Greece and the Euro

Greece and the Euro

In recent days the Greek crisis has gone from bad to worse. At the moment it is close to a breaking point. The Greeks seem unable or unwilling to make the changes necessary to avoid default, and the Germans seem determined to avoid continuing to subsidize Greece´s bad habits. If something is not done fairly soon, we are going to have a royal mess on our hands.

How did Europe get into this terrible predicament? The foundations of the problem reside in overly optimistic idealistic thinking, combined with the dangers of cheap easy loans. It has become apparent now that the whole euro project was rushed and not well thought through. The attitude while forming the Euro was that nations would naturally behave, but will allow it to rest my case and everything would just work out as planned.

The mentality that undergirded the creation of the euro was a typical leftist ideal that all humans are created equal, and therefore when some societies are doing worse than others, it simply due to a lack of “opportunity”. With this in mind, the belief was that the poor countries of Europe (such as Greece and the Mediterranean nations) are fundamentally no different than countries like Germany. Therefore, all the Mediterranean countries needed were simply some “development” funds and soft loans to get them going. The theory was that with these infusions of cash, the Mediterranean countries would quickly grow and develop — both economically and politically and socially — into well-functioning, orderly and prosperous nations, like the Germanic countries.  I remember a few years ago when the common line among European officials was that, with a new European development funds, the poor countries of Europe would soon reach parity with places like Germany.

Of course, like so much of leftist thinking, it was based entirely on idealism and wishful thinking. If there’s one thing that I’ve learned from traveling the world and observing different societies, it is that no two countries or societies in any particular time are never exactly the same. Every nation and every society at every particular moment is different from any other. Therefore, one should be very careful about casually assuming that, just because something works in one society, that it will automatically work in another. Americans often fall into this trap, because we do believe that all people are the same, and we often view the rest of the world as potential little Americans. This is the simplistic thinking that helped get us into the morass of Iraq. The idea was that, since America had quickly established a functioning democracy after throwing off the yoke of English colonialism, the Iraqis would do the exact same thing after we liberated them from the tyranny of Saddam Hussein put Mill Iowa. After all, if the Iraqis are fundamentally the same as Americans (since all people are basically the same), then it would stand to reason that getting rid of Saddam Hussein would initiate the creation of a liberal democracy, the same as occurred in America after the war of Independence. The reality, of course, is that Iraqi culture is completely different from the mentality and mindsets of America 200 years ago. In order to have a functioning democracy there has to be a certain level of maturity and responsibility on the part of the people and its leaders, and by extension their have to be functioning institutions. The reality is that Iraq is a society filled with rage and resentment, a desire for revenge and completely fractured upon religious, ethnic and tribalistic lines. In Iraq there really is no sense of the greater common good.

A similar mistake was made in the 1960s when leftists loved to look upon the successful example of Swedish socialism, and conclude that if socialism works in Sweden, therefore it must naturally also work in Africa. After all, if all people are equal, why shouldn’t socialism work as well in Africa as in Sweden? The reality, of course, is that socialism works in Sweden, because Sweden has a long tradition of an effective functioning government. When the Swedes pay their high taxes, they actually get something for their money. But, in Africa where government has always been a total disaster (filled with corruption and incompetence) how is socialism supposed to work? After all, socialism is nothing more than the government playing a very large role in the economy and the society. But, if the government is fundamentally dysfunctional, then how can having a large government ever benefit anyone, except for the few insiders who are making out like bandits by taking advantage of the system?  Of course, for anyone that understands how Africa functions, it should be blindingly obvious that any attempt at socialism would fail spectacularly. But, when leftists invoke their belief system about people being equal, it is very easy for reality to take a back seat to idealism.

Back to Greece. So, the idea was that funds and loans would be channeled to the Mediterranean countries, and in a few years they would all turn into little Germanys. The reality, of course, is that for the most part the Mediterranean countries took the money, bloated their bureaucracies, created all kinds of payoffs for favored parties, increase wages, spent the money, lowered productivity and generally lived above their means. They did basically nothing to reform their economies and make them more competitive. The “economic” development funds have now been spent, and the accumulated debts are coming due. The populace, which has become used to living above its means, is now angry at austerity measures, which require the nations to make the necessary sacrifices to constrain their bloated deficits, and to actually live within their means.

