Greece Has Chosen to Become a Banana Republic With its No Vote

It was an in-your-face message to the country’s creditors (largely the European Union, the European Central Bank and the International Monetary Fund) that Greece won’t be lectured on repaying debts or pension reform anymore. And it leaves the Troika with few options at tomorrow’s emergency summit—either cut Greece loose and accept the consequences, or give in to the country’s demands.

Not much of a choice, given that if the EU caves, it reads like an open invitation to countries like Cyprus, Portugal, Spain and Italy to do exactly what Greece has done. Since when is the Eurozone a transfer union? It cannot be expected to shift funds from high-productivity countries that keep their public finance in order to poorer ones that don’t. There’s a lesson to be learned here, lest the EU blows its chance.


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Note to Krugman: Greece Proves Keynesian Economics Wrong

Times columnist Paul Krugman’s continuous railing against austerity reached a crescendo with Greece’s default. In his What Greece Means, Krugman vents his outrage:

“What Greek experience actually shows is that while running deficits in good times can get you in trouble… trying to eliminate deficits once you’re already in trouble is a recipe for depression…Greece is the worst case, with unemployment soaring to 20 percent even as public services, including health care, collapse.”

Bankrupt economies, like Greece, need stimulus, not austerity, Krugman declares indignantly. The “austerity-induced depressions” around the European periphery are proof that Keynes was right.  Germany’s Angela Merkel, her IMF-austerity allies, and world-wide lenders do not understand that we need a massive stimulus to get Greece out of this mess. They need to step up to the plate if they are good citizens of Europe (or the world).

Krugman does not fess up that Greece’s Keynesian policy of endless borrowing to fund wasteful government spending and feed massive welfare programs is exactly what got Greece in the trouble it is now in. The Greeks cannot pay their  bloated public payrolls, out-of-kilter wages, and generous pensions and early retirements unless fools lend them money that will not be repaid. Even the Greeks themselves are not falling for that trick. They are too busy transferring their assets abroad. Merkel and her stingy Germans make for good scapegoats, but it’s not only them. Lenders throughout the world have shut down the lending spigot.

Liberals are gearing up to use Krugman's Greek fable of “Keynes has won” to justify further trillions of U. S. debt and growing government to ever greater heights, as Times columnist Nicholas Kristof reveals in his In Athens, Austerity’s Ugliness:

 

 “Europe declared war on Keynes, and Keynes is winning…If you want to know how well (Republican budget cutting) works, come visit Europe — especially Greece. Yes, Greece needed a wake-up whack and economic reform, but Republican-style austerity knocked the patient unconscious.”

Greece’s Keynesian orgy leaves  it with two unpalatable options. One: Without further European bailouts, Greece exits the Euro zone, its drachma collapses, and its living standards fall to Bulgaria’s. Eventually, after prolonged pain its wages and prices fall enough to restore its competitiveness. Two: It meets the terms of its EU bailout agreements, it stays in the Euro zone, cuts government spending, and reduces wages and prices over an extended period of time until its competitiveness is restored.

One statistic explains why Greece must experience rising unemployment, let wages and prices fall, and fix its broken welfare system under both scenarios. German unit labor costs (the cost of producing one unit of output) have been flat over the past decade, while Greek unit labor costs soared, fueled by borrowed money from abroad. Germany (and the rest of Northern Europe)  kept its costs in check by wage restraint, rising productivity, and checking the welfare state. Greece became a broken economy no longer able to compete either within the European or world market. Keynesian economics brought them to this sad state of affairs.

Greece is not a test of Keynesian economics as liberals would like to claim.  Only economic illiterates could call for deficit spending when there are no lenders. In order for there to be a deficit, someone somewhere has to pay for it.

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The European Mess (Berlin Journal #2)

More than a week of speaking with people, reading the press, and watching the nightly news in Berlin has brought home what a mess Europe is in.  The European Union now consists of 27 member states. Nine more are lined up to join, the most contentious being the “non-European” Turkey.  Seventeen countries have the Euro as their common currency. EU member countries range from small and desperately poor (Albania), to South Mediterranean spendthrifts (Greece), to large, wealthy, and thrifty (Germany). Each night’s TV news headlines leads with the latest attempt to save Greece from default.

The European Union has a parliament chosen in elections that attract little attention. It has a Council of Ministers, and a proliferation of high-paid Euro-bureaucrats. It operates ad hoc on the basis of a series of treaties. Its one attempt to draft a constitution failed. Key decisions require unanimity; others do not.

No one appears to understand what power the EU concoction has – in what cases it can trump national decision making.

If we think we have a mess sorting out federal-state issues, we have it easy compared to Europe. Let me take just one news item from the Frankfurter Allgemeine, September 29  to illustrate. The article is entitled “EU Parliament Approves Reform of Stability Pact,” and here is my reaction to it.

In its wisdom, the EU parliament approved “sanctions with teeth” for those countries like Greece and Portugal that run large deficits. Those who break the stability pact rule (deficit no more than three percent of GDP) will have to pay large fines. (They were already supposed to pay fines, but now the EU is really serious, I guess). The minority socialists, greens and leftists voted against this “blind savings fever.” The Christian democrats countered against torpedoing the stability pact “with worn ideas from the socialist mothball chest.” No one ventured to ask how countries that are broke are going to actually pay these fines.

Then things get even wackier. The EU parliament ruled that it could impose sanctions against countries with “excessive imbalances in their trade accounts.”  A green delegate argued that countries with export surpluses (like Germany) should make “fair wage agreements and future investments” to correct their imbalances.” In other words, Germany should take measures to reduce its competitiveness and efficiency so that inefficient spendthrift countries can sell to Germany!

I assume that such talk was just hot air. How can anyone force a country to become more or less efficient?

What I see generally is an endless struggle between Europeanists and nationalists. The EU will increasingly seek independent taxing authority so as to have its own sources of revenue. The EU proposal of a tax on financial transactions is a case in point. The poor countries will favor EU wide rules and taxes, and the richer countries will resist. In a United States of Europe, the poor countries know they can count on a steady stream of transfers from the rich countries. There are many more of them than rich countries.

The rich countries realize that they are being set up, but they have been conditioned to be “good Europeans.” On the Sunday (October 2) political talk shows, the head of the conservative CSU (part of the ruling Merkel coalition) explained that he voted for the German bailout of Greece because “we must all be good European neighbors.” He warned, however, that there were limits to neighborliness. He would not vote for any more money for Greece. If he did, his Bavarian base would throw him out of office.