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.

Bankruptcy Not Needed: Greece can lease islands to banks

After the American Century

At first I thought of this as a joke, but it is beginning to look reasonable. The choice for Greece is not either go bankrupt or borrow more money. There is a third choice, a typical capitalist choice, the choice to lease parts of the country for 50 to 100 years. China leased away Hong Kong and got it back, with considerable improvements. Greece could lease a large island like Crete to the German banks, in exchange for wiping out their debts to those banks. The French banks could get Lesbos. I want my bank to lease Corfu.

Even more radically, Greece could sell off some of its smaller islands, with the proviso that the buyer could not sell to anyone else without Greek government permission, and reserving the right to purchase the island back at the market price.

Such plans would make it official. The banks already call the shots in Greece.

I know this sounds a bit strange, but it is somewhat like a corporation selling off some of its divisions in order to survive. No doubt offense to patriots, but surely this is better than bankruptcy.

Don't like that solution? How about this one? All European countries could copy Greece, spending way over budget, and then the Euro zone could devalue by, say 35%. The idea being, if the train is going off the cliff, let's get into first class and enjoy the ride while it lasts.

Linking up with Turkey

After the American Century

I see in the news that Turkey is about to link its electrical system to Europe's, by way of Greece and Bulgaria. Such things are often regarded to be merely technical, but they are more than that. In the past such interconnections have anticipated closer political and economic ties. During the later years of the Cold War electrical links were established across the Iron Curtain years before the collapse of the Soviet system. 

Turkey is initially only joining the grid for a one year trial, but barring technical problems, one assumes it will then become permanent. Access to Turkey's hydroelectric power could provide greater balance in the grid as a whole. It could also make possible more pumped-storage projects, in which wind and solar energy are "stored"by pumping water up to a higher elevation, against the time when demand rises again, or the wind does not blow or sunshine is weak. Then the water is released and turns a turbine to make electricity that is far more valuable than the electricity from off-peak production that was used to store the water.

Norway and Holland have a pumped storage arrangement of this sort, which means that off-peak power production in Holland is stored as hydro power in Norway. They built an undersea cable to make the arrangement a direct connection. Such interconnections build trust between countries and create mutual advantages.

It is particularly significant that the old enemies, Greece and Turkey, are going to trust one another in this way. Ideally, both countries could eventually save huge sums if they stopped investing in military hardware to protect themselves from each other. The new link is also a small step toward resolving the Cyprus question.

It is not just an electrical connection, it is a move toward friendlier relations and an intelligent technical integration. Interestingly, the engineering and electrical work was done in good part by General Electric, so the profits and benefits are not limited to the Balkans and Turkey.

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.