Greece has been told that in no uncertain terms they are to get their house in order by this Sunday, July 13, 2015 and by that, they are to get their stuff together, hunker down, bite the bullet and accept the final deal offered by the troika, if they do not agree to the terms ‘the troika’ laid out for them in order to receive much needed bailout funds to keep their country’s banks afloat and make a payment on their debt to the IMF, they are basically out of luck and will be ejected from the euro currency and their membership to the EU may be revoked as well. Greek banks will no longer issue currency notes in euros, IOU will be issued instead and that is code for going back to the drachma. The European Commission apparently has laid out all the groundwork in the event that this happens. Right now, there are no more ‘negotiations’ or debt hair cuts, the Greeks have been forced into a corner and the only option they have on the table as far as Chancellor Angela Merkel is concerned is to accept the deal that is offered to them or get out. The negotiators on all sides are exhausted, exasperated and ready to stop flogging a dead horse. The trust between Greece and its negotiating parties have been eroded and there little time and goodwill to build it back up before the deadline this Sunday.
So it begs the question (rhetorical), how did it come to this? How did an advanced European country be the first to default on its debt to the IMF? What does it say about the EU and its founding principles? To go back a bit, the European Union was created to ensure peace and prosperity on the European continent and they decided to do this by becoming economically integrated, the logic is that if countries have economic and financial ties, they are less likely to go to war with each other. And the eventual goal was for European nations to join a common currency known as the Euro. After two world wars and countless lives destroyed, the continental Europe felt that it was best that they begin to integrate their economy to ensure prosperity so that the likelihood of another war is very slim as noted on their website:
“The European Union is set up with the aim of ending the frequent and bloody wars between neighbours, which culminated in the Second World War. As of 1950, the European Coal and Steel Community begins to unite European countries economically and politically in order to secure lasting peace. The six founders are Belgium, France, Germany, Italy, Luxembourg and the Netherlands.”
The idea is noble, it’s founded on the idea of creating lasting peace on the European continent, which if you look back in its history, it is blood soaked with various religious wars, civil wars, wars between nations or kingdoms for influence, power or territory. There were very few periods of lasting peaceful prosperity. Such that the last time the European continent had lasting peace was during Pax Romana, during the first to the third century of the Roman Empire and if you consider early glory days of the Austro-Hungarian empire as a time of relative peace and stability, most other eras were dotted with intermittent peace depending on who was in power and what influence was at play. It’s fair to say that the European continent is a huge graveyard. And on a side note, the ‘European Union’ rather awkwardly won the Nobel Peace Prize in 2012 and its win was based upon “the stabilising role the EU has played in transforming most of Europe from a continent of war to a continent of peace”, according to the Norwegian Nobel Committee. The EU’s most important achievement, according to the committee, has been “the successful struggle for peace and reconciliation and for democracy and human rights”.The work of the EU represents “fraternity between nations” and amounts to a form of the “peace congresses” cited by Alfred Nobel as criteria for the Peace Prize in his 1895 will. And I say awkward because it came at a time of economic uncertainty in its member nations, in particular the PIIG (Portugal, Ireland, Italy, Greece) nations which were still reeling with high unemployment, tough austerity regimes at the behest of Frau Merkel in exchange for bailout funds and dramatic shrinking of GDP due to the austerity measures. It appears they achieved peace without the prosperity.
With all grand noble plans, it’s the details that get you. The EU aim to unite European countries politically and economically, with each member nation giving up a little of sovereignty for the good of the whole continent without taking into consideration the vast cultural differences between the different European nations. And this is not to stereotype but it is fair to say that Scandinavian countries are run very differently than their Southern neighbors, Germany and France though being neighbors have very different styles of government and labor structure. Germany was divided during the Cold War between East and West Germany and fallout from that is still keenly felt today, France decided to turn itself into a socialist government with bloated public spending and strong union for their labor. The Southern European or countries bordering the Mediterranean are known for its laid back atmosphere and friendly people, full of lovely beaches and prime holiday spots but their governments are notoriously inefficient, at times corrupt, bloated and tax evasion is the norm. This is not to say that Scandinavian nations, Germany, France or Great Britain are without corruption, tax evasion or government waste, but it’s not as prevalent and not viewed as the norm. From the expressions on Frau Merkel’s face, it’s clear she’s very frustrated with the lack of movement on tax evasion reform in Greece, to a German, having a pervasive and entrenched problem like that is just beyond her comprehension and what’s more, the lack of urgency from Greek politicians to do anything about it until now is even more exasperating for her. Tax evasion, in her view is the biggest problem, without tax revenues, Greece cannot support its own very generous obligations to its people.
