Greek Chutzpah

Posted by Daniel J. Mitchell

There’s an old joke that if you owe a bank $10,000, you have a problem, but if you owe a bank $10,000,000, the bank has a problem. The Greek government certainly seems to have that attitude. Short-sighted and corrupt politicians in Athens have spent their nation into a fiscal ditch and they now want to mooch from both the IMF and other European nations (especially Germany). The German Prime Minister (if only for political reasons) is talking tough, saying that Greece should do more to reduce subsidies and handouts. Why should Germans work until age 67, after all, so Greeks can enjoy overpaid government jobs and retire at age 61? So what is the response from the Greeks? Amazingly, one of the politicians had the gall to say his nation “cannot accept” further wage cuts. Here’s an excerpt from the Daily Telegraph:

It is far from clear whether Athens will agree to further austerity as strikes hit the country day after day. Andreas Loverdos, Greece’s labour minister, said the EU-IMF team wants further wages cuts. “We cannot accept that.” Greece knows it can opt for default at any time, setting off an EMU-wide crisis and bringing down Europe’s banks. It also knows that key figures in the Bundestag favour debt restructuring. ‘Those who chased high yield by purchasing Greek debt must share the costs,’ said Volker Wissing, chair of Bundestag’s finance committee. Leo Dautzenberg from the Christian Democrats said banks should prepare for a `haircut’ of up to 50pc. The ECB, Brussels, and the IMF have been fighting feverishly to head off such a move, fearing a financial chain-reaction.

If the Germans have any brains and pride, they will tell the Greeks to go jump in a lake (other phrases come to mind, but this is a family-oriented blog). And if this means that German banks take a loss on their holdings of Greek government debt, there’s a silver lining to that dark cloud since it is time for financial institutions to realize that they should not be lending so much money to corrupt and wasteful governments.

Greetings from Spain

Posted by Daniel J. Mitchell

I arrived in Madrid yesterday for a speech to the annual Convention of Independent Financial Advisors, and it is somehow fitting that Spain was downgraded by Standard and Poor’s as I entered the country. I’m not a fan of the bond-rating agencies, and the fact that it has taken so long for Spain to be downgraded simply reinforces my skepticism about their value. So let’s focus instead on identifying the sources of Spain’s fiscal crisis. If you look at the OECD’s fiscal database, you will see that Spain’s short-run problem is solely the result of a growth in the burden of government spending. Over the past seven years, the budget in Spain has skyrocketed from 38.4 percent of GDP to 47.2 percent of GDP. And since tax revenues have stayed the same as a share of national economic output, it is difficult to see how anyone can conclude that the fiscal crisis is the result of inadequate revenue. In the long run, the problem also is excessive government spending, largely because demographic factors such as an aging population will push up outlays for pensions and health care.

In other words, Spain is in trouble for the same reason that Greece is in trouble. Government is too big and politicians are unwilling to take the modest steps that are needed to rein in dependency. This, of course, is exactly why there should not be a bailout. Subsidizing Greek politicians and Spanish politicians — regardless of whether the bailout comes from German taxpayers and/or the IMF — will send a signal to other European nations that there is an easy way out. But the “easy way out” simply postpones the day of reckoning and makes the eventual adjustment much more challenging. Here’s an excerpt from the Washington Post report:

European and International Monetary Fund officials on Wednesday were considering a dramatically increased $158 billion bailout package for Greece as the country’s debt crisis continued to ripple across Europe, with Standard & Poor’s downgrading the credit rating on Spain, the continent’s fourth-largest economy. …In Europe, the most intense focus remains on Greece, but fears were intensifying elsewhere, especially in Portugal and Spain. Though analysts noted that both countries are in better shape than Greece — with lower ratios of debt — they both shared large fiscal deficits and poor long-term economic prospects. On Wednesday, the government in Portugal announced that it would move up a program of painful spending cuts to shrink its budget deficit and shore up confidence amid signs that fearful depositors were moving capital out of Lisbon banks. After lowering Greek debt to junk bond status on Tuesday, Standard & Poor’s kept Spain at investment grade status, but lowered its rating one notch, to AA.

Could Obamacare Survive a Fiscal Crisis?

Posted by Gerald P. O'Driscoll

Over at Think Markets, NYU’s Mario Rizzo asks how Obamacare might be repealed. He focuses on the fiscal brawl that will occur when the Medicare cuts must be implemented. Let’s take a look at another fiscal scenario.

The Greek debt crisis is just the leading edge of a global debt crisis in developed countries. It is not Greece that matters to the rest of the European Union, but the precarious position of other highly indebted EU members: Portugal, Italy, Ireland, and Spain. Fiscally sound Germany could bail out Greece, but not all the others. A Greek default (likely if not inevitable) will fracture the EU and the contagion surely would spread to the United States.

The result will be what I call a Leninist moment. Lenin famously observed that a situation must often get worse before it can get better. He had a different idea of what better would be than do libertarians, but his insight is nonetheless correct.

