After a meeting of EU finance ministers in Poland on 17 September 2011, it became clear that Germany fears the worst about the Greek public debt crisis, namely that at least half of the debt must be written off and that would mean downgrade of German banks, along with other banks across Europe. This would entail a lower value of the euro and less liquidity in the market that is in dire need of cash to operate. This scenario has unfolded as the Chancellor Angela Merkel's Christian Democratic Party lost the election in Berlin (18 September 2011) and it continues to show weakness nationally in comparison with the Social Democrats and the Green Party.
One reason that there has been a considerable cooling of US-German relations in the last year or so is because US policy on several fronts from monetary to foreign affairs, has worked against German objectives. The persistent position of the US that EU and especially Germany back Greece has angered many Germans who see that they are throwing money at the Aegean bottomless public debt pit.
As of 19 September 2011, the “up front” credit default swaps (CDS) stood at 60.5, which entails that it would cost $6.05 million up front and $100,000 annually to insure $10 million of Greek debt against default for five years. This is a signal that many investors have nearly 100 percent confidence in an official default, because the unofficial bankruptcy has occurred long ago as I have noted in previous postings.
The Greek debt crisis is a no-win situation for Greeks, Europeans, Americans and the world economy, as sharks betting on default smell blood in Aegean waters and are waiting to cash in. The European Central Bank and EU member central banks coordinated their policies last week to strengthen banking capital by providing more dollars to them, but that hardly addresses long-term structural problems and the real prospect of chain reaction if/when Greece finally defaults in some manner managed and orderly or chaotically.
Greece already collects taxes as percent of GDP that are about the average for OECD countries, and well above the the aggregate US tax collection. However, it still has a widespread problem with:
a) TAX EVASION:
tax evasion by the top 50% of income earners - but how does one collect from people who refuse to pay or bribe officials not to pay their taxes? Moreover, several hundred thousand businesses have left Greece during this recession for the north Balkans, and those with money have transferred billions of euros abroad.
b) PUBLIC EMPLOYEES
a public sector bureaucracy that is much higher than it needs and much higher than the average EU - but even if 20-25 percent of the civil servants are eliminated and that means a savings of about 15 billion euros, the problem then becomes unemployment of above 25%, or Great Depression levels. This means risking revolution, perhaps military intervention to prevent leftist take over of the government.
c) BANKRUPT POLITICAL SYSTEM
lack of public confidence in the two leading political parties - conservative and the ruling Socialist that is in reality neo-liberal. Even if Greece has elections, the result will be that no political party has the parliament seats to govern. A coalition may become a necessary reality, but it will face the exact same problems, thus the exact same social pressures. Political instability is here to stay and that is bad news for austerity measures working.
d) AUSTERITY WITHOUT ECONOMIC DEVELOPMENT
a flawed austerity program by the IMF-EU has entailed that both the EU and Greece have wasted billions paying banks interest to service loans, but there has been zero emphasis on development. The productive economic base of Greece is thin with tourism and merchant marine constituting about one-third of GDP, but the majority of the labor force is employed by small shops that are closing one after the other during this crisis. Without any attempt on the part of the EU to help Greece develop its economy, the result has been larger deficits, larger negative GDP growth, higher unemployment, and the realistic prospect of default if this scenario continues without policy direction from collecting money to service the banks to providing a comprehensive development program that would focus on jobs-stimulated economic growth.
Can Greece be saved from this crisis and can the EU overcome the greatest challenge in its history? The EU is so deeply intertwined in the Greek-Southern European debt crisis that it cannot see any 'good and cheap' alternatives to the existing road of more austerity and more loans to service past debts. To be fair, Portugal and Ireland are actually doing fairly well, but then there is Spain and Italy whose prospects are very poor - and if the Italian situation is not handled soon and effectively, the EU may be finished.
Impoverishing Greece will not solve the problem for EU banks and it will not be good news for the EU economically or politically. One reason that the Germans have been so tense in their relations with the Americans is precisely because of this situation. However, China has also been pressuring Germany along the lines of the US, and that kind of pressure is too much to withstand for the EU's strongest economy and for Chancellor Merkel continuing to lose support as public opinion polls indicate.
The solution to the crisis depends on what kind of European Union both the creditors and the debtors want, if any, and what kind of social contract they want - that is, what kind of society do they want and what sacrifices are the privileged classes willing to make to have the kind of society that they seek? It may be that in the end, no matter what they want, at least half if not more of the Greek debt will be written off, and Spain and Italy may cripple the eurozone.
It may be that a two-tiered currency is created within the EU, which would then permit the debtor nations to devalue and accept the consequences of hyperinflation. Another scenario is forcing the banks to take the hits so that they can save the debtor nations, but that is unlikely. There is no end to the possibility of scenarios, but the most likely one is nothing except staying the course will continue to play out because politicians always are very slow to react.
No comments:
Post a Comment