percent less than in 2008, according to the IMF. A cumulative difference in GDP development of 19 percentage points over six years cannot be a statistical blip – it is real.

The bottom line is that Latvia and the other Baltics were willing to endure more short-term pain in order to achieve a quicker economic rebound.

That was a wise choice, particularly since the alternative, as we see in Greece, is seemingly permanent stagnation.

Anders Paalzow of the Stockholm School of Economics in Riga also suggests, in a recent article in Foreign Affairs, that Latvia is a good role model.

Professor Paalzow starts by explaining that Latvia is now enjoying good growth after enduring a dramatic boom-bust cycle last decade.

In 2008, Europe’s most overheated economy, which had been fuelled by cheap credit and rapidly raising wages and real estate prices, collapsed. GDP dropped by 20 percent and unemployment rose to more than 20 percent. But here’s where things take an unexpected turn. By late 2010, the first glimmers of recovery became apparent. Today, the economy is among Europe’s fastest growing, and its GDP is back at pre-crisis levels. So how did Latvia, the hero of this story, do it?

The first thing to understand is that Latvia was determined to join the eurozone, so that meant it wasn’t going to devalue its currency in hopes of inflating away its problems. Which meant the only other choice was “internal devaluation.”

…the Latvian government’s only real option was fiscal policy adjustment, the details of which it unveiled in its supplementary budget for 2009 and its budget for 2010. Both of these saw substantial reductions in social benefits accompanied by long overdue cuts in public employment with close to 30 percent of civil servants laid off. Those who remained in the public sector saw their salaries cut by 25 percent, on average, whereas salaries in the private sector fell by on average ten percent. …the reductions made during the crisis years amounted to approximately 11 percent of GDP. Most of the fiscal consolidation was done on the expenditure side of the public budget… The fiscal consolidation program continued into 2011 and the years following, even though the economy started to grow again.

Not only did the economy grow, but the government was rewarded for making tough choices.

…in 2010, the government responsible for austerity was reelected.

But here’s the challenge. Professor Paalzow warns that fiscal reforms won’t mean much unless the chronic dysfunction of the Greek government is somehow addressed.

The importance of the institutional framework cannot be overestimated. …it seems like a fool’s errand to try to sell off the public assets of a country riddled with high corruption… Furthermore, with a legal system incapable of enforcing current legislation and characterized by slow judicial processes, inefficient courts, and weak investor protection, legal reform will be a necessary condition for an economic turnaround.

So he suggests that Latvian-type fiscal reforms should be accompanied by Nordic-style institutional reforms.

Greece should look further north to Finland and Sweden, which overcame their own crises in the early 1990s. …The three to four years following the initial economic disaster saw remarkable institutional reform…substantial changes in both welfare systems. …both countries pursued austerity…, a remedy that both nations had frequently tried in the 1970s and 1980s without any success. What made the difference this time was that the institutional, and hence the fundamental roots, of the problems were addressed.

While I like his prescription, I suspect Paalzow is being too optimistic.

You can’t turn the Greeks into Finns or Swedes, at least not without some sort of massive jolt.

Which is why my preferred policy is to end bailouts, even if it means that Greece repudiates its existing debt. If the Greeks no longer got any handouts, that necessarily would mean an immediate end to deficit spending (assuming the government doesn’t ditch the euro in order to finance spending by printing drachmas).

Welfare State Wagon CartoonsAnd that might be a very sobering experience that would teach the Greek people about the dangers of having too many people trying to ride in the wagon of government dependency.

That might not turn the Greeks into Nordics, but it presumably would help them understand that you can’t (at least in the long run) consume more than you produce.

That’s also a lesson that some American politicians need to learn!

P.S. I wonder if Paul Krugman will attack Latvia’s good reforms. When he went after Estonia for adopting similar policies, he wound up with egg on his face.

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The conventional wisdom, pushed by the IMF and others, is that Greece’s economy will never recover unless there is substantial debt relief.

Translated into English, that means the Greek government should be allowed to break the contracts it made with the people and institutions that lent money to Greece. That may mean a “haircut,” which would mean lenders (often called creditors) only get back some of what they’ve been promised, or a “default,” which would mean they get none of the money they were promised.