The resulting fiscal crisis in the United States would finally force a serious debate over fiscal discipline. Not even eliminating all defense expenditures would close the budget gap. Could Obamacare survive the crisis?

Regardless of the Problem, the European Political Elite Thinks More Centralization and Bigger Government Is the Answer

Posted by Daniel J. Mitchell

Greece is in trouble for a combination of reasons. Government spending is far too excessive, diverting resources from more efficient uses. The bureaucracy is too large and paid too much, resulting in a misallocation of labor. And tax rates are too high, further hindering the productive sector of the economy. Europe’s political class wants to bail out Greece’s profligate government. The official reason for a bailout, to protect the euro currency, makes no sense. After all, if Illinois or California default, that would not affect the strength (or lack thereof) of the dollar.

To understand what is really happening in Europe, it is always wise to look at what politicians are doing and ignore what they are saying. Political union is the religion of Europe’s political class, and they relentlessly use any excuse to centralize power in Brussels and strip away national sovereignty. Greece’s fiscal crisis is simply the latest excuse to move the goalposts.

The Daily Telegraph reports that Germany and France are now conspiring to create an “economic government” for the European Union. Supposedly this entity would only have supervisory powers, but it is a virtual certainty that a European-wide tax will be the next step for the euro-centralizers.

Germany and France have [proposed] controversial plans to create an “economic government of the European Union” to police financial policy across the continent. They have put Herman Van Rompuy, the EU President, in charge of a special task force to examine “all options possible” to prevent another crisis like the one caused by the Greek meltdown.

…The options he will consider include the creation of an “economic government” by the end of the year. “We commit to promote a strong co-ordination of economic policies in Europe,” said a draft text expected to be agreed by EU leaders last night. “We consider that the European Council should become the economic government of the EU and we propose to increase its role in economic surveillance and the definition of the EU’s growth strategy.”

…Mr Van Rompuy, the former Prime Minister of Belgium, is an enthusiastic supporter of “la gouvernement économique” and last month upset many national capitals by trying to impose “top down” economic targets. Angela Merkel, the German Chancellor, has called for the Lisbon Treaty to be amended in order to prevent any repetition of the current Greek crisis, which has threatened to tear apart the euro.

Thursday Links

Posted by Chris Moody

Lessons from the Greek Budget Debacle

Posted by Daniel J. Mitchell

Fiscal crises have a predictable pattern.

Step 1 occurs when the economy is prospering and tax revenues are growing faster than forecast.

Step 2 is when politicians use the additional money to increase government spending.

Step 3 is that politicians do not treat the extra tax revenue like a temporary windfall and budget accordingly.Instead, they adopt policies – more entitlements, more bureaucrats – that permanently expand the burden of the public sector.

Step 4 occurs when the economy stumbles (in part because more resources are being diverted from the productive sector to the government) and tax revenues stagnate. If the resulting fiscal gap is large enough, as it is in places such as Greece and California, a crisis atmosphere is created.

Step 5 takes place when politicians solemnly proclaim that “tough measures” are necessary, but very rarely does that mean a reversal of the policies that caused the mess. Instead, the result in higher taxes.

Greece is now at this stage. I’ve already argued that perhaps bankruptcy is the best option for Greece, and I showed the data proving that Greece has a too-much-spending crisis rather than a too-little-revenue crisis. I’ve also commented elsewhere about the feckless behavior of Greek politicians. Sadly, it looks like things are getting even worse. The government has announced a huge increase in the value-added tax, pushing this European version of a national sales tax up to 21 percent. On the spending side of the ledger, though, the government is only proposing to reduce bonuses that are automatically given to bureaucrats three times per year. Here’s an excerpt from the Associated Press report, including a typically hysterical responses from a Greek interest group:

Government officials said the measures would include cuts in civil servant’s annual pay through reducing their Easter, Christmas and vacation bonuses by 30 percent each, and a 2 percentage point increase in sales tax to bring it to 21 percent from the current 19 percent. …One government official, speaking on condition of anonymity ahead of the official announcement, said…that “we have exhausted our limits.” …”It is a very difficult day for us … These cuts will take us to the brink,” said Panayiotis Vavouyious, the head of the retired civil servants’ association.

Now, time for some predictions. It is unlikely that higher taxes and cosmetic spending restraint will solve Greece’s fiscal problem. Strong global growth would make a difference, but that also seems doubtful. So Greece will probably move to Step 6, which is a bailout, though it is unclear whether the money will come from other European nations, the European Commission, and/or the European Central Bank.

Step 7 is when politicians in nations such as Spain and Italy decide that financing spending (i.e., buying votes) with money from German and Dutch taxpayers is a swell idea, so they continue their profligate fiscal policies in order to become eligible for bailouts. Step 8 is when there is no more bailout money in Europe and the IMF (i.e., American taxpayers) ride to the rescue. Step 9 occurs when the United States faces a fiscal criss because of too much spending.