The crisis has been further aggravated by the fact that the political class´ reaction to the worsening economic conditions was to tell their electorates that everything would soon be fine, that sacrifice was not needed, and that all their economies required was a little more economic “stimulus” (in other words yet more deficit spending to try to desperately keep the ship afloat). In other words, no pain, no pain. I remember clearly in Spain in 2008, when the recession was just beginning to develop, the incumbent Socialist president (Zapatero) belittled his opposition candidate (Rajoy) by saying that all the talk of a coming recession was nothing more than doom and gloom and was unpatriotic to boot. In other words, don’t worry be happy, was his message. And, the Spanish electorate happily reelected Zapatero, the sunshine candidate, over the opposition candidate, who was much more realistic in his warnings. Of course I don’t want to exclusively blame the Mediterranean countries for lack of leadership in facing the crisis. Gordon Brown in Britain dealt with the problem by simply spending more and more money that the government did not have. It was only when the opposition took control, that the British government began to actually tackle deficits. In America it is even worse. There has been no attempt by the American government to take control of its raging budget deficit. Instead we’ve had stimulus after stimulus, in a desperate attempt that yet more deficit spending will somehow fix the problem.

All governments around the world, at least to some degree, are corrupt and mismanage public money. Even the best — the Scandinavian countries — have their problems, so no one is perfect. But, there’s a world of difference between the relatively high degree of public responsibility and effectiveness of the best run governments, and the total ineptitude and dysfunction of governments in places like Africa. Most of the rest of the world functions somewhere in between, ranging from poor to mediocre on a good day. Most of the world’s governments, therefore, are riddled with corruption, waste enormous resources and do little for the nation. However, governments are very good at enriching the ruling class and their friends who helped get him elected.

In the Mediterranean nations the governments are set up principally to serve the interests of the well-connected ruling class. The worst offenders tend to be socialist governments (but not always), because they are even more likely to look upon public monies as a giant slush fund where they can dole out money to every group that will help them get elected, all in the interests of an ever expanding government which is supposed to “help” the people. Governments are not set up to serve the people, but to make sure that those in power (and their buddies) are making out like bandits. If you look at how governments operate in Mediterranean countries, you will find that:

– Politicians who live very well. This is a problem that is not just limited to the Mediterranean countries by the way.

-Government workers who are overpaid and coddled with jobs for life, short working hours and little pressure to perform. Again other countries, including America, also have this problem to a lesser degree.

-Parasitic unions which receive funding from the state and actually hinder economic development while doing little for workers.

-An abundance of cartels, monopolies, rules and assorted regulations all designed to reduce competition to favor a select number of well-connected businesses.

-Government funds spent to subsidized radio, television, newspapers and films which then become well-funded propaganda outlets for the government.

-Rigid two-tier labor markets, which favor well-established and older employees at the expense of younger employees. This is one reason why Spanish employment among youth is so astronomically high. France has the same problem.

-Wages which are not set principally by the markets, but by fiat through collective bargaining agreements between industry and workers. This has the danger that politicians will simply raise wages by decree to the point that they become uncompetitive.  This also makes it especially difficult for an economy to become competitive again once costs and wages render that economy uncompetitive. I know this is a problem in Spain(and other Mediterranean countries). The years of false prosperity created by the property boom and deficit spending caused wages to rise to an uncompetitive level. Now the Spanish economy needs to reduce salaries to the point where the economy can compete again, but the rigid collective wage agreements prevent that, so Spain goes on year after year unable to gain competitiveness, and trapped in an ongoing economic malaise.

Government set up these systems (above) to favor the well-connected few over the interests of the many, because they need the support of these paid-off groups in order to get elected. That’s why reform is so difficult, and is resisted even when the countries fiscal back is to the wall. The last thing that politicians want to do is go against the privileged interests of those who helped put them into office. In a sense, reform would undermine the very system that brought politicians to power. This is why in African countries, reducing corruption is almost impossible, because any leader that truly tried to stamp out corruption would inevitably be thrown out, because the people, who provide the support to keep the leaders in power, have a massive vested interest in keeping the corrupt system going.

In Mediterranean countries there is little sense of the collective good or the willingness to sacrifice at all for it. The societies basically function on the principle that persons or collective groups (families, unions, regions, government workers…) only look out for their own interests, and the nation and society as a whole be damned. I can see this principle quite clearly in Spain (which is hardly the worst example). Spanish houses tend to be very clean and well-maintained. But once outside, many Spanish see absolutely nothing wrong with casual littering, graffiti and even vandalism. The mentality seems to be that, if it’s my house I treat it very well, but if it’s merely the public space, I don’t have to have any respect for it. I had a friend from Egypt who mentioned the exact same phenomenon in that society.

