Figure 1.-- |
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Real prosperity suddenly appeared in Greece after the country joined the Euro Zone. The Euro was founded (1991) and Greece soon signed on (2001). This was possible only because the country' Socialist Government falisfied financial statements which hid just how deeply enbedlted the country was. And once in the Euro-Zone Greek Governments were able to borrow money for ahile on the same terms of the financially responsible German government. The result was even greater borrowing, As Prime Minister Thatcher explained in the 1980s, Socialist ecomomies fail when they run out of other people's money to give away. Nothing so illustraes this dictim as the Greek financial disaster. This finally occurred in Greece in 2010. The problen was delayed for many years because as a member of the Euro zone, Greece could for many years could borrow money at rates similar to more finncially responsible countries like Germany. The statistics are staggering. The Greek defecit was 13 percent of GDP and the overall national debt waa 115 percent of GDP. About 60 percent of employment is in the non-productive public sector who have generous benefits. Lenders realizing that the current situation was unsustainable stopped lending to Greece and interest rates available to the Government increased to a prohibitive 17 percent. With the Euro in freefall, the Europeans with IMF assistance came up with a $0.95 trillion bailout program. It is unclear if even this huge intervention will solve the problem and it looks increasingly like the debt will have to be restructered, essentialy meaning Greece will default on part of the debt. It will also mean that Greece will have to make substantial cuts in its welfare system. The EU-IMP is now working on a bailout. This only addresses the country's huge debt and based on past experience will only postpone addressing the mountain of debt. And there is no indication that Greece has the slighest inclination to change policies depressing the private sector. The Greek people rather than blaming socialist politicans turned to castigating the people that lent them mny and now the people who bailed them out. And to 'save' them elected a radical left-wing governent -- Syriza (January 2015). Not only doe Syriza accuse their the lendrs of being criminals for lending the money and extoonists and imperilists for expecting repatment, but then in the same breath accuses them of being heartless for refusing to lending more without making reforms and if that was not enough accuses the Germans of being modern-day NAZIs.
The post-World War II Europen Economic Community (EEC) evolved into the larger and more integrated European Union (EU) which increasingly adopted economic and social policies which superceeded the authority of the governments of member states. As the EU developed, European leader increaingly began thinking about the potential benefits of a common currency which proved sobeneficial in the United States. Thus a consensus began to develop that true economic integration would require a common currency. Major EU and European national leaders endorsed the idea. This included former EU commission presidents Jacque Delores and Jacques Santer; French presidents Francois Mitterrand and Jacque Chirac; and ex-German Chancellor Helmut Kohl. This was generation of European leaders who had lived through either the disater of Wold war II or the aftermath with maaive loss of life, destoyed citties, a continent awash with refugees, and horendous food shortages. The European consenus was 'never again'. This of course was the consensus after World War I, so European leaders adopted newpolicies--the most important being economic integration. European leaders believed that they could secure both peace and prosperity through integration. As the EU progressed, increasingly the need for a common currency surfaced. Thus the Euro is not just a currency, like the EU itself is an expression of the European political ideal. That ideal is that countries that our bound together by trade and coomon institutions will never go to war again. It seemed to beworking. With cooperation rather than confrontation through the EEC/EU, the Western European member states has been at peace since 1945. The EEC and its predecesors helped break down trade and reduce cultural barriers between Western European countries, most importantly four larger countries (France, Germany, Italy and the United Kingdom) (1950s-80s). Partly as a result, economies in Western Europe boomed--the Europan Economic Miracle. And much to the surprise of mny Europeans, this was accomplished at the same time Europe lost its colonies. The people of Europe prospered, not only th moddle-class, but the working-class as well. The coolapse of Communism (1989) left the leaders of Western Europe were left wih major choices. They could coninue the EEC as it was.,esentially a free trade zone, or they lcould move toward broader political and economic integration. The result was the EU (1993) and the decesion to admit the now independent countries of Central and Eastern Europe. A common currency was the eventual outcome of these policies. The Europeans created the Euro (1999). It quickly became the second most important currency in the world. European leaders were so intent on their European Project that they rushed the Euro into existence. They failed to pursue the more difficult pronlem of ensuring the common fiscal polices needed or the fubctioning of a common currency.
Real prosperity suddenly appeared in Greece after the country joined the Euro Zone. The Euro was founded (1991) and Greece soon signed on (2001). This was possible only because the country' Socialist Government falisfied financial statements which hid just how deeply endbelted the country was. OtherEU countries had high debt levels and weak fiscal policies. None even approached, however, the situstion in Greece. The Euro Zone struggle to deal with the issues presented by varying national fiscal policies. The Euro Zone did not even cosider that a member country would blabtantly lie.
And once in the Euro-Zone Greek Governments were able to borrow money for ahile on the same terms of the financially responsible German government. The result was even greater borrowing. The problen was delayed for many years because as a member of the Euro zone, Greece could for many years could borrow money at rates similar to more finncially responsible countries like Germany. One observer reports, as soon as “the euro was introduced, it did not take long for imbalances to develop and accumulate.” [Bagus]
Countries like France, Germany, and Italy and many smaller countries had real economies that generated wealth in the form of Euros. Greece as aresult of bith popular attitudes and Government policies, did not. As a professor explains, "... the only way to get new euros,” he added, “was for a country like Greece to issue more government bonds and give them to the European Central Bank as collateral.” [Bagus] And issue bonds Greek Goverments did, borrowing on a phenomenal level.
