Should Greece Exit the Euro?

After the American Century

Some time ago in this space I suggested that giving money to the Greeks would not solve their problems, and that it was better to let them go bankrupt if they could not reform. Now leading German thinkers have reached the same conclusion, as reported today in the New York Times.  It took them a while, and the Germans pumped billions of dollars into Greece while thinking about it.  Now some are suggesting that perhaps Greece should exit the Euro, and in effect go through bankruptcy, and then come back in when its house is in order. There is no mechanism for throwing a country out of the EU, so this would have to be a "voluntary" departure.

It would have made far more sense to refuse a bail out in the early spring. To refuse now has a different meaning than it would have then. In August a refusal says not only that the Greeks must pay their own way, but that their problems are too big for the rest of the EU. Stopping all support for Greece now looks rather like a team of fire fighters leaving a blaze that is out of control because they cannot put it out. If the fire brigade is inadequate to save Greece, what good will it be when a larger economy such as Spain or Italy gets into trouble? The EU begins to look weak, and its currency unreliable. 

In short, once the EU has gone this far to save Greece, it rather must find a way to succeed. Recently, I suggested in jest that perhaps Greece could lease some of its islands to other countries for 99 years. This idea begins to look almost serious.

Different Default Situations: US vs. EU

After the American Century

Both the EU and the US are struggling with massive public indebtedness, and in each case the problems emerge from bad decisions made during the last decade. The problems are quite different, however.

First, consider The United States. It seems hard to believe now but the US had balanced its budget and was rapidly paying off its national debt in 2000. The current fiscal woes are due to an excessive tax cut that overstimulated the economy, combined with massive military expenditures and a failure to regulate the banks. These problems all came from the White House, which dismally failed to protect the strong economy created in the 1990s. Bush overspent, undertaxed, and virtually abandoned regulation. The country needs years to get out of the mess he created, during which it needs to raise taxes back to where they were in 2000, particularly on wealthy people. But the Republicans, once a party of fiscal rsponsibility, have no intelligible economic program and they seem willing to let the nation go into default rather than compromise with the White House. In short, the American problem is firmly lodged in Washington, rooted in the failures of the Bush years. The problem is not impossible to solve from an economic point of view, but it is hard to resolve politically. The stupidity is, if you will, ideological.

Second, consider Europe. Here the problem is much different. The problem has emerged at the regional level - Greece, Italy, Spain, Portugal, and Ireland, all have weak economies and huge deficits. In contrast, some other members of the EU, notably Germany and Sweden, have strongly rebounding economies and do not have unbalanced national budgets. The problem here is that no single banking policy is appropriate for both the strong nations and those tottering on the brink of default. The stupidity in the EU is, if you will, a regional matter.

The US has a problem that could be easily solved by reverting to the tax code of the Clinton years. Possibly, something approaching this will occur, probably at the last minute. As Winston Churchill once said, the Americans always do the right thing in the end, but not before they exhaust all the other possibilities.

In contrast, it is much harder to see what the EU can do to solve its fiscal problems. The failure of Greece to pay its debts could set off a financial tsunami. Even the controlled default now being contemplated (or rather orchestrated in Brussels)  could have dire effects. The unity of the EU will be sorely tested if the fiscally responsible economies have to bail out those, like Italy, that are rife with tax cheating and black market labor. Why should Germans or French tax payers have to endure higher taxes when many wealthy in Greece continue to lie about their assets and pay less than they should?

History is not logical, of course, and it might be that the US will stumble into a completely unnecessary default, while the Europeans stumble through to a somewhat undeserved equilibrium. But the fascinating thing is to see how these wealthy countries have made such a mess of fiscal policy.  In a worse case scenario, default on either side of the Atlantic could trigger a larger world crisis, from which Asia would almost certainly emerge the stronger.

We are in for a perilous three months.

Euro Song Contest Maintains its Tasteless Traditions

After the American Century

It must have been that crazy European song contest. I cannot sleep tonight,  nor can I sing a single line from any of the 25 songs I heard. After at least a decade of steadfastly ignoring the event, I decided to watch. The day before I heard a long discussion on the radio, in which several university lecturers explained how the event had evolved over the years. Its style had been affected by American Idol and similar contests. It displayed a variety of ethnic and regional song traditions. The choreography had improved. The contest stimulated European integration. And on and on. I decided to watch again, to see how the contest had been transformed.

