But it doesn’t really matter what is deserved. The blame game doesn’t make things better, it often delays the implementation of real solutions. Looking over the list of austerity proposals on Greece, it’s hard to see how all that is gonna get done in a way that doesn’t wreck their economy. Greece’s GDP is expected to shrink 17% from 09-13. Even if you think they deserve it, the pertinent question is can they survive it? If they can’t, then forcing them to is more detrimental than beneficial.
The important thing is to have a plan that allows countries in debt to turn their economies around and start growing again. If the current measures will prevent that from happening in Greece, then yes, they should be scrapped and replaced by something better.
But for a variety of reasons Greece deserved a lot of the austerity that it got. One way they could have payed off their debt was increase tax compliance and crack down on corruption. Years of experience showed that was not likely to happen. It appeared that the Greeks wanted to have their cake and eat it too (or eat their cake and have it too). Since increased tax revenue was off of the table, about the only thing left is spending cuts.
This could be a wake-up call for them to change their ways. But if not, then maybe they’re better off (along with everyone else) without the Euro.
There is sufficient evidence that a severe austerity plan will not allow them to do that.
Once again, what they DESERVE is not the issue. I think we can all agree that Greece doesn’t DESERVE many of the economic considerations made to them, but they were necessary to create a better long-term outcome.
Perhaps, but the reality is that you can’t increase compliance with the law by mitigating the force of law and efficacy of the government as a result of fewer resources being dedicated to those things. It’s like going to a high-crime area, an saying, well, since you asshole don’t want to follow the law, we are going to cut the number of police in your town and the amount of money transfers to those who live there, then expecting crime to drop. Why would the Greeks who pay taxes now feel obligated to pay (more) in a situation where their government is less responsive and less beneficial to them?
I don’t think it is off the table. In fact, it was part of larger reform efforts imposed on Greece. They have already started arresting big tax cheats. They collected $154 million in tax arrears in the first half of 2011. Ultimately, it will be about changing the culture, but that will not be easy if people have no faith in the government.
That’s not really answering the question either. Sovereign immunity allows Greece to tell its creditors to fuck off if they demand something. It doesn’t allow Greece to dictate the terms of new lending; that is, there’s no reason Germany can’t tell Greece its new borrowing will be secured by the Parthenon, or whatever.
Many countries besides Germany have accepted that so-called austerity has been the correct medicine. The Netherlands, Denmark/Sweden/Finland, Luxemburg, Austria. The East European countries had some difficulty convincing their population, why they should pay for a bail-out fund to the much richer Club Med., when the same east European countries had previously been told that they should expect no such thing for themselves. But in any case, if Germany was alone, they’d still have the final say as long as they have to pay the bill.
Not without breaking up the Euro. And good luck with leading an expansive financial policy without the backing of Germany.
Germany already has imposed austerity on themselves. They did so in the previous Social Democratic government under Gerhard Schroder. Before that Germany had notorious high unemployment rates and was frequently known as the sick man of Europe. Their current success is very much based on those austerity changes made then.
Spain desperately needs to do something about its business climate and labour laws. The same with Italy, Portugal, and Greece. According to the World Bank it is easier to do business in civil war torn Yemen and communist Vietnam than in Greece, and Mongolia scores better than Italy. An expansive debt fueled economic policy, even if it was possible – which it clearly is not, would only postpone doing something about those fundamental things. Hollande has promised that the pension rate is to be lowered to the 60 years. It’s either populism or madness. Certainly it has nothing to do with reality.
No they have not. There remains industry in non-German nations. And in fact other nations are quite able to hold their own against Germany. Sweden comes to mind. Denmark too. Denmark has benefited immensely by Germany’s international export success by subcontracting to German industrial conglomerates, so that Germany is now the largest buyer of Danish industrial output, helping boost the record Danish trade surplus. I expect the same is the case for other of Germany’s neighbors, like the Netherlands, and Austria. If a nation is unable to benefit from the economic growth of a neighboring nation, then chances are that the problems lies at home.
