Merkel: Future EU at Stake

In defense of the German cabinet’s decision to participate in an unprecedented effort to bail out fellow EU member state Greece, Chancellor Angela Merkel warned on Wednesday that the future of the European Union — “and the future of Germany within Europe” — is at stake in this crisis.

In spite of the multibillion euro rescue package pledged by the EU and the International Monetary Fund, Greece’s financial woes continue to cause concern with investors. The value of the euro has sharply decreased in recent days while protests in the Greek capital today shed further doubt upon the country’s chances at recovery.

Greek prime minister George Papandreou has announced severe austerity measures necessary in order to meet the requirements of the €110 billion bailout. He will have to get his country’s budget deficit down to the European maximum of 3 percent by 2014. Civil servants are expected to be hit especially hard, facing job loss, pension cuts and raised taxes. Thousands of public-sector workers took to the streets of Athens to protest against the plans. Three bystanders were killed in a fire bomb explosion. At least six people were arrested by riot police desperately trying to manage the situation.

Germany has been skeptical of helping Greece and wants tougher budget rules for eurozone members lest a similar crisis compel the more stable of European nations to come to another’s aid ever again. Chancellor Merkel faces increasing popular resentment against the euro at home and defeat in this weekend’s regional elections in the populous and industrial western state of North Rhine-Westphalia. Defeat will rob Germany’s ruling coalition of Christian Democrats and liberals of their majority in the upper house of parliament.

The chancellor knows that the euro has been good for Germany at the same time, despite its recent lack of popularity. Stable exchange rates have encouraged trade and growth while the German economy, ironically, profits from the financial disturbances in the south which makes the euro, and therefore, German exports, cheaper.

Meltdown in Greece

The Greek debt crisis is spinning out of control. The country is in desperate need of credit, but foreign investors are ever more wary of providing loans. Standard and Poor’s downgraded the sovereign debt ratings for not only Greece but Portugal as well on Tuesday, citing weak macroeconomic structures, basically degrading the countries to junk status on par with Third World states. Money is available from the EU and the IMF, but analysts wonder whether those loans can ever be repaid.

Shockwaves from Greece’s predicament have hit as far as East Asia where the Australian and Japanese stock markets plunged into the red over worries about the country’s ability to service its debt. The euro dropped to a one year low against the dollar. Oil prices extended losses, sliding to near $82 a barrel Wednesday amid concerns that European debt crises might imperil the global economic recovery and hurt demand for crude oil.

The downgrades came after Greece announced last week that it would be forced to tap into the €45 billion aid fund sponsored by the European Union and the International Monetary Fund. European leaders reached compromise on this arrangement last month after Germany objected to an outright bailout. France and Italy led the effort for an exclusively European rescue operation, fearing that interference from the IMF would diminish the union’s economic stability. Italian prime minister Silvio Berlusconi even warned that if Europe failed to deliver, it had no right to exist at all.

There is further discord over the future of the Stability and Growth Pact. Berlin wants tougher sanctions for members that violate European budget rules, including the ability to expel them from the eurozone. Brussels would rather be more involved in countries’ budgeting from the start in order to prevent, not punish, excesses. Some are already interpreting this as the beginning of the end for all of the European Union — an exaggeration of course, though it painfully demonstrates a lack of credibility on the part of the EU when it comes to containing its economic troubles.

Chancellor Angela Merkel has demanded that Greece come up with tougher austerity measures before the EU and the IMF plough in billions of euros. Investors fear that the Greek government will be unable to deliver with trade unions already taking to the streets to protest against any shortening on entitlement programs.

Worries about the scope of public debt in Europe first surfaced in February when The New York Times revealed that Wall Street firms had helped keep countries’ mounting debts, Greece’s included, off the books for many years. British economic historian Niall Ferguson warned at the time that the contagion would spread to Ireland, Portugal, Spain and possibly Belgium and Italy. He predicted that markets would wake up, realizing that these eurozone members’ plunging into the red in the wake of the financial crisis “were not credible fiscal policies.” Today, that’s what the markets did.

