Three people were killed in Greece as more than 100,000 protesters, some of whom set a bank ablaze, demanded an end to government spending cuts required by the nation’s debt. “The police blamed what were called ‘hooded youths’ for setting fire to the building. … But most now appear to be resigned that megaphones and protest songs are no match for the volatile financial markets that have roiled the country for the past several months.”
The tumultuous events masked another crisis: the increasing worry that “Europe may be months, conceivably weeks away from an expanded debt crisis that cuts more countries off from access to the markets and forces fresh emergency action by rich governments or the European Central Bank.”
For now, Portugal, Ireland and Spain, widely seen as the next possible “dominos” after Greece, remain in significantly better shape. The interbank market is far from grinding to a halt as it did after Lehman Brothers collapsed in late 2008.
But the spread of investor jitters in the past 24 hours, affecting markets as distant as yen swaps in Tokyo, suggests market conditions could deteriorate as rapidly as they did during the global financial crisis of 2007-2009.
Some analysts worry that even if the financial situation stabilizes, partly with American money, that it will merely represent a stay of execution not a pardon. The fundamental problem, according to Real Clear Markets, is that practically all of Europe has spent or promised to spend more than it can afford. The Welfare State it argues, is a bronze giant with feet of clay. And now that giant is starting to topple as rivers of debt eat away at its foundations.
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.
Almost on cue, the European Commission warned the UK that its debt would be “higher than any other European Union country this year. … Brussels economic forecasts published today predict that debt will account for nine tenths of the British economy’s total value by the end of next year.”
The commission is also concerned that Britain’s massive bank bail-outs have stored up potential budget problems for the years ahead. “In addition government financial sector interventions taken during the crisis have generated large contingent liabilities,” said the report.
If that parallel sounds eerily familiar to Americans then so does this political prognosis. The situation in which Britain finds itself is so dire that the Governor of the Bank of England told an American economist that whichever party won the current general election it would be “out of power for a whole generation because of how tough the fiscal austerity will have to be.” David Cameron may find, immediately after taking control of the ship of state that he has been promoted to the captaincy of the Titanic.
Even the Guardian, which cheered Labor on on its path of destruction is starting to worry. The Greeks simply won’t take their medicine. But why should they after years of assurance that street anger, a media campaign and a celebrity spokesperson or two could always produced the Golden Egg? Like many others the “hooded youth” were told that the goose would always lay the golden egg. And they are now surprised, indeed astonished, that the exhausted bird comatose in its nest will lay no more; and no amount of throttling and matches lighted under its webs can get it going again.
With unions backing the general strike – a walkout that crippled the country and isolated Greece from the rest of the world – the protests were seen as a key test of prime minister George Papandreou’s determination to carry out the reforms. Germany, which will be picking up the lion’s share of the emergency aid, has been quick to warn that if Athens strays the money will dry up.
But he clearly has a battle on his hands. “No longer can they say that these are isolated incidents of violence carried out by stone-throwing anarchists,” said Makis Papadopoulos, who owns a popular tourist store in the capital’s historic Plaka district where shopkeepers were fearfully boarding up premises.
“People are being pushed to the hunger line. With the intervention of the IMF things have changed. We now have an explosion situation and no one knows what the limits of Greeks are, how far people will go to vent their spleen.” Resolution, say some, will only come with a root-and-branch clean up of Greece’s corrupt political system.
The words “corrupt political system” mark the introduction of that favorite bogeyman, the vague They. ‘They’ are forcing the people into austerity. ‘They’ is the term of choice when ideologues don’t want to be specific. “Rich nations”, “the IMF”, “the usurious Americans”, “juntas”, “Bosses”, “fat cats” etc, will be excoriated, as doubtless they should be. And in the fire and smoke, literal in the case of Greece, the culpable idea of promising something for nothing will hide in the sooty shadows. It will be the old “Wall Street” versus “Main Street” meme again, without ever mentioning the inconvenient fact that the protesters on Main Street borrowed from Wall Street in the first place to fund a dream that has now turned into a nightmare.