Greece and the Last Gasp of European Fiscal Sanity

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Voters across Europe have spoken in the last week and the message they have sent has upended the fragile consensus that budget cuts and fiscal discipline would bring the continent back from the brink of debt Armageddon.

In national elections in Greece and France, as well as local elections in Germany and Italy, voters turned out governments that backed so-called “austerity” programs that would have brought a measure of sanity back to budgeting and debt management, while electing socialist politicians who promised that economic problems could be solved by implementing “growth” policies — policies that include massive new spending, tax increases on the “rich,” and a rollback of budget cuts.

Greece appears to be a nation in full denial, rejecting the coalition that negotiated a bailout package worth 180 billion euros that would have kept the nation in the euro zone, and embracing a radical socialist party that wants to scuttle the deal. French voters had other problems with former President Nicholas Sarkozy, but it was primarily his tepid attempts to reform labor laws and the education system that led to his downfall in the May 6 election.

President-elect Francois Hollande has promised to restore what Sarkozy cut, while making it clear that he wants to “renegotiate” the carefully crafted “fiscal compact” that sets budget and deficit guidelines for the entire euro zone. The compact was the work of German Chancellor Angela Merkel and Sarkozy — “Merkozy” as the duo was referred to in the European press. The defeat of Sarkozy calls into question the France-Germany relationship, which is largely responsible for keeping the EU from disintegrating in these last two years of crisis, as the leaders of the two largest economies in Europe successfully navigated the panics that almost tore the euro zone apart.

In Spain, where one in four workers are unemployed, the government has come under massive pressure from the left to change course from the painful medicine of cutting services and firing government employees and embrace massive increases in spending. Prime Minister Mariano Rajoy is determined to stick with his budget cutting and deficit reduction. Madrid announced this weekend that it may take over the finances of an entire region because the local government may not be able to meet his deficit targets. He has also vowed to clean up Spain’s tottering banking sector, taking over Bankia, the country’s largest mortgage lender, just this week.

But for all of Rajoy’s cutting, it is likely he will not meet his deficit target for the year. Instead of a projected deficit of 5.3% of GDP, Spain is likely to see a 6.4% shortfall. This is down from 8.3% last year, but is not likely to appease investors in Spanish debt who will demand a premium that may lead to even more financing problems for the country. Ten year notes ballooned to over 6% this past week — an unsustainable level that would set off a ruinous debt spiral of increased deficits due to costlier debt servicing, which would panic investors even more, leading to higher interest rates on bonds to finance the debt.

Spain’s economy is expected to contract almost 2% this year, with anemic growth projected for 2013. With budget cuts just beginning to bite and no growth in sight to bring the unemployment rate down significantly, the future is not bright for Rajoy’s efforts. Hundreds of thousands took to the streets on Saturday in Spain’s major cities to protest against Rajoy’s efforts to bring Spain’s fiscal crisis under control. It is doubtful, given what we’ve seen across Europe this past week, whether he can hold together the consensus to continue his austerity program.

Spain may flirt with disaster in the coming months, but the spotlight this past week was on France, and especially Greece, where national elections have unleashed the socialist left and promise to bring the euro zone back into a full fledged crisis sooner rather than later.

The election of Francois Hollande in France — the first socialist to win the presidency since Mitterand 16 years ago — has had the immediate effect of breaking the alliance between Merkel and Sarkozy that proved to be the linchpin that held the EU together during the worst of the sovereign debt crisis. Their partnership produced several measures that will allow the European Central Bank more leeway in dealing with future crisis while their collaboration on the EU fiscal compact has tied the economies of the EU together in a way never before attempted.

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  • carn

    As a reader from Germany i have to correct one misperception of the author:__"In national elections in Greece and France, as well as local elections in Germany and Italy, voters turned out governments that backed so-called “austerity” programs that would have brought a measure of sanity back to budgeting and debt management, while electing socialist politicians "
    The social demorats, which won two local elections past 2 weeks are – however i dislike them – not socialists backing massive new spending. While they tend to spend more than Merkels christian democrats, they supported 2009 and still support an amendment to the constitution that aims at requiring a balanced budget. The full socialist – the twice name mutated ex-SED – suffered seriously in both elections losing 2/3 of their vote share. Furthermore the only real capitalistic party – liberal democrats – manage to reverse their trend since 2 years to loose elections.So while the german election results are not nice for Merkel, they are no sign that German voters favor socialists.