There is also a generalized lack of respect for others and self-control. The attitude so often seems to be, “I do whatever I want. And no one should tell me how to behave.”  If I can generalize, in Mediterranean countries there is more of a tendency to act immaturely and do not want to accept responsibility.

Of all the Mediterranean countries, Greece is by far the worst. Greece may be geographically in Europe and Christian country, but it functions more like a third world country. Greece has so little sense of collective responsibility, that it is the only country in Europe that I know of that has completely failed to impose an effective smoking ban. And, the same is true for motorcycle helmet laws, and a host of other regulations that are simply completely ignored. In Greece, brides of all kinds are simply a common way of doing business. The country is so backward and disorganized that it does not even have a land registry. By contrast, Spain (despite his flaws), has an effective smoking ban, motorcycle helmet laws are enforced, there is an effective land registry office and petty bribes are very rare.  Spain tends to be slow and mediocre, but it does usually work. In Greece, there is a whole new level of third world like corruption and dysfunction.

I suspect that the centuries of Ottoman domination have helped Greece become much more Middle Eastern in culture and mentality than they would like to admit. I heard that in Greece nobody really has to worry about losing his job, because the large extended family takes care of its own. I heard the exact same comment in reference to Arab societies as well, where the extended family functions as the true safety net.  This creates the effect that people are less motivated to go out and keep a job, since if they don’t work, the family can always take care of them. It also seems that the Balkans are suffering the effects of Ottoman domination. It is interesting to note that when one travels from the north in Slovenia, where Ottoman domination was very brief, to the south of Serbia, where Ottoman domination lasted for centuries, we can find a gradual and in the end complete transformation. Slovenia is a successful prosperous country that has his act together. Croatia, just to the south, is a little worse. Bosnia, further south, is still worse. And, at the end in Serbia which is the most backward, corrupt and mismanaged of all. Basically as we go from Slovenia we have a functioning European country, and by the time we get to Serbia we are up to our necks in dysfunction. Even IQ rates gradually descend the farther south one goes in the Balkans.

So, we have Greece, which operates basically had a third world level. The country is chronically mismanaged, corruption abounds, the government exists to serve itself and its friends (who helped get into power) the economy is riddled with cartels, rules and rigidities which make it uncompetitive, there is absolutely no sense of collective responsibility or sacrifice. The ruling class is successfully fighting any real reform in the economy, or how government functions , because this threatens their vested interests. The population also rejects any efforts at sacrifice or belt-tightening.  A rampant self-pitying nationalism mixes with a tendency to blame all of Greece’s problems on nefarious foreign interests, which conveniently removes the need for the population to accept responsibility and sacrifice, since they so often feel that someone else is to blame.  If Greeks don’t blame foreigners for their troubles, they blame the politicians. While the politicians are guilty, the electorate does not want to take responsibility for having voted these politicians into power in a democracy.  Civil servants, who have been living the good life for years and we have helped push up Greece´s, are now indignant at the idea of having their salaries reduced.  Well, what is the alternative? To simply go on spending beyond their means, as they have done up until now? The whole reaction of the Greek public often seems a bit infantile. Furthermore, there is a strain of hard-core leftism/communism that wants to blame all of the nation’ s problems on capitalism, globalism and the rest of the world. These groups recently staged a 24-hour strike would shut down much of the country. What a smart thing to do. The economy is on its knees, the country’s is about to go bankrupt, so it seems only sensible to try to undermine the main pillar of the Greek economy, which is tourism, just when the high season of summer is getting started. All this strife and unrest is only encouraging foreigners to stay away from Greece this summer. What German wants to vacation in Greece when he can be met with the kind of resentment and hostility that must be common that country?

Not surprisingly Greece as a nation with a low IQ (92) and one of the lowest in Europe.  I suspect that for decades now, if not for centuries, many of the best and brightest have been leaving Greece, leaving behind the laggards to run the country.