What I saw, however, was depressingly familiar. There were many bad copies of American popular songs, most of them sung in something like English. None of the songs was memorable enough for me to hum a line now. None of the lyrics told a story, so far as I could tell. The event was held in a football stadium, and its acoustics, at least on my television, were poor. There were some terrible costumes, and silly but very athletic dancing. Several of the contestants could not sing on pitch, notably  the French entry, who was a master of bathroom bathos. Quite a few female contestants seemed to have been chosen because of their beautiful legs, which were displayed all the way up. Much cleavage also was on display. Cyprus gave Greece 12 points. Romance language countries voted for each other. Former Soviet countries all voted for each other. Nordic countries voted for each other. Truly atrocious songs did rather well in the voting. In other words, this is the tasteless event that I remember from decades ago. It has maintained its traditions.

Azerbaijan won, which is perhaps the best thing one can say about this year's event. And, oh yes, Denmark finished a quite respectable fifth. Not too bad considering there were 25 finalists, selected from 43 national entries in the semifinals. Sadly, however, the Danes finished behind the Swedes, who will remind them of this frequently for the next year.

In this contest, unlike the European Cup in football, little countries have a good chance of winning. Britain lost, despite sending a professional band that I thought was rather good. Ireland did better, and should have been near the top. But it did not appeal much to the Eastern Europeans. 

For Azerbaijan, the victory is proof that it exists in the eyes of Europe. It is an invaluable advertisement. I am considering already when to go there on vacation - it looked so quaint in the video before the song. But it will absolutely not be to see next year's event.

The Problem of Libya is Europe's Problem

After the American Century

There are daily calls for the United States to do something dramatic to tip the balance in Libya. The clamor comes from many places, from Republicans like John McCain to some European politicians to the Libyan rebels themselves, who have asked for a "No Fly" zone. Once again, the United States is being asked to serve as the world's policeman, even though it is still not extricated from that role in Iraq or Afghanistan. And in case no one remembers, the US has a gigantic budget deficit. It actually cannot afford to do much policing right now, because the Republicans have lowered taxes to the point that the budget is deeply in the red.

Far fewer people call for the EU to do something, perhaps because the EU has never managed to create a common, visible, and enforceable foreign policy. Since Libya is literally on the doorstep, almost as much as Kosovo, one might think the Europeans had learned something from its inaction in that earlier crisis. Apparently not.

This would seem to leave NATO as the most plausible actor, if anyone is going to do anything. But NATO apparently is going to wait to see if the UN gives it permission to do anything. Meanwhile, the Libyan dictator is crushing the rebels, relying in part on mercenaries. He is bombing civilians and committing crimes against humanity (as he has been doing for 42 years, actually.) 

It was so much easier in the case of Egypt or Tunisia, where the local population was able to throw off their dictators with little bloodshed. But the problem with Libya (and also with Iran) is that the government is quite willing to imprison, torture, and slaughter its own people in order to remain in power. Europeans need to stand up and represent something in the world. There are many things that can be done short of military action. These include breaking diplomatic relations, freezing Libyan assets in European banks, blockading Libyan ports, stopping all flights to and from Libya except those helping foreign workers to escape, refusing to buy Libyan oil until the present government abdicates, and so on.

So far, however, the EU is acting not like a single power but like a herd of cats, all going off in different directions. This sort of thing was supposed to end with the Treaty of Lisbon, but the crisis in Libya has exposed the EU's lack of central authority and its inability to respond effectively to events on its own doorstep. This should not be a problem for the United States at all. The EU has all the resources and military might necessary to deal with Libya. Perhaps it will pull itself together and do something before it is too late.
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27 Oct. 2011:  I am pleased that Europe did rise to the challenge, and used NATO to back the democratic forces that threw out the Libyan dictator. Next, can Europe also help Libya to a lasting peace?

Greeks Undermine the Euro by Underpaying Their Taxes: $30 Billion Each Year

After the American Century

Since writing the previous posting about the Greek debt crisis, the New York Times has published an article about the widespread failure of wealthy Greeks to pay income tax. Estimates are that the Greek government has failed to collect $30 billion every year. In other words, there really should be no debt crisis, but there is a corruption crisis. 

How can the European governments be conned into bailing out a country that is systematically being ripped off by its own citizens? See the Times story here.