In addition German companies have invested enormously in the industries of many of these countries that now have problems. Enabling many of these industries to become competitive providing a rare positive ray of hope, whereas they otherwise would have gone bankrupt. For instance, I think the Portuguese Volkswagen factory has been declared the worldwide most productive Volkswagen factory, and soon they’ll be churning out Porsches and Bentleys. Hard to imagine they would have done so without German investments.
brickbacon, I guess what I’m trying to say about Greece is that no country was just going to give them the money, especially after it turned out that part of the problem was the Greece defrauded the other Eurozone members. Also, if they just gave Greece the money and did nothing else, Greece would just fall right back into debt again. Since previous attempts to get everybody to pay their fair share had failed, the other countries felt that Greece couldn’t be trusted to do anything but implement austerity measures, both to prevent them from falling deep into debt again, and also to pay back the banks.
I haven’t heard of any other Eurozone members being that untrustworthy. And like I said, some austerity is reasonable. But I think there’s a problem if that’s all that’s being offered. For example, I’m sure some countries are trustworthy enough, maybe they could receive help getting back on their feet first, and then start paying back their debt.
Just because austerity worked for Germany, doesn’t necessarily mean it will work for other countries as successfully. If you have austerity, trim away the fat, your economy doesn’t improve, and the only option you’re given is more austerity, then you have to start cutting the muscle.
Rune you said that Spain, Italy, Portugal, and Greece need to change their “business climate and labour laws.” How does austerity accomplish this?
That wasn’t the question that was asked. The original statement was:
The reason creditors can’t demand hard assets be liquidated is because of sovereign immunity. Of course new lending could come with different terms, but even if Greece defaulted on new lending that was secured by the Parthenon, there is likely no way any private creditor cold collect on something like that anyway. Who would force the Greek government to abide by the terms of the deal? That’s why a deal like that probably wouldn’t occur.
Austerity is such a vague word. It is often used for any change you do not like. Labour market reforms, and measures to combat tax evasion are often seen as austerity measures. Making public employees redundant by reducing bureaucratic red tape and breaking up monopoly cartels are two austerity measures that translate directly into better business climate. But in general austerity does not by itself lead to a better business climate. Steps taken towards bettering ones east of business core might however spur growth that could lead to making austerity unnecessary. Provided such steps had been taken ten years ago.
Here is the World Bank Ease of Doing Business Index. Portugal is at 30, Spain is at 44, Italy at 87, Greece at 100. By comparison Denmark is at 5, Norway 6, Sweden 14, Finland 11. After they have made reforms to put them in the top-20, and reformed the labour laws, then will be the time to help them financially.
Whenever I hear or read about austerity measures it’s always heavily implied, or outright stated, that it means spending cuts.
You mean public employees will be made redundant by allowing the private sector to take over?
would you mind restating this? I’m not sure I understand what you’re saying.
It’s not like they aren’t trying.
Spain
San Fransisco Chronical
Italy
LA Times
The Portuguese government seems to welcome austerity measures.
New York Times
Italy is a special case-it has had an underground economy for years now-small factories and shops operate invisibly to the law. These businesses pay no taxes, but employ people (some of them collecting benefits), and contribute to Italy’s exports-though invisibly as well.
A friend of mine had an interesting experience there-upon leaving a restaurant, he was stopped by an agent of the Finanzepolice-they asked to see his receipt (to be sure that the restaurant was collecting the VAT).
So skimming is an art in Italy, as well as in Greece.
I regret to say that Italy does have a significant black economy.
The thing that surprises me about this is that although everyone seems to be in on it, you might imagine their industry would prosper since the burden of taxation is far smaller due to the non-payment of direct taxation.
There really does need to be a culture change, however the level on tax avoidance in all the other EU nations is pretty significant too - but it is all legal.
One wonders what would happen if tax evasion and avoidance were largely eliminated, would all tax rates then drop? Or would the money just run overseas?
Here is a list by the BBC, which includes such things as higher taxes, drive to tackle tax evasion, market reforms, labour reforms, military cut backs, etc. EU austerity drive country by country. But absolutely, actual cut backs would be a more natural definition.
No. Although supposedly there is some amount of by optimization to be had by privatization. But I mean that if a nation does away with unnecessary red tape, the people employed in the bureaucracy set up to handle this will become redundant, and free to enter other areas that create actual growth and welfare.