  • Occidental

    As a Greek who has read hundreds of BS articles on the crisis, I would like to congratulate you on your spot-on reporting. Many western economists do not realize that here in Greece it is the most fascist and reactionary communist forces that are pushing for a return to the drachma.
    Beyond economics, staying in the euro is a societal choice, a battle of West vs East, of pro and anti-West forces… We, the minority, who fought and shed blood against communist filth in the past must not be abandoned today by the West!
    Every article published in favor of Greece leaving the euro, is another vote of confidence for the left and for Greece becoming another Lebanon. Please help the Greeks who are FOR the reforms asked by the IMF, the EC and the ECB. There are a lot of us –even if we are not the majority. This is a cry for help.

  • Anthony

    I think Greece leaving the EU is a positive thing. Returning to their currency at this point, barring so called
    ” Austerity Measures” is logical. About the break up of EU member states, this is to me a good thing. I know the Greek poster above will not agree, but most people see the totalitarian nature of the EU project and the damage it is doing.

    I hope the lefts ultimate project on the European continent, the enslavement of the various peoples of Europe fails. Hopefully, the fall of Greece is just the beginning domino.

    Remember, if the maniacs in Brussrls have their way, Turkey will become “European” overnight, and be free to invade Europe proper.

  • davarino

    I have always wandered how you can have a European Union with all the states doing their own thing with no accountability. They tried to copy the American experiment without realizing the importance of the main ingredients. It will be a very painful leason to learn about "austerity" and how it works for both a nation as well as personal finance. Just because your a nation doesnt mean the laws of economics dont apply anymore, Money is money and if you dont have enough you have to cut somewhere or make more. And if you make more by taking more and more from your wealth producers they will leave and then everyone is left with nothing.

  • StephenD

    Gotta get them ready to accept the new Caliphate right? After Turley gets in and the whole of Europe is dominated by Islam, well, there'll be nothing to worry about will there? You will then have your one world leader and conveniently enough, a one world religion! How quaint! Taking from those that have for those that do not is merely one small step behind making the Kafir pay the Jiza. Looks like if you were the most anti-freedom person in the world this would be a system you would love to embrace. Eventually, every single aspect of your existence is dictated for you. You are no longer a citizen but rather a subject.
    I HATED theories like this because I always thought they were promulgated by whacko conspiracy theorists. Not any more…because you can see it happening.

    • Stephen_Brady

      Stephen, I have to agree with you, starting with your former take on conspiracy theories. Like you, I once thought all of these people were "whackos". Now, I guess I join their ranks.

      D i c k Morris is of the opnion that Obama's rash of one-world executive orders, recently, and what will undoubtedly be an attempt next Fall … in the lame duck session of Congress … to ratify certain treaties (like the Law of the Sea) is a blatant attempt to bypass the American voter and the Constitution, and pass our sovereignty on to "global institutions". He also believes that these efforts are a conscious attempt to destroy any effort to undo his administration by the GOP.

  • Occidental

    Sorry guys, but you have got it wrong. I, too, have read America Alone et al. but this is not happening yet and is not the issue. Turkey will never become a full member of the European Community and breaking up Europe to avoid such an eventuality seems pretty stupid to me. I am aware of all the arguments advanced by economists on the untenability of the euro. They are perhaps right. However, I will ask you all, one question: How is it that in most European countries the political forces that are the most vocal opponents of the European Union, are the most regressive, racist (and here I also mean anti-Jew) and leftist ones??? Doesn't that say anything to you? It is easy sitting in an armchair halfway around the world to pontificate on the utility or not of a united Europe…

  • Chezwick

    Occidental presents some compelling arguments, but I personally see the entire EU project as a bureaucratic monstrosity that should be dismantled. It is a regulatory hyper-government. Furthermore, we all know the European elite is committed to the Eurabian project. If the EU breaks up, at least those individual states that want to resist can do so.

