What is perhaps most amazing is that it has taken over two years of global financial stress to cause Europe's disconnect between monetary policy (the common euro) and fiscal policy (national budgets) to come to light - questioning the viability of European economic union and providing a warning to America, if we will listen.
From Greece's perspective:
- An economic shambles. Debt at 125 of GDP; a 12.4 % budget deficit; at least 30% tax cheats; phony government financial reporting; huge government unions; little going on in the private sector; because of the euro, unable to debase the currency to pay off debt or lower the cost of exports. With a long history of post-war communist and socialist governments, the outcome is fit for a Greek play, tragic flaws and all.
- The 1992 Maastricht Treaty which established the euro-zone theoretically requires countries to hold deficits to 3% of GDP and accumulated debt to no more than 60% of GDP. (All participants have exemptions, but Greece is the worst.) Despite riot-inducing budget cuts, a draconian plan to increase the retirement age to 63, tax increases to include a 40% rate, and a temporary ability to borrow at European interest rates, most economists have a hard time seeing how Greece can grow out of its abyss.
From Europe's perspective:
- While Greece is but 2.5% of the euro-zone, the national debt of $375 billion greatly exceeds any prior International Monetary Fund bailout. There is every reason to fear contagion to include at least Spain, Portugal, and Ireland - and to the German, Swiss, and French banks which hold much of the debt. While Germany has caved in to the creation of a $640 billion fund and the IMF is putting up $320 billion, the Germans see this as a stop gap, worth perhaps three years.
- More broadly, the common currency reflects the half-century dream of France and others for a united Europe - militarily, foreign policy, monetarily - capable of balancing the United States. Germany bought in due to European fears at the time of the integration of East and West Germany in 1990, and has prospered with their fiscal conservatism and productivity. But, the alliance is strained - Germans do not want a politicized European central bank buying Greek debt, and Angela Merkel's party is already paying a political price for bailing out the "too big to fail" Greeks. Many think that the solution is temporary.
From America's perspective:
- In the short term, the Greek impact is mostly one of financial markets, with a falling euro, concern about a stalled European financial recovery as countries move from stimulus to debt repayment, reduced demand for US exports, and reduced earnings from European divisions of US companies. The pressure that President Obama put on Merkel to go along with the bail out fund and the American contribution of some $50 billion to the IMF effort have received little attention.
- In the long run, it should be noted that the US budget deficit is 12.4% with no plan to get it into the 3% range, that the accumulated US debt is passing the European 60 % maximum, and that the credit default swaps markets are flashing a warning that California is now in the top 10 of likely governmental defaults (despite it being illegal.)
So, a daring prediction: efforts will shift to minimizing the damage from evicting the Greeks (and perhaps some other Club Med countries) from the euro zone - perhaps sooner than later. Global markets beware.
This week's video is one example of establishment-anointed Connecticut Democratic senatorial candidate Richard Blumenthal's false claim that he served in Vietnam when he, in fact, obtained 5 deferrals before joining a safe reserve unit. In an age of anti-establishment political rage, he will apparently face Republican Linda McMahon(CEO of World Wrestling Entertainment) in November - whose investigators found the story missed by the Hartford Courant, the New York Times, and all other media outlets over a period of years. Bring it on.
And my continuing endorsement of Tom Campbell for Senate in the June 8 California Republican primary - the proven fiscal conservative.
bill bowen - 5/21/10
Next week: Rand Paul