Ferguson also noted that “in terms of the size of its debt,” the United States were not all too far behind Greece. It would have great trouble, he said, to get back “into any kind of balance” in the foreseeable future.

Even some economists on the left appear to realize finally that deficit spending is not a game that can be played indefinitely. Simon Johnson for instance, who is convinced that banks are to blame for the crisis and ought to be broken up, understands that fiscal irresponsibility lies at the heart of Greece’s woes. Nonetheless, he seems to believe that it is up to the rest of Europe to “restructure government debt in an orderly manner,” however that may come about.

Johnson is not the first to suggest that the eurozone as such is to blame. Greek prime minister George Papandreou chastised his colleagues in February for supposedly turning his country into “a laboratory animal in the battle between Europe and the markets.” That remark did not inspire a particular willingness on the northern euro countries to come to Greek’s rescue.

Economist Paul Krugman similarly blamed the “arrogance” of the European political establishment which allegedly “pushed Europe into adopting a single currency well before the continent was ready for such an experiment.” Deficit spending didn’t matter much, he argued; the inflexibility of the euro was to blame. In April he reconsidered, recognizing that fiscal irresponsibility was part of the problem before finding the real fault with deflation or “excessively low inflation.” Evidently, Krugman still won’t dare admit that spending more and more isn’t always a smart thing to do.

European and IMF officials are currently hard at work convincing the German cabinet to agree to the multibillion euro relief effort. European Commission President José Barroso reassured bond markets in Tokyo that help is underway. “The commission expects this work to be finalized in the coming days,” he said. “In my mind, there’s no doubt Greece’s needs will be met in time.” The German finance minister Wolfgang Schäuble meanwhile tried to prevent the panic from engulfing all of Southern Europe, declaring that Greece’s budget problems “are not at all comparable” with the market pressures on Portugal and Spain.

Liberal Wrongheadness on Greece

In his column yesterday, New York Times columnist Paul Krugman demonstrates how wrongheaded liberal thinking on economics can be.

Pointing to the fiscal problems being experienced by Greece, Krugman correctly points to the core of the problem: excessive spending and borrowing by the Greek government. Although he doesn’t point out that all that spending and debt is to pay for the ever growing expenditures of Greece’s welfare state, at least he recognizes that a government can spend and borrow too much. Indeed, he even recognizes that the situation can become so dire that investors don’t want to invest anymore in a government’s bonds because they fear a default, which is precisely what is now happening in Greece.

But then Krugman goes awry, finding another culprit to blame for Greece’s debacle: deflation or even “excessively low inflation.”

What he’s alluding to is that because Greece doesn’t have control over its money supply, the Greek government cannot do what the American government and other governments do to pay off excessive debt — simply print the money and paying off creditors in debased dollars.

Krugman says that one possible solution to Greece’s problems is to slash spending and raise taxes. But of course slashing spending would involve major reductions in welfare benefits for the Greek citizenry, who are, by the way, protesting against any reductions in their dole. They take the same position as American dole recipients: that they have a right to their dole, come hell or high water, even if the government doesn’t have the money to continue paying them their dole. As Krugman observes, raising taxes will put more businesses out of business, raising unemployment and thereby aggravating the overall problem.

Krugman suggests that another possible solution is to have other European countries guarantee Greece’s bonds. But as he suggests, German taxpayers are not excited about having their money taken from them so that Greek taxpayers can continue receiving their “free” welfare state dole.

So, the obvious solution to his quandary, one that the American government’s Federal Reserve has long used, is simply to crank up the printing presses and pay off all that debt in depreciated, debased currency.

But there’s one big problem, one that Krugman deeply laments: Since Greece is part of the eurozone, it doesn’t have the power to crank up the printing presses without the approval of the other EU countries, which are not likely to want to debase the euro for the sake of saving the welfare state dole for Greek citizens.