The Greeks love to blame foreign financial institutions for their problems. While it is true that the likes of Goldman Sachs have acted dishonorably, sleazily, opportunistically and predatorily in this whole affair, the reality is that if Greece had not racked up such a huge debt, and created such an uncompetitive economy, Goldman Sachs & Co. would never have had the opportunity to bet against them.  The financial institutions have acted badly, but Greece, in it’s irresponsibility, has given them a golden opportunity to do so. If Greece had kept its deficit under control, Goldman Sachs would not have been given the opportunity to machinate against Greece.  It´s as if Goldman Sachs created the hangman’s noose, and is now using it. But, it was Greece that gladly stuck its head into the noose. No one forced Greece to put his head into the noose.  It did so willingly and voluntarily. In some the financial institutions have helped to precipitate the crisis, but only because Greece presented them with a golden opportunity to do so.

A final unpleasant trait of the Greeks, is a tendency to play the game of lying and manipulation, which is also common in Middle Eastern cultures. The Greeks lied to get into the euro and they lied about the state of their finances for years after.  When the crisis hit, and Greece desperately needed new loans from the European Union, it promised all kinds of reforms. They got the money and, probably not surprisingly, they are now dragging their feet on making real changes, because the last thing the ruling class wants to do is undermine its own privileges and that of its financial/electoral base.  Furthermore, the greater public seems to be highly against any measures that would require sacrifice on their part. So the politicians don’t want reform and the people don’t want reform, so it’s not surprising that Greece is doing as little as it possibly can. It appears almost as if Greece is engaging in a game of chicken with the rest of the European Union. The message seems to be that, “We’ll “try” to make the reforms that you demand , but if we don’t tackle the problem, what is the European Union going to do if Greece goes into default?”.  The Germans, who tend to have a much higher sense of responsibility and discipline, have grown increasingly exasperated by the games that Greece has been playing. Still, among the ruling class in Europe (and in Germany too) there is the robotic mentality that the European Union and the euro must be saved at any cost-that’s there is no way out and no way back. If Greece continues to not make the necessary reforms to its system, there is no way that Greece can avoid default. If it comes to that, and it is looking increasingly so, what is Germany going to do? I suspect that, because the euro is so sacrosanct among the political class, that if Greece goes under, the Germans will grit their teeth and pay and pay and keep paying Greece until, I suppose the Germans explode. Northern people tend to be less temperamental than southerners, but that makes it all the worse when they really finally lose their temper. Germany might put up with this system for a few more years, until it simply reaches the end of his patience, and Germany decides to withdraw from the euro.

Another problem, of course, is that if Greece is allowed to receive indefinite funds for its mismanaging of its economy (because it called Europe’s bluff) that will send a big signal to the other troubled countries that they also don’t have to get their finances in line, because, in the end, the consequence of not dealing with the problem is simply to be bailed out by Germany.  What if Spain or Portugal or Italy decide to not get serious with reform? What will Europe do then?

Of course, the European Union (including Germany) certainly should share some of the blame. They rushed the euro project forward based on wishful thinking and idealism. And in 2005, the only mechanism that was in the Maastricht treaty — the stability and growth pact, which would have presumably impose some discipline on member states finances — was ripped up by none other than France and Germany, effectively removing any restraint on member states to live within their means. Furthermore, the European Union was overly trusting, or simply decided to look the other way, when Greece cooked its books. Also, the European Union has been far too lenient in providing soft loans to weak and uncompetitive countries and thus helping to fuel their budget deficits.

In sum, it appears that the euro is a project that was incorrectly set up. It has deep inherent flaws that will not simply go away. And, correcting those laws will be very difficult. Germany enter this whole enterprise with the promise and expectation that they would give up their beloved deutsche mark for a new extended deutsche mark (the euro). Instead, what they have gotten is a much weaker and less stable currency, along with a bunch of liabilities to have to bail out uncompetitive countries that don’t want to get their act together.  This latest crisis has certainly helped to undermine the previous generally good feelings that Europeans have about the EU project. The PIIGS now feel that may be the euro have not turned out to be such a bonanza as expected. Germany feels increasingly had. They expected other member states to behave as Germany generally does and follow the rules. Instead, they got countries like Greece where creative negotiation and interpretation are the order of the day.

Bernanke must, in a way, be thankful for the euro crisis. Considering the way that the Fed is printing money, the only thing that is keeping the dollar from collapsing is probably the fact that the only other currency that could rival the dollar is the euro.  And the euro is currently embroiled in a massive mess and its future is in doubt.  With things so uncertain, a lot of investors feel that the dollar is a lesser of two evils. If things had gone as planned, or if the whole situation had been managed more responsibly, I believe that the dollar would be falling a lot more in relation to the euro, and other currencies by extension.


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