  • Schlomotion

    Mr. Moran uses a lot of questionable terminology. Firstly, he refers to the undemocratic machinations of the unelected Eurozone central bankers as a "fragile consensus." It's fragile, but it's not a consensus, as anyone who has watched Nigel Farage address Van Rompuy and Barroso, knows.

    Secondly, Mr. Moran said "Hundreds of thousands took to the streets on Saturday in Spain’s major cities to protest against Rajoy’s efforts to bring Spain’s fiscal crisis under control."

    No one believes for a second that all those people came out to protest balanced budgets and an end to the fiscal crisis. They came out to protest being swindled by a cartel of bankers.

    Finally, Mr. Moran is up in armchair arms about the fact that Hollande cleverly sought to impose a hefty, confiscatory tax on the Eurozone MPs who are ruling by capitalist communism. If it is so important to balance the EU financial crisis at the expense of the weak then maybe the PIIGS should roast the people holding the barbecue.

  • BS77

    A warning to the Left: Be careful of what you wish for. Socialism, welfare statism, bloated bureaucracies and a largely idle work force: Recipe for disaster.

  • tagalog

    Looks like Europe is headed for the second set of revolutions in the past 85 years. I hope it doesn't end up the way it did the last time.

  • AntiSharia

    Sun Tzu knew it 2500 years ago: all battles are won or lost before they are fought. That goes for political battles. The EU was doomed as soon as it came into existence. Europe doesn't have enough strong economies to subsidize all the weak ones, and the people of Europe won't reform their welfare states, to them government subsidized programs are a sacred birth right not to be tampered with. Any government trying reform will find itself out of office. So the underlying problems will never be addressed. Greece cannot survive as part of the EU, and most of the Mediterranean countries will probably have to leave and drop the Euro as currency.

  • WilliamJamesWard

    Thinking that if the worst happens and we can compare our times to the great depression I note that
    it will be with a gigantic population by comparison and massively less resources. The people of the
    World are different in they do not see themselves as Nationalists and what loyalties they have
    are to self and a what's in it for me attitude. Those leaders that want the UN to control every aspect
    of life on the planet will while sneakily pushing in laws via people like Hillary Clinton. The
    Marxist/Socalist/Islamist kabal becomes a threat to American sovereignty and cause stresses
    that will only be removed with the leftists out of Government in America and the return to and
    American economy which world wide banks will hate, the globalists must destroy our freedom
    and this makes me wonder just how far we are willing to go to defend freedom and just what
    if any limits those who would be our masters see for themselves, probably none………William

  • Patrick Henry

    I've been following events in Europe and have come to the same conclusion as many others: the eurozone is untenable. Differences in productivity between Germany and the periphery nations-states (PIIGS), coupled with low interest rates that reflect (price) the low risk of borrowing money appropriate for the Germans but inappropriate for the others caused speculative bubbles in housing and over-generous pensions for bloated state bureaucracies. The malinvestment that occured, similar to the US housing/credit bubble, must be purged before the economy can right itself. As long as borrowed money is poured into unprofitable endeavors, which can only occur in an economy with government intervention, then the troubles will become acute and lead to further misery and violence. Because these are democratic nations, the people, in a sense, get what they deserve. As Margeret Thatcher is alleged to have said: "Socialism works fine, until you run out of other people's money." The fiat money supply will work its black magic and we'll once again be witness to man's folly writ large.

  • intrcptr2

    …be worse.

  • Amused

    Dont worry about Europe economy wise , WORRY about what JP Morgan just did . And JP's lobbies forked over 21 million buck to weaken Frank -Dodd , which would have prevented their 19 billion dollar drop , and their 2 billion and still going loss . But hey that's what you repocons want , ain't it ? No regulation ? What JP morgan just did was EXACTLY what caused the economic situation we find ourselves in today …"derivitives and aswaps " are what caused the '08 crash and recession . If you guys haven't figured that one out by now , you're either IDIOTS or LIARS .
    P.S. Don't expect any of FPM 's pundits to bring that subject up , because there aint no wiggle room ,and the usual SPIN just won't work .

