by Frank Thomas
It’s strange to hear Paul Krugman predict the imminent breakup of the Eurozone caused by countries that spent too much but should spend more … and be additionally supported by countries who have followed a course of reasonable fiscal discipline. Indeed, Ireland, Portugal, Greece, and Spain are all drowning in debt – the origin of which is a separate story for each country. U.S. right-leaning conservatives typically get the causal factors wrong when they automatically conclude that what’s happening to Greece, Spain, Portugal, Ireland, and Italy is a result of that evil “Socialistic cradle to grave” European economic model.
Conveniently forgotten is that America is still in a disastrously prolonged recession due to Bush Jr.’s 6 year over-spending message of BUY, BUY, BUY (a house ), SPEND, SPEND, SPEND (on cheap products from China) and LEND, LEND, LEND (at 100% of inflated values from slick lenders) spurred by ever lower taxes for the rich and stagnant wages and insane credit card debt for everyone else! A truly terrific grand economic formula for social-economic progress for ALL Americans! Those export trade deficits just kept piling up to ±$68 billion per month in 2007-08 … putting extreme reliance on a 70% of GDP CONSUMPTION level and Zero Savings to achieve minimum 3-4% GDP growth rates negatively affected by gigantic trade deficits, disgracefully low public and private investments in infrastructure and manufacturing.
And here we are about to reignite that same magical growth formula as trade deficits rebound from a 36% of GDP level in 2010 to an onward sky high trend of 51% of GDP last March and rising … with hopes the middle class will SPEND, SPEND, SPEND with ever lower wages! It’s called junk economics. And junk economics it will remain with enduring high unemployment until we, among many other things, do what European nations have done long ago concerning trade policy with countries like China … namely, enter a phased in agreement that China will bring its exports to U.S. to a par level with U.S. exports to China by 2015. Away with trade deficits!
But back to the problem of Greece. Following are just a few facts concerning the generally non-socialistic origins of Europe’s weak performing countries.
Greece has been on the verge of bankruptcy for almost half of the last 150 years! Yet, this history and the country’s real financial situation when it was admitted to the European Union were entirely overlooked. As most know, Greece developed phony statistical figures to gain entrance to the Eurozone currency in 2000. Then, while Greece continued producing deficits in the 20th century and on and on through the first decade of the 21st century – fiscal discipline provisions of the Maastricht Treaty were NOT enforced. The current inevitable financial collapse of Greece comes from many factors: lax EU enforcement of fiscal discipline; large trade deficits facilitated by EU banks wildly lending to Greece to stimulate exports to Greece; gross internal mismanagement and a culture of corroding corruption (like that of Russia); a criminally irresponsible socialistic system of flagrant social-nets to keep people dumb and passive and the corrupters safe while they were misappropriating the taxes collected.
Spain and Ireland’s financial chaos situations are NOT due to socialist programs run amok but simply to a greedy, irresponsible investment wave in real estate, including government guarantees of much of the speculative bank lending on real estate projects. Both countries are suffering from the aftermath of a burst property bubble compounded in Spain by a 20% unemployment rate. Prior to its property financial crisis, Spain’s national debt was at a very low 40% of GDP reaching 65% currently. The real estate crisis was intensified by the 2009-2011 mini-depression … a mini-depression sparked and transported to Europe by the U.S. exotic casino bank lending and bank/hedge fund derivative financial poker game played on a mammoth scale over the period 2003 to 2008.
Italy’s crisis is NOT due so much to socialist programs as to an ancient, costly banking system and corrupt gross mismanagement under the chaotic egomaniacal leadership of the business tycoon Berlisconi. Result? Italy, like Greece, has been one of the lowest tax collection countries in Europe. And NOT surprisingly, Italy has the HIGHEST salaries for government bureaucrats, but, surprisingly to most perhaps, has among the LOWEST working class wages in Europe! Of course, the latter is why Italian (and Greek) tax evasion is so high as the working class is forced to operate heavily in the black just to survive with meager wages. Does this ring familiar to our systemic wage/benefit exploitation of our working class? Poor tax collection, stagnant consumption deepened by an ongoing mini-depression is a deficit inducing financial reality for any country operating for so long with a middle-class wage race to the bottom system like Italy and the U.S.