I wouldn’t be surprised if Greece has a full or partial default. And that actually might not be a bad result if it meant an end to bailouts and Greece was immediately forced to balance its budget.

But let’s set that issue aside and look at the specific issue of whether Greece’s debt is unsustainable. Here’s a look at Greek government debt, measured as a share of economic output.

As you can see, when the crisis started in Greece, government debt was about 100 percent of GDP.

Was Greece doomed at that point?

Well, if the situation was hopeless, then someone needs to explain why the United States didn’t collapse after World War II.

As you can see from this chart, debt climbed to more than 100 percent of economic output because of the heavy expense of defeating Nazi Germany and Imperial Japan. Yet the American economy rebounded after the war (notwithstanding dire predictions from Keynesians) and the debt burden shrank.

So maybe the more interesting issue is to look at how America reduced its debt burden after 1945, which may give us some insights into what should happen (or should have happened) in Greece.

Here’s one question to consider: Did the burden of the federal debt drop between the end of World War II and the 1970s because of big budget surpluses?

Nope. If you look at Table 7.1 of OMB’s Historical Tables, you’ll see that there was a steady increase in the amount of government debt in America after 1945. Yes, there were a few years with budget surpluses, but those surpluses were more than offset by years with budget deficits.

The reason that the national debt shrank as a share of economic output was completely the result of the economy growing faster than the debt.

Here’s an analogy. Imagine you graduate from college and you have $20,000 of credit card debt. That might be a very big burden relative to your income.

But in your 50s and (hopefully) earning a lot more money, you might have $40,000 of credit card debt, yet be in a much stronger financial position.

So the real issue for Greece (and Spain, and Japan, and the United States, etc) is not so much whether the amount of debt shrinks. It’s whether debt is constrained compared to private-sector growth.

That doesn’t require any sort of miracle. Yes, it would be nice if Greece and other nations decided to become like Hong Kong and Singapore, high-growth economies thanks to small government and non-interventionism.

But all that’s needed is a semi-sincere effort to avoid big deficits, combined with a semi-decent amount of economic growth. Which is an apt description of U.S. policy between WWII and the 1970s.

Is it unreasonable to ask Greece to follow that model?

Some may say Greece is now in a different situation because debt levels have climbed too high. Debt in the United States peaked a bit above 100 percent of GDP at the end of World War II, whereas government debt in Greece is now closer to 200 percent of GDP.

It’s certainly true that today’s debt burden in Greece is higher than America’s post-WWII debt burden. So let’s look at another example.

Government debt in the United Kingdom jumped to almost 250 percent of economic output by the end of the World War II.

Did that cause the U.K. economy to collapse? Did Britain have to default?

The answer to both questions is no.

The United Kingdom simply did what America did. It combined a semi-sincere effort to avoid big deficits with a semi-decent amount of economic growth.

And the result, as you can see from the above graph, is that debt fell sharply as a share of GDP.

In other words, Greece can fulfill its promises and pay its bills. And the recipe isn’t that difficult. Simply impose a modest bit of spending restraint and enact a modest amount of pro-growth reforms.

Unfortunately, prior bailouts have given Greece an excuse to avoid reforms. Though the IMF, ECB and European Commission (the so-called troika) have learned somewhat from those mistakes and are now making greater demands of the Greek government as a condition of another bailout.

The problem is the troika doesn’t seem to understand what’s really needed in Greece. They’re pushing for lots of tax increases, which will make it hard for Greece’s private sector to generate growth. The only good news (or, to be more accurate, less bad news) is that the troika doesn’t want as many tax hikes as the Greek government would like.

In other words, don’t be too optimistic about the long-run outcome. Which is basically what I said in this interview on Canadian TV.

The bottom line is that a rescue of the Greek economy is possible. But so long as nobody with any power wants to make the right kind of reforms, don’t hold your breath waiting for good results.

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I suggested a couple of months ago that the economic turmoil in Greece and Venezuela is somewhat akin to a real-life version of Atlas Shrugged.

And I’ve also used that analogy when writing about France and Detroit.

But I’m probably not doing justice to Ayn Rand’s famous novel because Atlas Shrugged is not just about an economy that collapses under the weight of too much government regulation, intervention, and control.