    • reader

      So why Obama and his court jester tax evader treasury secretary keep bailing them out, a village genius?

    • tagalog

      Would you please define "repocon?"

      • Amused

        Sure ….YOU

  • Amused

    The bailouts were initiated by yours truly G W . And they WERE necessarry , Obama simply followed what the Bush Administration Started .And if you think AIG was not too big to fail ? Then you have absolutely no understanding of what caused the crash , and what fdurther implications would follow if AIG was allowed to fail . Again reader , you're out of your league for the sake of a juvenile ad hominem . In addition you're still sorely lacking in reading comprehension . Run along little boy .

    • tagalog

      "Too big to fail" means "too big." Such businesses are monopolies and should have been forced to divest, and when they have financial difficulties of the type that generated TARP and the Obama stimulus, ought rightly to go bankrupt. It would have been cheaper to pay the unemployment benefits to the people who would have lost their jobs. The Chapter 11 bankruptcies would have resulted in reorganization or dissolution with new, more streamlined business taking their places, and we would have been out of this crunch a couple of years ago.

      I agree on the Bush Dynasty. I can't understand why people are occasionally talking about yet another Bush (Jeb) in federal office. Two Bush disasters were more than enough. No more Bushes.

  • Amused

    And to prove I'm non-partisan GW made the right move , not because Obama followed but given the situation , there was no other choice [even though his own legislation or lack thereof contributed to the crash ] but to make the right move , and GW to his credit made the right move .
    SO , if you're slamming Obama , then you are also slamming G W ……DUMMY !

    • reader

      You're proving that you're an ignorant and hypocritical moron – yet again. Attacking Wall Street and making deals with the same Wall Street in the same breath – how clever.

      • Amused

        Learn to read schmucko .

    • tagalog

      Instead of pumping taxpayer money into these economic dinosaurs, they should have been allowed to go bankrupt.

  • Amused

    As for todays JP debacle ? Heres what Warren of the NY FED had to say , and she's spot on :

    Warren on Monday blasted Dimon for his history of fighting government regulation of banks.

    “Notwithstanding the fact that we are just coming out of this huge crisis, Jamie Dimon has been the one who has led the charge in order to say, nope, no more regulation, fight back against regulation, called the regulation un-American, and resist, tried to put loopholes into the regulation, hire an army of lobbyists,” she said. “This has really got to stop.”

    “What happened here is not just about JPMorgan Chase, it’s about the kind of attitudes, that the bank should be regulating themselves instead of having real oversight… we have to say as a country, no, the banks cannot regulate themselves,” Warren added. “They are financial institutions that run the risk of taking down everyone’s job, run the risk of taking down everyone’s pension, run the risk of taking down the entire economy. And that means it’s appropriate to have some government oversight.”

  • Amused

    Now if any of you repocons OR Democrats have objections to logic like that , then you're ALL bigger morons than I ever estimated you to be .

    • tagalog

      What's a "repocon?"

  • Patrick Henry

    What I find amusing is Amused calls everyone who disagrees with him (and the good folks at the New York Fed) "morons." Please follow this logic: you base your argument on a hidden or unstated premise, that the current paradigm of central banks (the Fed) and Congress manage the economy through controlling the price of borrowing (interest rates), micromanaging production and labor via a labyrinth of regulations, and artificially increasing demand via deficit spending to prop up asset prices as they are currently configured. With this taken for granted a good, then your argument for more regulations (i.e., the Volker rule now under consideration) is a sound one. However what you fail to notice is that the arguments to the contrary dismiss this paradigm because it produces malinvestment and mountains of debt, which is an analysis that's far more profound and compelling than you seem to appreciate. In short, it appears your analysis is lacking because you assume that with a few more tweaks to the system, they'll get it right. Perhaps you should change your pseudonym from Amused to Befuddled.