Greece and the Last Gasp of European Fiscal Sanity

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Hollande will travel to Berlin for a meet and greet with Merkel after he is sworn in later this week. His election means that France will perform an about-face on attempting to bring the budget under control and reverse Sarkozy’s labor law reform, making it once again virtually impossible to fire anyone. Hollande has promised to pay for any new spending he proposes, but he plans to do it by eliminating tax breaks for business and raising taxes on “the rich.” He plans a “75% tax rate on income above 1 million euros a year and a 45 percent upper tax rate for those earning over 150,000 euros. He would limit executive pay at state-owned companies to 20 times the lowest wage, cut the presidential salary by 30 percent and index the country’s minimum wage to economic growth.”

His plans call for 20 billion euros in new spending over five years, and he wants to “hire 60,000 more educators over his term and 1,000 police a year, and create 150,000 state-aided jobs to tackle youth unemployment.” He says his tax hikes will bring in an extra 29 billion euros while limiting the growth of government spending to 1.1% a year.

And the French voters bought it all. Unfortunately for Hollande, wealthy Frenchmen are already making plans to leave the country and avoid the socialist penalty for being successful.

It is Hollande’s demand that the EU fiscal compact be “renegotiated” where he will clash with Merkel. He wants to include provisions for “jobs and growth” in the compact, which sets strict guidelines for the budgets of member states, as well as deficit targets that must be met. Merkel has already said she has no intention of reopening negotiations on the pact, and their meeting this week will no doubt be much frostier than her consultations with Sarkozy.

Given the near certainty that Greece will exit the euro zone in the coming months, can the two leaders cooperate in inoculating the rest of Europe from the contagion of a Greek default? Thankfully, Merkozy worked to strengthen the European Central bank against such an eventuality by creating a 700 billion euro emergency fund to shore up shaky banks and loosening restrictions on the ECB’s ability to buy government bonds. These measures should see the EU through a Greek default, but it is an open question whether further erosion in Spain or France can be so easily dealt with.

Meanwhile, Greece is in chaos. The radical socialist Alexis Tsipras, whose SYRIZA party finished a surprising second in the May 6 elections, has forcefully declined to participate in a coalition government with the traditional socialist party PASOK and the New Democracy party who negotiated the bailout deal with the EU and IMF last March. Tsipras campaigned on an anti-austerity, anti-bailout platform, referring to the painstakingly negotiated agreement with the EU, IMF, and ECB (the “troika”) as “blackmail.” He rejects the idea that Greece will exit the euro, believing that the troika is bluffing when they say there will be no bailout if Greece rejects the deficit targets and budget cuts to which the previous government agreed.

Tsipras’ obstinacy has led to a crisis as there is no way a governing coalition can be formed. Together, PASOK and New Democracy won only 40% of the seats in parliament. Most of the smaller parties also ran on an anti-bailout, anti-austerity platform and appear unwilling to join the mainstream parties in walking the plank to save Greece from default.

Greek President Karolos Papoulias has called for a meeting on Monday of the top three parties but Tsipras has already rejected the idea saying, “They’re asking for accomplices to austerity. We can’t take part in this crime.”

Tsipras has good reason to torpedo the talks. Polls show SYRIZA is likely to win an outright majority if negotiations fail and new elections are called for next month. But Tsipras may have overplayed his hand. His suggestion that the private bank accounts of Greek citizens should be used to support the Greek economy, as well as his total disregard for the possibility of default might scare enough voters that they would return to their traditional loyalties, voting for PASOK and New Democracy next month.

Although the EU has been planning for a default by Greece, the shock of a member state leaving the euro zone will probably not help shaky banks, or government bond sales going forward. And the complex nature of Greece returning to the drachma as currency has many unknowns to which the EU will have to cope.

But if Greek voters prefer default and even more chaos to an austerity program with at least the promise of emerging from economic stagnation some day, they may give Tsipras what he wants — a majority of radical socialists for a government and economic pain that will make austerity look good by comparison.

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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.