Diary

Greece: Exit Stage Left

Long before there was a Rome, a Frankish kingdom in Paris, Anglo-Saxon rulers in England, or a Prussia, there was Greece: Aristotle and Plato; the Iliad and the Odyssey; Auschylus, Sophocles, and Euripedes; the victories over the Persians at Marathon and Priam’s kingdom at Troy. How could there be a Europe without Greece?  Well, everything can get stretched to its breaking point and some lessons are eternal.

The crisis facing Greece has two central elements:

1. Socialist governments collapse when the ruling elites run out of other people’s money.

According to the Heritage Foundation’s 2015 Index of Economic Freedom, total tax revenues amount to 33.8% of Gross Domestic Product, while government spending amounts to 58.5% and the accumulated deficit is 170% of GDP. This is what the Greek government, the European Commission, the International Monetary Fund, and the European Central Bank have been arguing about for months.

The left wing government of Syriza was elected in January based upon impossible promises to negotiate significant forgiveness of the crushing debt, cancel planned privatization of public ports and utilities, and re-hire thousands of government workers. They have negotiated marginally less severe budget objectives from the European and American folks who loaned them the money, but have refused to reduce generous government pensions and have proposed tax increases rather than cost reductions. (Like in the US, liberals want to raise taxes; conservatives want to cut government spending.)

Unfortunately for the Greeks the majority of their 300 billion euro debt is owed to international institutions which are heavily influenced by the Germans whose psyche has never recovered from the hyperinflation which wiped out their middle class in the 1930’s. Industrious they are; sympathetic they are not; and their government is led by Angela Merkel’s conservative Christian Democrat Union whose Finance Minister, Wolfgang Schaeuble, views his Greek counterparts as Marxists and communists.  Syriza’s call for war reparations from World War II appealed to the Greek masses and even had a bit of support from German leftist parties, but it did little to mollify the guy with the hammer.

The Greeks have run out their ability to borrow from future generations and from the Germans.

2. The European model of a common currency with independent national fiscal policies is fatally flawed. 

One must distinguish between  the 19 member common currency “Eurozone” which began in 2002, and the European Union which began in 1958 with the six-member Common Market and has evolved into the current 28-member European Union,  The larger organization provides for free movement of people and goods, and harmonization of regulations with European equivalents of the Food and Drug Administration, the Environmental Protection Agency, the Department of Transportation, the Department of Agriculture, the Federal Communications Commission, and a myriad of other growing bureaucracies in Brussels. The smaller “eurozone” (which does not include Britain, Poland, Hungary, and Sweden among others) began as an intermediate step toward a fully integrated continent which would eventually have a centralized government much like the United States. It is a political compromise, the most centralization that the pan-Europeans could negotiate at the time.

The Eurozone is overseen by the European Central Bank which has a mandate to keep inflation in check, but there is no central budgetary authority. Instead there are guidelines – budget deficits no more than 3%; debt to Gross Domestic Product ratio not above 60%; sound bond ratings. Modest violations were routinely excused in the interest of furthering integration until the 2008 financial crisis. The other major culprits – IrelandPortugalSpain – swallowed hard, cut spending, raised taxes, and largely got their houses in order. Greece lagged despite austerity measures which drove unemployment over 25%. The deals being discussed talk about operating budget targets – not the manageability of interest payments or debt repayment.  It is hard to see how Greece can ever meet the Eurozone requirements without significant debt forgiveness, a changed attitude about tax avoidance, and a long period of grinding austerity.

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Aside from sentiment, there are good reasons to want Greece in the European Union. At the dawn of the Cold War in the 40’s, there was a real chance that Greece would fall into the Russian orbit. The American and British-backed army won a three year civil war against Greek communists who were supported by Tito’s Yugoslavia. Greece joined NATO, but decades of political instability and right wing governments followed. When Syriza leader Alexis Tsipris visited Vladimir Putin in Moscow in April there was at least an echo of their common communist and Orthodox Christian history. Unfortunately for Tsipris, the Russian checkbook is also depleted.

So, what would a Greece in the EU but out of the Common Currency look like. Some debt forgiveness would be required. The Greek drachma would depreciate substantially, reducing the buying power of the Greeks and making their exports, real estate, and services less expensive for other Europeans. There would be more jobs, but not much prosperity. The outflow of aspiring young Greeks to other European countries would accelerate. Inflation would erode the buying power of a country full of pensioners. The next few years promise to be bleak and full of political turmoil.

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This week’s video is David Axelrod’s reaction to the Supreme Court’s Obamacare decision. He is a savvy guy. The Republicans will be in a much better position to fix it if they win the presidency in 2016 than they would have been with an upended system, a Democratic president, and a Republican Congress without a plan.

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