If the market and labour reforms they are driving through now, had been made a decade ago, then perhaps that would have generated the growth necessary to make the current austerity measures unnecessary. Hopefully the current market reforms will eventually make it possible to roll back some of the austerity. Well not the obviously foolish ones, like 60 year pension age promised by the French president candidate.
However I have long suspected that one of the underlying causes, perhaps the most important, of the international financial crisis, has to do with demographics. More elderly. Less children. Some of the most hurting nations also have deeply insupportable birth rates. It will simply not be possible to keep low pension ages when the number of elderly are exploding and the number of workers having to support them are steadily dwindling. Higher pension ages are something that is going to be made permanent. Probably it’ll have to go higher yet.
No. They have already done a lot. Also in Greece. Incidentally it is not like it is only South European nations that have had to implement austerity. Denmark has had to make quite deep cuts and welfare reforms. And more are on the drawing boards. We also had a number in the early 90s, which were called the “Potato Diet” – on account that everybody was reduced to poverty and a diet of potatoes. But only five years later the nation was back on a sustainable growth path.
Thanks for the link.
Got it.
From what I understand, France seems to be to the left of most other European countries socially and financially.
A big problem is lack of growth.
Reuters
That almost sounds contradictory. If you’re on a sustainable growth path then why do you need to make deep cuts and welfare reforms?
I’d largely disregard anything Rune says, Nobody, because he seems to think everyone is some kind of welfare queen. To take one example:
Dude, what the hell are you talking about? This crisis was caused because the banking system nearly collapsed; pensions have fuck-all to do with it. Pensions, social security, and other welfare gets targeted because it’s another source of money to shovel into the banks to keep them from collapsing, and because greedy, arrogant misanthropists on both sides of the Atlantic have always been fixated on making life worse for their lessers. Unfortunately for Germany and the banks, it looks like the French and the Dutch people have had enough.
Yup, and the cases of Spain and Ireland are instructive here.
Both were running budget surpluses before the crisis. I suppose if one ignores the actual demographics, one could argue that they suddenly found themselves with a sufficiently drastic increase in the number of pensioners and babies to put themselves into a budget deficit, but that requires a bigger stretch of the imagination than a collapse of the banking system.
Or, I suppose, you could argue that both nations suddenly decided to drastically ramp up spending somehow or something. Actually, I’m not sure how this argument is supposed to work, since taking a quick glance at demographics shows it’s just completely off the mark.
First of all, just after the Dutch government called it a day (because one partner didn’t want to cut expenses); a group of parties (2 former government parties and 3 former opposition parties) fleshed out a new deal within 48 hours. We will limit our deficit at 3%. This has been met with surprise by pretty much everyone and is seen as politicians finally ‘getting on with it’. Especially now that we are having elections in a few months. Even though all these 5 parties had to give up stuff that will not be liked by their voters, the first polls indicate they are all doing better at the expense of the parties who elected to ‘play politics’.
Secondly, the fact that the babyboomers are retiring is definitely a big deal (and has been for quite a while). For the simple reason that the state will have to pay out a lot more pensions than it used to (which will have to be payed for by the younger generations). Deficits are likely to run up (if we do nothing). Just the thing we can’t have is we want a stable Euro.
Ireland chose to bail out its banks, Spain has had anemic growth rates for decades and when the EU could not save Greece interests rates went up for sovereign debt. That is what it has caused the debt crisis in those countries. Ireland suddenly had a lot more debt, and Spain suddenly had a higher interest rate. It does not matter why this happened, it is reality. Nations have to adjust to reality and find the money to pay back what they have borrowed.
Austerity is the only adjustment to that reality possible. They could go on borrowing and spending, but who would lend them the money and at what rates?
And says (in effect) “screw you-we’re not paying!”?
Peru seems to have gotten away with it-and they seem none the worse.
of course, membership in the euro club prohibits this-but heck, bring back the peseta!
That’s the banks’ position. Deutsche Bank has liabilities that amount to around 80% of Germany’s GDP. One bank. France’s banks have liabilities that amount to around 3x their total annual GDP. Can you see why those nations might have an interest in inflicting suffering on their neighbors in order to keep the payments up?
It’s fundamentally arrogant for the banks to insist on being paid in full on their crap investments and brooking no possibility of a haircut. It amounts to a denial of any culpability in the mess Europe is in.