The Euro gave the country a creditworthiness imprimatuer that the drachma never did. Greece was even presented the “Sovereign Borrower of the Year” award (2007). The new ability to borrow at the low rates offerd to financially health countries le to
an orgy of increased government spending, growing deficits, and debt because of the ready demand for soverign bonds. The country's budget deficit, as a result, tripled from only about 5 percent of GDP (2006) to nearly 16 percent in (2010). The Greek defecit led to an unprecedented level of national debt -- 115 percent of GDP.
Borrowing money is no inherently a bad thing. The United states borriwed large amounts of money during the 19th century. These funds wre used in wealth creation projects like building railroads and not to constrct a vast government beaureacracy and to create a welfare system with abnormally high benefits. Greek Government did not, however, use their borrowed funds in wealth generation projects. In fact Government policies discouraged business investment and expansion. Sucessive Greek governments used the funds to hire unprcedented numbers of government employees and build a welfare system with extremely generous payments even by European standards. Greek voters rewarded politicians building the welfare system and iffering ever increasing benefits. The impact on Greece was according to one economist, 'a culture of decadence'. That further weakened the country's economy. The prevailing attitude was s'tick it to the rich' The result was a decling economy, but no real incrwese in revenue. This relects a general lack of appreciation that tax increases often result in reduced revenue, especially over the long term. An investment specialist explains that Greek politicans eeking votes used 'the proceeds to lavish generous salaries and even more generous pensions on Greek voters. Although Greek wages were mostly lower than those in Germany, Greek pensions were considerably higher. In most cases, it took only 35 years of work to collect a full pension in Greece, as compared to 45 years in Germany." [Davidson] Incredibly about 60 percent of employment in Greece is in the non-productive public sector. Civil servants’ jobs have been protected by a law that dates back to the 1880s, which became enshrined in the century-old Greek constitution. Winning political power in Greece has for decades been achieved by providing and protecting public sector jobs to win votes. Important here is protecting workers from being fired when a opposition party gains power. As a result, nearly iron-clad job guarantees for government workers have become enshrined in the country's Constitution. The expansion of Greece’s government sector took decades to create, but its increase in recent years has been notable. Public employment grew by fivefold from 1970 through 2009 — at an annual growth rate of 4 percent. [Zafiris Tzannatos and Iannis Monogios] Over the same four decades, employment in the private sector increased by only 27 percent — an annual rate of less than 1 percent. A former Greek finance minister told a German newspaper, "Instead of shrinking the bloated government apparatus and making it more efficient, New Democracy and Pasok hardly even touched it.” [Manos]
And their wages and benefits were extremely generous. Accirding to one of the experts we consulted, "... Greeks who labored in ‘strenuous’ occupations could retire after 25 years of work on full pensions at age 55. Among those ‘strenuous occupations’ -- Greek hairdressers. On the whole, Greeks retired earlier than their European colleagues, on pensions that averaged 80 percent of wages, as compared to 46 percent in Germany.” [Davidson]
As Prime Minister Thatcher explained in the 1980s, Socialist ecomomies fail when they run out of other people's money to give away. Nothing so illustraes this dictim as the Greek financial disaster. This finally occurred in Greece in 2010. Lenders realizing that the current situation was unsustainable stopped lending to Greece and interest rates available to the Government increased to a prohibitive 17 percent.
With the Euro in freefall, the Europeans with IMF assistance came up with a $0.95 trillion bailout program. It is unclear if even this huge intervention will solve the problem and it looks increasingly like the debt will have to be restructerd, essentialy meaning Greece will default on part of the debt. It will also mean that Greece will have to make substantial cuts in its welfare system. The EU-IMP is now working on a bailout. This only addresses the country's huge debt and based on past experience will only postpone addressing the mountain of debt. And there is no indication that Greece has the slighest inclination to change policies depressing the private sector. The Greek people rather than blaming socialist politicans turned to castigating the people that lent them momey and now the people who bailed them out.
And to 'save' them elected a radical left-wing governent -- Syriza (January 2015). Not only doe Syriza accuse their the lendrs of being criminals for lending the money and extoonists and imperilists for expecting repatment, but then in the same breath accuses them of being heartless for refusing to lending more without making reforms and if that was not enough accuses the Germans of being modern-day NAZIs. Syriza Finance Minister Janis Verafakis, a left-wing economic professor in of all places, Texas, instead of engazing his European colleagues, began lecturing the finance miniters of successful countries on why their own polocies were not only wrong but exploting the hard-working Greek people.
Bagus, Philipp, Presentation at the Mises Institute in Alabama (2012). Professor Bagus teaches economics in Spain and has authored two books: Deep Freeze: Iceland’s Economic Collapse and The Tragedy of the Euro. e is an on EU dynamics and the Euro.
Davidson, James Dale. Strategic Investment Newsletter (2015).
Manos, Stefanos Manos. Interview in Frankfurter Allgemeine (June 2014).
Zafiris Tzannatos and Iannis Monogios.
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