That leaves Greece with the option of withdrawing from the eurozone and resorting to its own monetary system. But as Krugman points out, that might not be successful given that would likely be a rush of people to get their money out of the banks, along with a refusal by investors to buy bonds issued in the new currency.

Needless to say, Krugman deeply laments the inability of the Greek government to inflate itself out of the crisis. Never mind that paying off creditors in debased currency constitutes an intentional default. That doesn’t seem to bother Krugman one whit. All that matters, obviously, is that the Greek welfare state be saved from collapse.

Unfortunately, by not surprisingly, Krugman draws the wrong lesson for America from this Greek tragedy. He says that while the American government needs to be “fiscally responsible,” it should also “steer clear of deflation, or even excessively low inflation.”

In the final analysis, Krugman gets it wrong. What has collapsed in Greece is the welfare state, and hanging on to this anchor is what is sending Greece to the bottom of the ocean.

Americans need to take what has happened in Greece as a warning: Get off the dole road before it’s too late. Dismantle and repeal (that is, don’t reform or reduce) all welfare (and warfare) programs and departments, along with the taxes that support them.

Moreover, don’t do what the Federal Reserve has done for decades — that is, don’t inflate. In fact, abolish the Fed, America’s engine of inflation, and restore sound money to America.

This story first appeared on Hornberger’s Blog, The Future of Freedom Foundation, April 9, 2010.

Compromise on the Greek Question

The compromise which European leaders reached last week on aiding Greece may struck many foreign observers as evidence of the EU’s ineffectiveness at settling its internal discord, but it was in fact a minor victory for “President” Herman Van Rompuy and his campaign for greater economic governance from Brussels.

Van Rompuy, former prime minister of Belgium, became the first permanent president of the European Council last year, which is the regular conference of EU government leaders. The election of a relative unknown from one of Europe’s smallest of member states wasn’t particularly hailed as a great step forward for the union. Van Rompuy, critics dreaded, would allow himself and the EU presidency to be overshadowed by more powerful figures, including France’s Nicolas Sarkozy and Germany’s Angela Merkel.

Newsweek‘s Anita Kirpalani was quick to point out that the cautious choice for Van Rompuy was also a wise one, for he had actually a chance at fostering consensus. “What looks like timidity might just lead to a stronger Europe after all,” she predicted last November.

The Belgian’s ability to balance French and German interests was revealed in recent weeks. France, along with Italy, vehemently resisted the notion that withering Greece should seek support with the International Monetary Fund, believing that such a move post an embarressment to Europe’s economic integration. Germany on the other hand had no desire to bail out a member state that had repeatedly violated European budget rules and argued for tougher sanctions instead to punish eurozone members that made a mess of their finances. Chancellor Merkel even suggested that violators should eventually be denied the common currency.

Both parties compromised on Friday, agreeing that a Greek rescue plan should include the IMF. That Sarkozy was forced to give in is something of a personal victory for the Fund’s managing director, Dominique Strauss-Kahn, writes The Wall Street Journal. He might be running for the French presidency in 2012.

The IMF isn’t likely to act immediately. Both Europe and the Fund prefer to wait to see whether the aid announcement on itself will suffice to reduce Greece’s borrowing costs.

Greece Continues to Divide Europe

German chancellor Angela Merkel met head on with the European Commission on the Greece question over the weekend. Chairman José Barroso is pushing European governments to commit to a Greek bailout this Thursday when member states convene in Brussels. Merkel is having none of it.

The chancellor declared on German radio on Sunday that no bailout is being considered. The Greeks themselves, after all, haven’t asked for help, she said. Barroso responded in today’s Handelsblatt, urging European states to find a solution, regardless of their internal politics. Read more “Greece Continues to Divide Europe”

Just How Much Debt Are We In?

After The New York Times revealed on Saturday that Wall Street banks helped Greece keep its mounting debt off the books for many years, Edward Hugh at A Firstful of Euros explains how shady financial constructions allowed several European governments to hide part of their financial trouble.