If Greece exits the Eurozone, it’s probably back to the Middle Ages for Greek people and possibly a major financial shock wave for the rest of Europe. Without substantial injections of loan funds in addition to the hundreds of billions already spent and/or committed by the EU and IMF, Greece can’t pay government salaries, pensions, social nets as well as international debts over the next five years. In an exit scenario, the new currency will be a weak currency, wages will fall and expanded unemployment can be expected. When all savings, loans, and contracts with foreign investors are converted to the new currency and many Greeks timely transfer their money to foreign accounts, the Greek bank system could indeed collapse. This in combination with a possible investor withdrawal of funds from other weak performing countries such as Spain, Portugal, Ireland could lead to an implosion of the Eurozone. JP Morgan has estimated that a Greek exit will result in immediate bank losses of €400 billion on loans that will be repaid in a devalued currency. This includes € 130 billion from the EU/IMF, €240 billion in Greek debt, and €25 billion in European banks loans.
On the other hand, banks and private investors just experienced the biggest debt write-off in Greece’s history … a bond swap rescue package of €237 billion amounting to more than 70% of investor holdings going up in smoke. This action was led by the Netherlands and German Financial Ministers, de Jager and Schauble. BUT, the same investors and others who lost so much have not withdrawn from the Eurozone … not even after the Fitch rating agency downgraded Greece’s default rating from CCC to C, indicating Fitch considers the bond swap rescue package a distressed debt exchange making a default more likely.
Meanwhile, the weak Euro members Spain, Portugal, Ireland, Italy have undertaken the necessary austerity measures, unlike Greece. So their financial vulnerability has been somewhat reduced. In addition, the European Emergency Fund and IMF have built up a reserve funds exceeding €650 billion in the event of a Greece exit from the euro. And the Emergency Fund will probably be further increased. But it is highly unlikely much of these funds will be used to save Greece if the country does not come up with an acceptable, credible alternative plan to lower its enormous debt level … now running at 160% of GDP to 120% of GDP by 2020.
The northern EU countries are not about to pour more billions of good money after bad money into Greece. A confidential analysis by the European Central Bank, the European Commission, and the IMF in February projected that Greek debt would still amount to 129% of GDP by 2020 – despite multi billions of loans from the rest of Europe – and could still be as high as 160% of GDP in 2020.
So it's "tough love" time for everyone involved in Greece's financial disaster and contamination possibility to other weak and even strong EU countries. Firewalls are being built up to minimize the damage of a possible Greece exit. It's a devil's dilemma. Europe lends to Greece and loses billions. Europe doesn’t lend to Greece and losses billions. In the final analysis, no one really knows with any degree of confidence what a Greek exit from the euro financially means for all of Europe. The Maastricht Treaty has no provision for expelling a member form the Eurozone. Can there be an orderly exit with minimal damage to all parties?
The U.S. and UK remain obsessed with “consumer spending” their way out of the economic downturn, while Eurozone members are putting systems in place to enforce fiscal discipline for ALL members including the Greeces. Northern European countries that are advocates of sound money are not enamored with pure money printing solutions to get control of big deficits.(See: "European Banking System Is Not Seen as a Money Printing Press, Jan. 15, 2012 and followup article, "Continuation: ECB Banking System Should Not Be Seen as a Money Printing Press, Jan. 27, 2012").
BUT, are Europeans going to bring about or allow a total breakup of the European Union due to the Greece crisis and its danger of spreading to Spain, Portugal, Ireland? Are Europeans going to revert to 27 different currencies? I seriously doubt that. A solution will be found for Greece to leave the Eurozone in an orderly manner with constructive assistance from the EU or the Greeks will put forward a credible, acceptable austerity and reform alternative to get itself back on a sustainable footing. I’m not optimistic about the latter option.
Irregardless, Paul Krugman’s suggestion that the European Union is about to or could Fall Apart soon is a bit premature and highly improbable!
Frank Thomas
The Netherlands
May 16, 2012
