7/5/15

As I write this post, the people of Greece have just voted—very convincingly—in a referendum to reject the terms dictated to them for another bail out by their main lenders: IMF, EU countries, and ECB.

This is clearly a Greek tragedy, with the usual three episodes ending in the typical exodus.

However, in this story there are no heroes, only bad guys.

Episode One
In late 1990, the then Greek government simply cheated/cooked the books in the most simplistic and straightforward manner in order to qualify for the coveted Eurozone. Other countries did that too. For instance, Italy maneuvered and used financial engineering; but no one cooked the books.

Episode Two
From 1999–2008, years of profligacy by all subsequent Greek governments followed, coupled with laziness, dishonesty, and Dolce Vita by the Greeks themselves. So much so that a number of surveys show that the Greeks had a HIGHER standard of living than the Germans!!!

Episode Three
Reality always catches up with one, no matter how much it is delayed. As Margaret Thatcher used to say, “The problem with Socialism is that you eventually run out of other people’s money”—in short, OPM (or as I call it Opium). The Greeks ran out of Opium in 2008 and what followed was 7 years of harsh reality dictated by the EU led by Germany, IMF, and ECB (the triumvirate). Unfortunately, rather than use this opportunity (remember the Rahm Emanuel edict “never let a good crisis go to waste”) to insist on real free market—growth generating reforms—the triumvirate was content with superficial solutions that did nothing but push the problem down the road. These so-called reforms resulted in unimaginable suffering by the Greeks: economy contracted by 25%! during these years, unemployment at 25%, youth unemployment at 50%!!, suicide rate through the roof and on and on. The worst thing of it all is that, because there were no real reforms, debt kept on piling on, reaching 175% of GDP, a level that everyone knows is not sustainable. Greece was into perpetual bailout with no hope. That is the worst of it all. People can suffer much if there is hope. But that forced bailout scheme with no real reforms left them with zero hope—just perpetual suffering.

Exodus
The last act is upon us now. As always, it is the climax of the tragedy. Greece is in for a terrible depression—in or out of the EU. It does not matter. They are in for serious additional suffering.

The whole notion of the Euro, the common currency, is foolhardy as I’ve written a few time before such as in my post The Euro Folly, and I am not going to repeat it here.

In the long term, the Euro project will collapse. It took 75 years for the forces of the economy, enhanced by visionary leaders, to cause the USSR’s communism to collapse. I am not comparing the Euro project to the evils of the USSR but economically it is the same foolhardy and hubris. It may take 75 years—probably less—but it will not survive.

So who is at fault here? So many people:

  • Suffice it to say that the fathers of this unrealistic idea, including of course the leading light of the EU at the time, and some well-known US economic professors are the original sinners.
  • Greek governments of all political shades cheated and spent money irresponsibly and did not take responsibility for the problem when the crisis arrived, choosing to continue to play hide and seek from reality and delay the day of reckoning.
  • The current Greek government, voted in six months ago, wasted no time to act with all the finesse and tact of a bull in a china shop.
  • The IMF and EU authorities are no angels, either. They put together the previous bailout, which was designed to fail. They insist on keeping the charade going even though everyone knows that there is simply no way that Greece can stand and survive with this level of debt.
  • Germany (and few other smaller EU countries) is the main force in the EU, and is the leading and dominant “bad-guy” ostensibly. They are being asked to finance another bailout; it is always Germany that is being presented with the bill of other people’s extravagant and irresponsible standard of living way beyond their means. Why should Germany pay for it? The simple and surprising answer is that they should. Why? The whole Euro project made sense ONLY for Germany. They (again together maybe with the Netherlands and maybe one or two other small countries) benefited from the Euro to a huge degree. As the world’s third largest exporter, and the one whose percentage of export out of its GDP is probably the largest at about 45%!! (compared to less than 10% for the US; I’m not sure regarding China), Germany reaped enormous benefits and riches over the last 16 years from the reduced value of its currency. The Euro being a reflection of all Eurozone economies, allows for the strength of the German economy on the one hand, but the weakness of so many other economies; Greece, France, Italy, Spain etc., etc. It is impossible to know what the German Mark would be valued if it stood on its own, but it would have been materially higher than the Euro. That would have caused Germany’s export to be more expensive and, materially, less competitive; and thus would have reduced their export. By how much? One cannot say for sure but even if it would have reduced it by say 3–5% EVERY year over the last 16 years, that would have amounted to the loss of one trillion Euro for the German economy, which comes on the margin and would be very material. For instance it would have reduced the size of the economy by about 2% EVERY year for the last 16 years. That is a cumulative reduction of 35% in the accumulation of assets and wealth etc. in the German economy. It is as if Germany devised the Euro project to give it hegemony over Europe, which it could not have achieved with force (I am not suggesting there was an evil conspiracy here but, factually, that is what has happened). It is therefore totally right that Germany should pay. Although it is unlikely that they would unless on their terms, which is another reason they are the “bad-guys” in this tragedy.

Whatever happens now, Greece is in for a terrible rude awakening and economic depression; again, in or out of the Euro zone.

My own view is that in long-term they are better off out of it. In the short-term, Greece will be worse off. But at least the Greeks will have hope. Greece will have a chance to revive itself under its own terms. Having said that, nothing positive will happen to Greece if they insist to continue to act irresponsibly and avoid free market reforms.

Similarly, nothing good will happen if they just continue to toe the line under the boot of their oppressors in the IMF, EU, and Germany (with all the invectiveness that this term implies in the context of Germany). Of course, if the EU decides to write-off a significant part of the loans in return for free market reforms . . . but that is like saying that pigs will fly. To be fair to EU, at this stage it is too late for that. If they do it, what will Ireland, Portugal, Spain, and a lot of other anti-EU parties say?

Just for record:

  • Greece’s public government debt is about 175% of its GDP while the US’s is 100%.
  • Greece’s debt per capita is about US$ 33,000 the US’s is about $60,000!!!!!