WHERE WILL THE
CHAIN REACTION LEAD?
WHAT LESSONS MUST EUROPE LEARN?
The first part of the chain reaction could
affect the solvency of some European and American banks who lent to Greece, and
who would not be getting all their money back. Those who sold credit default swaps with those banks could
also be caught.
The second part of the chain reaction would affect other
Governments, who may not have quite as difficult a situation as Greece, but
who, like Greece, have to borrow to cover day to day expenses because their tax
revenue is insufficient to cover their outgoings. Ireland is in this
category. Lenders who lose money
they had lent to the Greek Government, would be even less willing, than they
are now, to lend to other Governments. A 21st century precedent of
an advanced European country defaulting on its debts would have unknowable
consequences in a fragile and volatile world.
I have read a recent publication by a
German economic think tank, the Ifo Institute, about Greece.
The conclusion I drew from it was that the problems, now
coming to a head in Greece, have been obvious and knowable for at least twenty
years, long before Greece joined the euro.
If mechanisms were not insisted upon to remedy those problems,
before Greece joined the euro, then responsibility must be shared for that by
all the member Governments of the euro, who admitted Greece into the euro. The European institutions, that
were supposed to be examining the
accounts of the Greek
Government to ensure that those accounts presented
an accurate picture of Greece’s real liabilities, have to answer for their
omissions too.
Greece was one of the fastest growing
economies in Europe from 1950 to 1973, but thereafter it stagnated. But public
spending went on growing, from 23% of GDP in 1970, to 30% in 1980, and to 49% in 1990. By 2009, it was 52% of GDP.
A lot of the money went to
pensions and extra public sectors jobs. Whenever a Greek politician arrived at an international
meeting, he was accompanied by an entourage that was four times as big as any
other.
But tax revenue
was not keeping pace. The Government
debt level grew
especially quickly in
the 1990s when guaranteed debt of
state companies were taken onto
the Governments own balance sheet,
and money the Government borrowed
from its own Central Bank had to be properly accounted for. This was known before Greece was
admitted to the euro.
Greece does have a tax collection problem.
This is because it has such an
exceptionally high proportion of its workforce who are self employed, or who
are in the non traded sector of the economy ( ie. sectors who cannot export
their services, like doctors, shopkeepers etc.). The extent to which people pay due taxes is lower than
elsewhere in these two sectors.........almost everywhere in the world.
Seemingly tax evasion by the Greek self employed in not much worse than by the
self employed in the US, the Greek
problem is that self employed
people make up a much bigger share
of the Greek economy, than they do of the US economy. Greece’s tax collection problem thus has more to do with the
structure of its economy, than with any uniquely Greek aversion to paying tax.
All these facts must have been known to the European Central Bank, the
Banque de France, Bafin (the German regulator), and all the other supervisory authorities, when the banks they were supervising lent vast sums to the Greek Government, during period since Greece joined the euro. While its exact scale may have been concealed by accounting
tricks by the last Greek Government , the fact that there was a huge
problem was knowable.
I believe that it is time to face up to the
full extent of the sovereign debt and banking problem in Europe.
We need now is a ten year plan for the euro zone, not just a
ten month plan!
Europe must align its income expectations to its
productivity. At the moment, the first is running well ahead of the second.
Productivity must catch up, or income expectations must fall back. In some cases, the gap will take years
to close. These social choices are unavoidable, but have to be made in a democratic way.
Voters are able to face reality, so long as
everything is laid out before them.
In the countries who lent foolishly, as
much as in those who borrowed foolishly, the authorities should own up to their
share in the mistakes. That has
not happened yet in every case.
Once that is done, Europe can move on more convincingly
1.)
to devise a political structure
to prevent irresponsible borrowing by Governments, ( One suggestion is an EU
veto on national budgets)
2.)
to increase productivity and
allocate scarce resources more wisely, (This is more difficult because it requires action by the private sector,
which has misallocated time and
money in the past)
3.) to slim down the
financial sector, (This is not happening, layoffs are taking place everywhere
except where the problem started!)
4.) to make banks safe to
fail, rather than too big to fail, (This requires a much higher capital ratio) and
5.) to build a large
contingency fund, by contributions from all members, that will stand behind
Governments who have kept the rules, but who face temporary difficulties beyond their control. Until a fund is built up, standing
behind weaker countries involves a risk for countries who have good credit ratings and who have to
pledge that credit to help out the
weaker countries.