The idea that the Euro should drop in value because of corruption is Greece is absurd. The rest of Europe should punish Greece for bad faith and for harming the common interests of the rest of the EU member states.

And the bankers, who were willing to loan money to Greece, assuming that they could pressure the rest of the EU to secure the loans, should be more tightly regulated. The EU should put in its constitution that each nation is responsible for its own debts, and that no other nation has any responsibility to make them good. Rather, EU nations might turn to their federal government in times of natural catastrophe, invasion, or other calamities over which they had no control.


Why does all this matter? Because Greece is only the worst case. The EU has been too lax. It has allowed member nations to ignore fiscal responsibility. It has allowed bubble economies to grow in Spanish and Irish real estate. After the collapse of the Spanish bubble unemployment has risen to 20%. Entire housing estates in Ireland have been built without finding buyers, and thousands of houses stand empty there.

This is the first crisis of the Euro, and if it wants to be taken seriously as a world currency, the EU has to put a stop to fiscal irresponsibility. As it is, the EU members such as Sweden, Denmark, and Britain, that have not joined the common currency are likely to wait a good long time before they can muster a majority to take the plunge.

A Greek Crisis Should NOT be A Euro Crisis

After the American Century

When my neighbor down the street goes on a spending spree, no one thinks all the neighbors should chip in and pay for his extravagance. The neighbor has to learn to live within his means. The same applies to nations. Greece has for years been living far beyond its means. It has allowed people to go on pensions at an earlier age than they can in other nations. It has not collected taxes from some of its citizens. It has allowed its public sector to grow and grow. It has routinely had much larger deficits than are allowed in the European Union.

Now the bill is coming due, and suddenly the world's stock markets see this as a crisis of the Euro. It is not. There is no reason for Germans to work a year longer before retirement so that Greeks can retire early. There is no reason why British home owners should pay higher interest rates because the Greeks have not lived within their means. There is no logic to the idea that the Euro will be stronger if other countries pay Greece's bills. Rather, it is logical that the Euro will be stronger if its nations enforce fiscal responsibility and prudence.

It sounds harsh but it is only fair that, if the Greeks cannot pay their bills, they must find their own solution to the problem. Greece is not a poor nation. It has many wealthy people. It has not suffered an earthquake or some other unforeseeable natural disaster. Greeks saw the problem for years and failed to deal with it. Greeks have to take responsibility for their own fate, rather than expect the International Monetary Fund or the other EU counties to pay their bills. Loans to Greece are fine, but only if they are going to be paid back.

People seem to think it terrible to contemplate Greece defaulting on their national debt. Yes, it is terrible, but it is even more terrible if other countries pay their bills. The Germans are quite right to resist loaning the Greek government money before they demonstrate that they can bring their economy into balance. The banks should have been equally hard on Greece years ago. International investors have over-extended credit to profligate nations, and they want others to pick up the tab. Sorry, but that is not how things are supposed to work.

Ah, but we are told, the poor Greeks will suffer under the austerity of budget cuts. Indeed, they will. That is the logical consequence of fiscal irresponsibility.  The Greeks as a whole are not poor,  and if they really want to they can invest their considerable wealth in government bonds, and then, as voters, make sure they get their money back. The Greek pension funds could be heavily invested in the Greek national bonds.  Or the Greek's could hold a massive telethon and get their own citizens to buy ten year government bonds at 5%. That would inject some reality into the situation. If Greeks don't want to buy their own debt, then why should anyone else?

Beware of Greeks demanding gifts. Beware of investment banks wringing their hands and saying the Euro is at risk, when it is their  poor judgement that led them to keep loaning money to Greece. And stop this nonsense of thinking that if Greece goes bankrupt due to a lack of political integrity and national will, somehow that means that the Euro itself is weak or that Germany or France or Sweden suddenly are not good places to do business. It should be just the opposite situation. The reluctance to pay the Greek bills should signal that the EU nations as a whole are sensible, that they will not be stampeded by incautious bankers into paying someone else's bills.

If all this seems a rather harsh argument, consider that other common market, the United States. The 50 individual states each has its own budget, and some of them at times get into trouble. California has overspent and under taxed itself into a corner at the moment. But that is California's problem, and it does not mean that the dollar is suddenly a bad currency.

California's economy is larger than that of Greece. Time to get some perspective on this issue.

