Spiegel Online International carried a disturbing story Monday on the subject of bailouts.
The proximate item is Greece’s economic strait, and this is what Spiegel is reporting about that. The current troika—the IMF, the European Commission, and the European Central Bank—are proposing
[a]nother partial default. That, indeed, would seem to be the conclusion that Greece’s main international creditors have come to. According to information received by SPIEGEL, representatives of the so-called troika—made up of the European Central Bank, the European Commission and the International Monetary Fund—proposed just such a debt haircut at a meeting last Thursday held in preparation for the next gathering of euro-zone finance ministers.
But half-measures simply prolong the problem and continue Greece’s addiction to handouts while at the same time providing no mechanism for getting the Greeks to self-sufficiency other than leaving them to their own, already failed devices—both those that drove them to this strait and those of the last three years that have had no useful effect.
Worse, though,
This time around, public creditors would be involved, meaning that taxpayer money from those countries which have stood behind Greece would vanish off the books.
But where is the justice in this? Indeed, where was the justice, originally, in forcing the taxpayers of entirely separate jurisdictions—other nations—to indemnify the Greeks (and the Irish, and by extension, the Spanish, Italians, and Portuguese) against their own foolish decisions? Indemnify rather than help, since no meaningful accountability mechanisms were applied.
That’s in the past; those innocent taxpayers already are dragooned into the existing bailout. The primary question remains, though: where is the justice in compounding that prior error by extending it, by forcing responsible taxpayers to pay for continuing this folly? And how does this enabling help the Greeks (and Spanish, Italians, and Portuguese; although these three already are attempting preemptive measures so as to avoid their own humiliation)?
Indeed,
Athens has only introduced 60 percent of the reforms [already] demanded by the European Union.
Yet,
The troika has already agreed to give Greece two extra years to meet its austerity goals, a delay that will likely result in a need for up to €30 billion in additional aid, according to the ECB and European Commission. The IMF believes the funding gap will be closer to €38 billion.
Thus, the EU and the IMF know they’re proposing throwing money down a rat hole, and they’re proposing that anyway. It’s true enough that cutting the Greeks off from further bailout moves will jeopardize the taxpayers’ money already committed. However, it’s the nature of bankruptcy—which the Greeks will be better off going through—that such debts get written off and the creditors lose out. But that’s the only way to stanch the bleeding here. There’s no useful purpose in committing additional taxpayer funds to this failed effort.
Take careful note of the similarities to our own situation. Failures here, too, says the current administration, need to be propped up with taxpayer money and, in our case, favored investors protected from the consequences of their decisions.
Money will flow where the labor is cheap, and so the goods are cheap. This is a function of the purchasing power parity that Ricardo understood so well. The PIIGS didn’t get into trouble because the Germans loaned them too much money, or because the Germans too unfair advantage of relative costs. Lending to a customer, in fact, is a valid way to create a market, or to support one during a temporary dislocation. The PIIGs, rather, got themselves into trouble by spending vastly more than they were taking in through tax revenue or cross-border trade.
The only way the PIIGS can help themselves–and they must help themselves; no one can do these things for them–is to reduce their spending below their taxes. And rather than raising taxes, lower them. Government spending crowds out the private sector, reducing its ability to hire folks–to create jobs. This is part of the fallacy of Keynesian “stimulus.” Government spending also actively takes money out of the private sector: government spending is either current taxes, or future taxes to repay the current borrowing, or current money printing to manufacture the money for spending (which is another form of taxation). Taxes, on the other hand, directly take money out of the private economy, depriving that economy of the fuel it needs for its activity–product development, sales, and so on–all of which add up to jobs and prosperity.
Indeed, even Keynes insisted that deficit spending by governments, in order to be stimulative, had to be temporary–which is not the case with the PIIGS.
The best way–the only way, really–to stimulate demand, to stimulate an economy, is for government to get out of the way: reduce spending and reduce tax rates. With more money in the hands of private citizens and their businesses, these folks will determine their own needs and act on their own initiative to satisfy them. But this would require those governments to trust to the collective wisdom of their people, rather than insisting that government Knows Better.
Eric Hines
called for Hollande to take the lead in moving Europe on a coruse different from the one Germany has set because I believe, to use the words of Paul Krugman, that the policy of expansionary austerity is just insane and is pushing depressed economies even deeper into depression. If Europe continues on it present coruse, I believe it is likely that we will see another terrible crash and a depression that will rival and possibly dwarf that of the Great Depression.The German economic miracle didn’t happen just because they tightened their belts or reformed their labor markets. It happened because of the structural imbalances in Germany’s favor inherent in the euro and because there was a huge influx of capital into the PIIGS and the countries of the periphery resulting in booms, which in turn resulted in higher levels of inflation and consumption of mainly German products. Since the adoption of the euro, Germany has run huge trade surpluses against nearly every other country in the Eurozone, including Greece, Italy, Portugal and Spain. Krugman argues that Germany was able to do this not because of the reforms but because the adoption of the euro meant it had a large decrease in its costs and prices relative to other euro countries because of the inflation in the countries of the periphery I mentioned. Consider the Spanish example. Essentially, the banks in Germany sent massive amounts of capital into Spain. Thus helping to fuel the housing boom (selling houses to mostly English expats). This, in turn, created some modest inflation which meant that the Spanish people could buy more high quality stuff made by Germany with money lent to them by the German banks. The housing market got hotter, the German banks lent more based on the inflated housing values and the Spaniards used their slightly inflated incomes to buy even more German stuff which resulted in even greater German trade surpluses.When the Spanish housing market crashed, the Spanish and German banks were stuck with lots of shaky debt, which austerity made worse by destroying the Spanish economy. Massive decline in GDP, massive decline and stagnation in all areas economic activity and horrendous unemployment. But also, a problem for Germany of basic arithmetic. Austerity in the periphery isn’t just destroying the lives of most people in places like Greece and Spain—-it’s also starting to reduce the demand for German products in those countries. That means that while Germany was growing in the past (partly because of its structural advantages that were baked into the euro and can’t be shared by the PIGGS).Moreover, Germany almost certainly isn’t going to be growing in the future. In fact, its economy will quite possibly soon be in much worse shape than that of France because it turns out that the German model isn’t compatible with austerity either. A surprisingly large percentage of the stuff that Germany makes gets sold to other Europeans. If they don’t have any money, they can’t buy any more stuff from Germany. If they stop buying German stuff, that’s the end for Germany. That’s why we need some kind of reform policies to get the economies of Europe growing and to buoy up demand. I have advocated both a functioning central bank and various stimulus programs as advocated by the Keynesians. I strongly recommend recommend Paul Krugman’s new book End This Depression Now! which explains all this far better than I can and also offers what I believe is a path out of this depression.If it was available in French, I would advocate that we take up a collection to buy a copy for Hollande and everyone in his government. I think they would learn something important about the kind of programs Hollande’s government need to propose for France and Europe. Also, the mere act of buying so many copies would itself be a micro-stimulus program.