Sunday, February 14, 2010

Greece vs European Union

Fingers are pointing this and that and every which way. They might as well be daggers. What a pathetic scene.

The FT reports: "Greek Prime Minister Mr Papandreou blamed the European Commission for failing to crack down on the previous conservative government’s “criminal record” in falsifying statistics. “This has undermined the responsibility of the European institutions with international markets,” he said".

Ah, so a domestic issue of lousy governance is a foreign responsibility?

You can bet your bottom dollar, or euro, that if indeed foreign authorities had taken a strongly worded public position there would have been a major uproar about violation of sovereignty.

Will stronger members of EU help out? In particular Germany, the largest of them all?

FT reports: "Mr. Papandreou's outburst is likely to infuriate the very leaders whose help Mr Papandreou needs. It came as it emerged there would be no more talk of financial assistance until Athens had persuaded the EU that it had a sustainable austerity programme in place.

Germany is insisting Athens bears initial responsibility for restoring confidence in Greece. Angela Merkel, German chancellor, resisted French efforts to come up with an explicit bail-out package at Thursday’s summit of EU leaders in Brussels"....

What would constitute a "sustainable austerity programme"?

Good question. The Greek government has just announced a series of measures: higher taxes on more people, no cash transactions of over 1500 euros after jan 1, 2011, higher VAT taxes, capital gains taxes and cut in earnings of public servants.

Ummm. Good luck. Expect social turmoil, if you asked me.

The economy has been in recession.

FT reports : "...a deepening slump which has been worse than reported, with the fourth quarter of last year seeing another turn for the worse – raising more doubts over whether it can meet its targets of cutting public-sector deficits. Greek gross domestic product contracted by 0.8 per cent in the final three months of last year, by far the sharpest decline reported so far by a eurozone country.

That followed declines of 1 per cent, 0.3 per cent and 0.5 per cent in the first, second and third quarters of the year.

Previous estimates had shown falls of 0.5 per cent, 0.1 per cent and 0.4 per cent. The pace at which Greek GDP dropped last year could also cast doubt on the government’s prediction that GDP will fall by just 0.3 per cent in 2010"...

Given this background and the history of free lunches, the history of a "shadow" market where cash transactions have been a normal fact of life to get around punishing taxes that have been misspent by incompetent and wasteful governments, no one would want to pay higher taxes.

Students of economic development are usually forced to read dense, mathematical economic models. I have always thought that's silly.

No economy can prosper without quality public governance. Countries are poor not because the leaders do not understand mathematics or economic models. They do and they don't care. Most economic problems are created by corrupt leaders.

Greece is yet another example of how those leaders have led the country down to a dead end. To revive it would take herculean effort -- not by leaders who are on top, but by the people who have to pay the price.

Now, people are willing to suffer, even die, if they believe in a just cause. Unfortunately, leaders, or the ruling elites, of declining economies have long lost their legitimacy as trustworthy. It will take a miracle for the Greek people, or for that matter, for the Argentinian people, or name any African people to voluntarily agree to an austerity program when they do not have trust in their leaders. In those poor countries "austerity" measures are usually enforced by force. Many people have died in protestations.

This is going to be a real Greek drama. Watch your headlines. I smell big trouble. Even blood.

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