Greek Bail-Out Not a Good Idea

After the American Century

Greece cannot pay its bills, even in the short run. With a national debt that is more than 110% of its gross national product, and a deficit of more than 10% for this year, Greece's debt will only get worse unless and until it enacts real reforms. So far it has failed to do enough, and the deficit will only get worse.

Had the Greeks been hit with a natural disaster like Haiti, they would deserve sympathy and charity. But the Greeks  insist on spending more than they can afford. They have given massive pay increases and early retirement to state employees that are not funded by taxation. They reportedly have a massively inefficient bureaucracy. There is no  reason for the other European states to give or to loan them money unless they show that they can live within their means. Giving them a handout will solve nothing, and will only delay for a short time the day of reckoning.

Indeed, the EU has made a major blunder by even letting this become an issue. Its own laws clearly state that nations who overspend will not be bailed out.

Consider, by comparison, the plight of California. It is also a part of a federation of states that have a common currency. But no one in the US is suggesting that Ohio, Nebraska and Maine should help fund California. Instead, since California voters refuse to raise taxes, they are closing libraries, firing workers, and forcing those who remain to stay at home several days a month because there is not enough money to pay them. Admittendly, this is ridiculous, since California is a rich state and could afford to fund its education system and its services, but this is the choice the state's citizens have made. The rest of the United States will not bail out California, and as a result the state is a less desirable place to live than it was a few years ago. Eventually, the voters will realize that they have made a mistake, and in the meantime loaning them money will actually prevent them from confronting that mistake.

So why are Europeans wringing their hands over Greece? You don't get an alcoholic to reform by buying another round of drinks.

If the Media is National, Can the EU be International?

After the American Century

I have been looking at coverage of the EU elections on a wide variety of stations, but the story is much the same everywhere, or rather it is entirely different everywhere. On German television, the election is about German political parties and their relative strengths. Nothing is said about the rest of Europe. On Spanish TV the results for their 50 delegates are revealed at precisely 10 PM, when the polls have closed all over Europe. Nothing is said about results elsewhere, however. On CNN they say that the election is taking place, mention that the German Social Democrats have had a bad election (but no details), and focus more on Gordon Brown's weaknesses, as revealed by Labor's poor showing.

In short, the media is national, the languages are national, and the focus is parochial. Not a word about whether the new European Parliament will favor environmental reform, cuts in the massive agricultural subsidies, or greater investments in research and development. These topics are not even mentioned in passing. It is all about the local, the particular, the parochial, and close to being idiotic.

Imagine that you lived in Nebraska during the time of an American general election, when all members of Congress and one third of the Senate were being selected. Imagine that you turn on the TV to hear the results, and can only find out about how the election went in Nebraska. You also get a station from Kansas, so you hear those results as well. But no one talks about the election as a whole, about what the balance of power will be in Washington. Not a single sentence on this subject. The entire focus is on Nebraska and its political parties. To make the comparison complete, you would have to imagine a European party system, i.e. Nebraska would have at least five parties, five leaders to interview, five news conferences, and so forth.

How can Europe ever become conscious of itself in this situation? As long as the media remain fixated on the parochial level of individual states, no one will know what is going on in Brussels, and no one will care. There is no European public opinion, there are only various national opinions, splintered into small parties.

Does the EU Know that It Exists?

After the American Century Today ends the election of representatives to the EU's equivalent of parliament or Congress. It has been a sad spectacle in Denmark. I heard many candidates during the past few weeks, but I did not hear anything wise or even very intelligent about the European Union. To judge by the tenor of the discussions, Danes have no idea what the EU does, or what they are electing people to do. Worse, they seem to send two kinds of candidates, those who are nearing retirement or people who are rather young and wet behind the ears. From this, I can only conclude that Danes do not really understand that the EU exists. It is more like a hypothesis or an idea that is being tried mostly elsewhere. There are still politicians getting a serious hearing in this country who want to withdraw from the union. Much the same seems to be the case in many other countries. Voter turnout is low, apathy about issues common, and confusion about the point of the exercise rampant. The situation is much as it was in the United States in about 1830. Loyalty then remained to the state where one lived, at least as much as to the united stat4es, or nation. What will the EU do if it faces a real military or foreign policy crisis? If people scarcely know it exists, they are not going to fight and die for it.