Belmont Club

"It's a trap"

Protesters have “demand(ed) an end to the Greece’s financial crisis” as the Greek government prepared to cut down on public spending. It had previously taken advantage of its EU membership to run up unparalleled deficits and borrow money on a monumental scale to increase its public spending, while concealing the true nature of its condition from EU inspectors. With the EU unwilling to assure any further bailouts the Greek government is under pressure to cut public spending and the protesters don’t like it. Just end the crisis already, they urged.

“It is a simple issue of survival,” the newspaper quoted Anna Tsounara, a protester as saying. “… I have never demonstrated like this before but now I want answers. All of us here worked in the public sector on contracts for years and now we are told the state is bankrupt by a government that comes in and says it wants to get rid of us. Just like that. That’s not fair,” the protester added. …
The country’s leftist government under Prime Minister George Papandreou, only in power for three months, faces the colossal task of carrying out reform programs to eradicate problems of corruption and politics standing in the way of economic growth.

He has reportedly warned of the country’s “sinking” as a result of bad public finances unless changes are made.

“People are puzzled. They spent the best part of the last decade thinking ‘it’s over, we made it, we’re rich’ and then suddenly they’re told the country’s bankrupt. Like the past conservative government, many bought into the illusion that borrowing was OK. And now they, too, are weighed down by debt,” Pavlos Tzimas, a political analyst told The Guardian.

Greece’s problems were ironically exacerbated by its inclusion in Euro currency area. With Greek prices denominated in Euros, it’s tourist industry collapsed because people could no longer afford to visit the country and it had to borrow more and more to keep up the economy. The saga of Greece’s attempts to rein in decades of entitlement makes for gripping reading, not in the least because it echoes many of the themes now being heard in the US.

In Oct 2009 the socialist PASOK took power with a big majority. They promised to rein in the deficit but the new budget submissions soon showed that the deficit rather than falling wound continue to rise. In response the Prime Minister vowed to tax the bankers and increase tax rates on high income groups while announcing some cuts in social security. But the markets fell and international creditors remain unconvinced that Greece was serious. Meanwhile the protesters continued to demand that Greece ‘end the economic crisis’.  Nobody believed that the party was over, that the last days of disco had come and that the gravy train had to stop. It simply couldn’t be true and the protesters acted accordingly. The public sector employees union ADEDY has called a 24-hour nationwide strike to protest against the government’s austerity measures on Feb 10. “Greek tax officials have also called rolling nationwide strikes throughout February. Private sector union grouping GSEE has said it will stage a 24-hour strike against the government’s austerity measures at end-February.”

Although Guardian columnist Larry Elliot proclaimed the Euro “too big to fail”, the chief economist of Deutsche Bank, Thomas Mayer said “If the Greece situation is handled badly, the Euro-zone could break down, or suffer major inflation … Neither the European Central Bank nor the Commission nor any other EU body can force Greece to implement necessary reforms in exchange for help.” Mayer warned that Greece may be only one of several countries that will fall into the “EMU trap” a condition in which Europeanization essentially destroys the competitiveness of the economy.

Thomas Mayer warns that some countries might have fallen in what he calls an “EMU Trap”: According to his analysis, countries which have strong labour cost increases might fall into a position in which growth is slowing because competitiveness has badly deteriorated. With growth slowing, tax revenues are falling and outlays for unemployment are increasing, leading to a bigger budget deficit. In this position, a country cannot do much anymore: Cutting the deficit further would lead to even slower growth while there is no possibility to improve competitiveness quickly.

Thomas Mayer sees Portugal and Italy already in the EMU trap and Greece and Spain in imminent danger of falling into this trap. Thomas portraits three possible consequences from the EMU trap: First, a country could cut its production costs. Second, it could leave EMU. Third, it could pressure the ECB to allow for a higher rate of inflation in the whole union.

Without competitiveness, there is no goose to lay the Golden Egg and therefore no eggs.  But these admonitions fell on deaf ears as  Greek farmers blockaded borders with neighboring countries to demand debt moratoriums, more subsidies and higher prices for their goods. Eggs! Eggs! Greek officials have explained that the government simply has no more money but many protesters were sticking to their demands. Meanwhile across the Atlantic, the US is struggling with its own crisis brought about by a huge increases in spending, which like Europe were mostly the product of entitlements. Ironically these rose even as the government continuously reduced spending in one of the core government functions — national defense — to levels unseen in fifty years. Surprising as it may seem, Bush spent less for defense as a percentage of GDP than the lowest point under Jimmy Carter and at half the rate of Kennedy years, even before Vietnam. It isn’t the burden of guns which is sinking the West, it’s borrowed butter. Rising interest payments may eventually overtake defense spending.

The economic crisis in the West is in part a cultural crisis born of a contradiction in expectations. For many decades and especially since the End of History was declared circa 1989, there was a widespread belief that an unlimited amount of money existed from which to draw while populations went around fulfilling themselves tending the garden of Gaia in a politically correct universe in which there was no need for guns, no prospect of hunger and no cause for danger. And now the publics are saying “do you mean it was all a lie?” You mean like Global Warming?

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