I probably won’t give the right description since I’m a policy wonk rather than philosopher, but Atlas Shrugged is also about the perils of self-sacrifice.

And I couldn’t help but think about that aspect of the book when I read the comments of certain Greek politicians during yesterday’s bailout vote in Athens.

If you scroll down to the 14:40 mark of this timeline from the U.K.-based Telegraph, you’ll find some remarkable comments that sound like they came straight from Ayn Rand’s book.

Greece’s ruling Syriza party has accused David Cameron of being mean over his objections to allowing British taxpayer’s money to be used to help Athens meet upcoming debt payments. …Mr Cameron’s attitude was described as cold-hearted by Nikos Xydakis, a deputy culture minister in Syriza. “Mr Cameron must explain to the European people and 11 million Greeks why he wants them to suffer a social crisis,” Mr Xydakis told The Telegraph. “This is not about politics, this is about human souls.”

Wow. I might agree that David Cameron is “mean,” but I think his cruelty is directed against British taxpayers, not Greek politicians.

But let’s stick with our main topic. Notice how the moochers in Greece are trying to use guilt as a weapon. I’m sure some Ayn Rand experts will correct me if I’m wrong, but the aforementioned comments definitely sound like passages from Atlas Shrugged.

That being said, the Germans apparently have more in common with John Galt than Jim Taggart. Here are some excerpts from a column in the New York Times by Jacob Soll, a professor from the University of Southern California. He recently attended a conference in Germany and found very little sympathy for the Greeks.

 …when the German economists spoke…, a completely different tone took over the room. Within the economic theories and numbers came a moral message: The Germans were honest dupes and the Greeks corrupt, unreliable and incompetent. …the Greeks destroyed themselves over the past four years. Now the Greeks deserved what was coming to them. …Debtors who default, they explained, would simply have to suffer…a country like Greece…did not seem to merit empathy. …When the panel split up, German attendees circled me to explain how the Greeks were robbing the Germans. They did not want to be victims anymore.

Wow, who knew the Germans were a bunch of closet Randians!

No wonder the Greek politicians decided to target David Cameron instead.

For what it’s worth, I must have some German blood in my veins because I wasn’t overly sympathetic to Greece in this interview.

I even referred (again) to “looters” and “moochers,” which are terms used in Rand’s book.

I’ll make two comments about the interview.

  1. My prediction about the vote in Greece was correct. Though I wish I had been wrong because the best long-run outcome (both for the Greek people and the world’s taxpayers) is an end to bailouts.
  2. I mentioned that there will be more debt-crisis dominoes at some point in the future. I hope I’m wrong, but it’s hard to be optimistic when you look at long-run fiscal estimates from the IMF, BIS, and OECD.

P.S. Lots of what happens in Washington also is disturbingly similar to scenes from Atlas Shrugged, particularly the corrupt Obamacare waiver process.

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I’ve shared lots of analysis (both serious and satirical) about the mess in Greece and I feel obliged to comment on the latest agreement for another bailout.

But how many times can I write that the Greek government spends too much money and has a punitive tax system (and a crazy regulatory regime, a bloated bureaucracy, etc)?

So let’s try a different approach and tell a story about the new bailout by using some images.

Here’s an amusing perspective on what actually happened this weekend.

I explained a few days ago that the bailouts have simultaneously enabled the delay of much-needed spending reforms while also burdening Greece with an impossible pile of debt.

But the Greek bailouts, like the TARP bailout in the United States, were beneficial to powerful insiders.

Here’s a look at how banks in various European nations have been able to reduce their exposure to Greek debt.

Sure, the banks almost surely still lost money, but they also transferred a lot of the losses to taxpayers.

To get a sense of the magnitude of handouts, here’s a chart from a Washington Post story.

And now, assuming the deal gets finalized, that pile of foolish and unsustainable debt will be even bigger.

One of the main components of the new agreement is that Greece supposedly will raise revenue by selling $50 billion of state-owned assets.

Don’t believe that number. But not because there aren’t plenty of assets to sell, but rather because the track record on privatization proceeds suggests that there is a giant gap between what Greece promises and what Greece delivers.