Eurostat, the EU’s agency for statistics, has been grappling with asserting just how much in debt the union’s member states really are. In 2002, writes Hugh, they found themselves forced to change their accounting rules, in order to try to enforce the disclosure of off-balance sheet entities that had previously escaped detection. European governments responded by simply reformulated their suspect deals.

In 2008, Eurostat reported that, “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

Many European governments have been using a system known as “factoring” to finance public projects. Factoring is a financial transaction whereby a business sells its accounts receivable (or invoices) to a third party (which is called a factor) at a discount in exchange for immediate money with which to finance continued business. Unlike regular loans, this setup involved three parties which allows the financing of public projects without upfront public funds.

So-called private finance initiatives were originally developed by the Australian and British governments and are now common in Canada, the Czech Republic, Finland, France, India, Ireland, Israel, Japan, Malaysia, the Netherlands, Norway, Portugal, Singapore, and the United States, among others. These contracts are currently off-balance-sheet, meaning that they do not show up as part of a country’s national debt.

Hugh identifies at least three problems with this arrangements. First, they assume a certain level of headline GDP growth to furnish revenue growth to the public agencies committed to making the payments. “Following the crisis,” he notes, “these previous levels of assumed growth are now unlikely to be realized.”

Second, they assume a growing workforce in spite of Europe’s aging populations. And lastly, they assume unchanging dependency ratios between active and dependent populations, “but these assumptions,” according to Hugh, “are no longer valid, as our population pyramids steadily invert.”

Given all this, a very real danger exists that what were previously considered as obscure securitisation instruments, so obscure that few politicians really understood their implications, and few citizens actually knew of their existence, can suddenly find themselves converted into little better than a glorified Ponzi scheme.

Greece, he writes, is just the first state that can’t pay up anymore. Italy and Spain are both in a particularly precarious situation as well.

British economic historian Niall Ferguson agrees and suggests that “the contagion is going to spread” to Ireland, Portugal and Spain while Belgium and Italy “shouldn’t be entirely free from worry” either.

In an interview with Bloomberg Television on February 5, Ferguson stressed that, “a significant number of eurozone members have been plunging into the red with their fiscal policies in the wake of the financial crisis.” The markets have now woken up, he said, realizing “that these were not credible fiscal policies.”

Although European leaders pledged to support Greece if necessary, there is no European structure to effectively deal with sovereign bankruptcy. European budget rules allow deficit spending up to 3 percent of GDP but when a country as Greece, that struggles with a gap of so much as 13 percent on its budget, violates rules, “there is no bailout on offer.”

The United States, warned Ferguson, “is not that far behind Greece in terms of the size of its debt and the problem it’s going to have getting back into any kind of balance in the foreseeable future.”

Vague Pledge of Support for Greece

European Union leaders convened in Brussels Thursday to discuss the Greek debt crisis. European Council President Herman Van Rompuy promised that the eurozone would provide “determined and coordinated action if needed” to preserve the currency’s stability although Greece, according to Van Rompuy, “did not ask for any financial support.”

Europe’s southern member state has been struggling with grave fiscal deficits and a heavy debt burden, sparking fear that at some point, the country might actually have to declare bankruptcy. The summit is meant to assure financial markets that the EU won’t let that happen. Van Rompuy spoke of the eurozone’s “shared responsibility” but whether this vague pledge of support did the trick is doubtful. After the Council President read his statement, the euro slipped slightly to an eight-month low of $1.37. The currency traded at $1.51 last December.

Van Rompuy stated that Greece will adopt “additional measures” to gets its budget under control. “We call on the Greek government to implement all these measures in a rigorous and effective manner,” he said.

No concrete aid was announced though. European leaders are reluctant to actually bail out Greece. Especially Germany, which, as Europe’s largest economy, would be forced to take the brunt of such a rescue effort, doesn’t care much to help out the nation that for many years violated European rules against overspending.

At the same time, Europe is wary of letting the International Monetary Fund extend help for such interference would be seen a sign of weakness on the union’s part.