For Step 10, read Atlas Shrugged.

Krugman: The Hubris of Central Planning

Posted by David Boaz

In the New York Times today, Paul Krugman discusses the Euro and the problem of Greece. He hastens to note that the problem is not debts, deficits, and government profligacy, which it sure might seem like to the untrained eye. But he fingers a different and deeper problem:

No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment….

It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.

Now, you’ll note that Krugman says that Europe wasn’t yet “ready” for a single currency, suggesting that in some happy day it will be. Because of course the logic of history is always to move toward centralization and conformity, right? Nevertheless, it’s great to see Paul Krugman criticizing the arrogance of elites and the hubris of the centralizing impulse.

Maybe Greece Should Go Bankrupt

Posted by Daniel J. Mitchell

The fiscal crisis in Greece is fascinating political theater, in part because the Balkan nation is a leading indicator for what will probably happen in many other countries. The most puzzling feature of the crisis is the assumption in other European capitals, discussed in the BBC article below, that a Greek default is the worst possible result. It certainly would not be good news, especially for investors who thought it was safe to lend money to the government, but there are several reasons why the long-term pain resulting from a bailout would be even worse.

  1. Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely. In a four-year period between 2005 and 2009, Greek politicians expanded the burden of government spending from an already excessive level of 43.8 percent of GDP to an even more excessive level of 51.3 percent of GDP. Subsidies are rampant, the public sector is bloated, civil service pay is way too high, and entitlements are wildly unsustainable. A fiscal crisis – with no escape options – is probably the only hope of reversing these disastrous policies. So why, then, would it make sense for Germany and other nations to provide an escape option?
  2. Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers. Greece is in trouble because the the people riding in society’s wagon assumed that there would always be enough chumps to pull the wagon. In reality, Greece is turning into a real-world version of Atlas Shrugged. Government has become such a burden that the job creators and wealth generators have given up and/or moved their money out of the country. Should taxpayers in other nations reward the greed and narcissism of Greece’s interest groups by being forced to pull the wagon instead?
  3. Bailing out Greece will encourage profligacy in Spain, Italy, and other nations. The hot acronym in public finance circles is PIIGS, which is shorthand for Portugal, Ireland, Italy, Greece, and Spain. Greece is getting all the attention now, but these other countries have the same problems of excessive spending, bloated and dysfunctional public sectors, and unsustainable finances. What happens in Greece will send a very clear signal to the politicians in these nations, much as a parent who lets the oldest child run rampant is sending signals the younger siblings. Does anybody doubt that a bailout of Greece will discourage the other PIIGS from undertaking needed reforms?
  4. Bailing out Greece is not necessary to save the euro. This is the most puzzling feature of this Greek tragedy (sorry, I couldn’t resist). There is a pervasive assumption that a default somehow would cripple the common currency of most European Union nations. But why would a default in Greece undermine the euro? If California went under, after all, that would not cripple the US dollar. There are unpleasant things that would probably happen following a Greek default, but the stability and strength of a currency is a function of central bank behavior. And so long as the European Central Bank does not crank up the proverbial printing press to monetize Greece’s debt, the euro should be fine.

In my darker moments, I have sometimes warned audiences of what will happen when a majority of voters in a country or a state become dependent on government. In such an environment, it obviously becomes much more difficult to put together an electoral coalition that will lead to fiscal changes that shrink the burden of government and curtail the predatory state. This is what has happened to Greece, and what is soon going to happen in other European nations (and, barring reform, what will eventually happen in the United States). The irony of this situation is that even the folks riding in the wagon should favor reform. After all, a parasite needs a healthy host.

For background info, here’s an excerpt from the BBC article:

Despite heavy rain, there have been rallies across Greece throughout the day, with thousands of striking workers and pensioners gathering in the capital, Athens. …The unions regard the austerity programme as a declaration of war against the working and middle classes… “It’s a war against workers and we will answer with war, with constant struggles until this policy is overturned,” said Christos Katsiotis, a union member affiliated to the Communist Party, at the Athens rally. …On Tuesday, Prime Minister George Papandreou’s socialist government announced that it intends to raise the average retirement age from 61 to 63 by 2015 in a bid to save the cash-strapped pensions system. …Mr Papandreou has already faced down a three-week protest by farmers demanding higher government subsidies. …The markets remain sceptical that Greece will be able to pay its debts and many investors believe the country will have to be bailed out. The uncertainty has recently buffeted the euro and the problems have extended to Spain and Portugal, which are also struggling with their deficits. The possibility of Greece or one of the other stricken countries being unable to pay its debts – and either needing an EU bailout or having to abandon the euro – has been called the biggest threat yet to the single currency. Ahead of the talks between EU leaders in Brussels on Thursday, some business media reported that Germany is preparing to lead a possible bail-out, supported by France and other eurozone members.