To understand why assets aren’t being sold, just keep in mind that most of the assets are under the control of the government in order to provide unearned benefits to different interest groups.

If you’re an overpaid unionized worker at a government-owned port, for instance, the last thing you want is to have that port sold to a private investor who presumably would want to link pay to productivity.

Here’s the best bit of humor I’ve seen about the negotiations this past weekend. It purports to show a list of demands from Germany to Greece.

While this image is funny, it’s also wrong.

Germany isn’t imposing anything on Greece. The Germans are simply stating that Greek politicians need to make some changes if they want more handouts.

Moreover, it’s quite likely that Germany will wind up being a big loser when the dust settles. Here’s some of what Gideon Rachman wrote for the U.K.-based Financial Times.

If anybody has capitulated, it is Germany. The German government has just agreed, in principle, to another multibillion-euro bailout of Greece — the third so far. In return, it has received promises of economic reform from a Greek government that makes it clear that it profoundly disagrees with everything that it has just agreed to. The Syriza government will clearly do all it can to thwart the deal it has just signed. If that is a German victory, I would hate to see a defeat.

So true.

I fear this deal will simply saddle Greece with a bigger pile of debt and set the stage for a more costly default in the future.

The title of this column is about pictures. But let’s close with some good and bad analysis about the Greek mess.

Writing for Real Clear Markets, Louis Woodhill has some of the best insight, starting with the fact that the bailout does two things.

First, this new bailout is largely just a mechanism to prevent default on past bailouts. Sort of like making a new loan to your deadbeat brother-in-law to cover what he owes you on previous loans.

…the €53.5 billion in new loans…would just be recycled to Greece’s creditors (the IMF, the EU, and the ECB) to pay the interest and principal on existing debts.

Second, it prevents the full meltdown of Greek banks.

The key point is that a bailout agreement would restore European Central Bank (ECB) “Emergency Liquidity Assistance” (ELA) to the Greek banking system. This would allow Greeks that still have deposits in Greek banks (€136.5 billion as of the end of May) to get their money out of those banks.

That’s good news if you’re a Greek depositor, but that’s about it.

In other words, those two “achievements” don’t solve the real problem of Greece trying to consume more than it produces.

Indeed, Woodhill correctly identifies a big reason to be very pessimist about the outcome of this latest agreement. Simply stated, Greek politicians (aided and abetted by the Troika) are pursuing the wrong kind of austerity.

…what is killing Greece is a lack of economic growth, and the meat of Tsipras’ bailout proposal consists of growth-killing tax hikes. The media and the economics profession have been framing the alternatives for Greece in terms of a choice between “austerity” and “stimulus.” Unfortunately for Greece, austerity has come to mean tax increases, and stimulus has come to mean using “other people’s money” (mainly that of German taxpayers) to support Greek welfare state outlays. So, if “other people” aren’t willing to fund more Greek government spending, then the only option the “experts” can imagine is to raise taxes on an economy that is already being crushed by excessive taxation.

Let’s close with the most ridiculous bit of analysis about the Greek situation. It’s from Joe Stiglitz,

Joseph Stiglitz accused Germany on Sunday of displaying a “lack of solidarity” with debt-laden Greece that has badly undermined the vision of Europe. …”Asking even more from Greece would be unconscionable. If the ECB allows Greek banks to open up and they renegotiate whatever agreement, then wounds can heal. But if they succeed in using this as a trick to get Greece out, I think the damage is going to be very very deep.”

Needless to say, I’m not sure why it’s “solidarity” for one nation to mooch in perpetuity from another nation. I suspect Stiglitz is mostly motivated by an ideological desire to redistribute from the richer Germans to the poorer Greeks,

But I’m more interested in why he isn’t showing “solidarity” to me. I’m sure both his income and his wealth are greater than mine. So if equality of outcomes is desirable, why doesn’t he put his money where his mouth is by sending me a big check?

Needless to say, I won’t be holding my breath waiting for the money. Like most leftists, Stiglitz likes to atone for his feelings of guilt by redistributing other people’s money.

And I also won’t be holding my breath waiting for a good outcome in Greece. As I wrote five-plus years ago, Greece needs the tough-love approach of no bailouts, which would mean a default but also an immediate requirement for a balanced budget.

Last but not least, I’m going to confess a possible mistake. I always thought that Margaret Thatcher was right when she warned that the problem with socialism is that you eventually run out of other people’s money. But this latest bailout of Greece shows that maybe politicians from other nations are foolish enough to provide an endless supply of other people’s money.

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I very rarely feel sympathy for the people of Greece. Indeed, events over the past five years have even led me to write that “I hate the Greeks.”

I also disparaged the people of Greece by stating on TV that they’ve been trying to loot and mooch their way through life.

So you can see that I generally believe in the tough-love approach.

But there comes a point when even a curmudgeon like me is going to say enough is enough and that the Greek people have suffered enough already.

And I had that experience yesterday. Check out this headline from a story in yesterday’s EU Observer.

Economic advice from the French government?!? Isn’t that a bit like asking the Chicago Cubs for suggestions on how to win the World Series?

What are the French advisers going to do, propose ways to make the government even bigger? Suggest ways of driving even more entrepreneurs out of the country?

For Heaven’s sake, this is the last thing the people of Greece need.

Sort of reminds me of a headline I saw attached to a report by Reuters a few years ago.

Geesh, the Greeks already suffered because of an invasion by people working for the German government back in the 1940s. Seems like another deployment of German bureaucrats would be adding insult to injury.

Particularly since it would create the worst of all worlds, marrying Teutonic tax efficiency (for example, taxing prostitutes with parking meters) with Greek profligacy (for example, subsidies for pedophiles).

I’m not sure where that would end, but it surely wouldn’t be a good place.

Now let’s make a more serious point about tough love and Greek suffering.

Back in early 2010, about the time the Greek fiscal crisis was becoming a big issue, I warned that a bailout would actually make things worse. I suggested it would be better to let Greece default, both because it would penalize foolish investors who lent too much money to the Greek government and because it would force Greece to live within its means.

That would have meant short-run pain, to be sure, but I think that approach would have involved the least amount of aggregate suffering.

But the political class ignored my helpful advice and instead decided that bailouts would be a better idea. But how has that worked out? The Greek economy has been moribund and the Greek people are now saddled with far more debt. Yes, some short-run pain was mitigated, but only at the cost of much more pain over the past few years (with more pain in the future).

Interestingly, the International Monetary Fund’s top economist unintentionally has confirmed my analysis. Here’s some of what Olivier Blanchard recently posted as part of an effort to defend the IMF’s choices back in 2010.

Had Greece been left on its own, it would have been simply unable to borrow. …Even if it had fully defaulted on its debt, given a primary deficit of over 10% of GDP, it would have had to cut its budget deficit by 10% of GDP from one day to the next.  These would have led to much larger adjustments and a much higher social cost.

Blanchard obviously thinks reducing government spending by 10 percent of GDP would have imposed too much “social cost,” but imagine if Greece had bitten the bullet back in 2010. Sort of like what Estonia did in 2009.

Yes, there would have been a challenging adjustment. Interest groups would have received fewer handouts. Greek bureaucrats would have lost jobs and/or had their pay reduced. Payments to vendors would have been delayed. State-run TV may have been shut down. The regulatory apparatus probably would have been cut back. And I’m sure the Greek government probably would have raised taxes as well.

Now imagine how much better off Greece would be today if it went with that approach.

We don’t have a parallel universe where we can see the results of that different approach, but consider the fact that Estonia had a deeper downturn than Greece, presumably in part because it undertook strong measures, but since that time has been Europe’s fastest-growing economy.

Greece, by contrast, has been Europe’s slowest-growing economy. Hmmm…seems like this should be part of any discussions about “social cost.”

So what lessons can we learn?

I realize there are lots of factors that determine economic performance and that it’s impossible to isolate the impact of either Estonia’s spending-cut policy or Greece’s bailout policy. But it would take a very bizarre and untenable set of assumptions to conclude that Estonia didn’t make smarter policy choices.

The only silver lining to Greece’s dark cloud is that it’s not too late to do the right thing.

P.S. Since we ended by speculating about the good results of my tough-love approach, let’s also enjoy some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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