Many economists including Paul Krugman believe the ECB (European Central Bank) and the European Commission in general reacted too slowly to the the global recession. Whereas Great Britain and the United States immediately put measures into place to stop the banks from failing due to stock market losses, the ECB dragged its feet. It slashed interest rates but didn’t implement any monetary policies, i.e. they didn’t go print a bunch of Euros to stabilize the banks, instead they went the other way, they decide to tighten the monetary controls. This is largely a kneejerk reaction on the part of Germany, which due to its history is deathly afraid of printing money and contributing to hyperinflation like it did during the 1930s, which resulted in economic ruin, social unrest and gave rise to Nazism the rest that followed. Many believed that the PIIG’s problems could have been partially alleviated had the ECB decided to print euros to support its banks like the Fed did. Krugman also contends that the euro was created on the basis of “politics and ideology, not a response to careful economic analysis (which suggested from the beginning that Europe wasn’t ready for a single currency). The same can be said of the turn to austerity: All the economic research supposedly justifying that turn has been discredited, but the policies haven’t changed.”
Now back to Greece, prior to them joining the EU and the euro currency, they were already known to have certain ‘issues’ when it came to government spending and taxation, in particular, the ability to collect the taxes. Tax evasion in Greece is a national pastime. It’s a country in which almost no one pays taxes but they have a lot of obligations they need to fund or what we call entitlements. The public sector in Greece accounted for 40% of its economy and public sector workers have generous salaries and even more generous pensions with a retirement age of 60. Another shocking figure is 52% of the population depends on public pension as their income but only 11% of the people pay taxes. In order to join the EU and the euro, there are GDP to debt ratio standards that each prospective member nation must maintain and it cannot be more than 60% of the GDP, which Greece on its best day has never achieved, and in 2009, when they’ve run out of accounting tricks to cover their massive deficit, they sheepishly admitted that they fudged the books to get into the EU and have ‘understated’ their deficit for years. When Greece gained entry to the EU and the euro, it was the time of free money and they borrowed money from the ECB (Germany) to fund their lavish public spending and they didn’t bother to reform their tax code and tax collection system. The ECB and Germany, to their credit had been very patient with Greece, asking them multiple times to clean up their corrupt tax system and cut back on their unsustainable public spending, which they didn’t do but continue to borrow at astronomical rates. And we fastforward to 2010, they are in dire need of a bailout or face ejection from the EU, the European Commission, IMF and ECB (known as ‘the troika’) created a bailout package for Greece which in turn asked for immediate cuts to their pension, welfare and tax increases across the board pronto. The average Greek citizen felt the pain straight away, GDP dropped, mass unemployment ensued, and in the past couple of years, there are signs of radicalism and social unrest. Political parties from the extreme left and right came out of the woodwork, angry with the pain that Germany is inflicting on them, bringing back bad memories from the brutal Nazi occupation during World War II, many went so far to call Angela Merkel a nazi, posters of her with a Hitler mustache were everywhere as she became the symbol of their pain.
Simply put, it’s time to pay the piper and the piper is coming to collect. This is not to minimize the pain of the pensioners desperately waiting for their next pension disbursement or the 50% unemployed youth and people who were formerly middle class and respectable and now reduced to penury and existing on soup kitchen handouts, their government has failed them and perhaps Germany stuck the knife in further. They made Greece a socialist haven on borrowed funds in which they have no way to repay. Socialism is expensive, as Margaret Thatcher noted “The problem with socialism is that eventually you run out of other people’s money [to spend].” Other nations that have made socialism work such as the Scandinavian countries and Canada, they pay huge amount of income taxes, an eye watering 50- 60% of one’s income goes to the state to fund all these lavish entitlements due to every Dane, Norwegian, Swede or Finn. It doesn’t come cheap and citizens of most countries do not like to hand over 50-60% of their hard earned income to the state coffers to redistribute to the masses in the form of free healthcare, free education until graduate school, free government funded childcare, free government funded employment training etc., it’s not really ‘free’. To make socialism work, the rich and super rich pay especially punitive tax rates and make no mistake, people didn’t become rich so they can hand over their hard earned money to the government. Also, rich people have the expertise and resources to legally dodge paying taxes by transferring their wealth out of the country of their domicile.
The Greece v. Europe (Germany) is now a David and Goliath tale, what was originally about money and finances is now about morality. How much does one punish the Greek people for their government’s mismanagement of public finances and profligacy, which, according to Frau Merkel, they are still not willing to give up. The major sticking points in the bailout negotiations is pension, sales tax and minimum wage, to which Greece and the troika cannot come to an agreement on. Especially this current prime minister Alexis Tsipras was elected on the promise of no more austerity. Tsipras so far, for a political novice, has played a tough and impressive game of chicken. The referendum vote was rather brilliant, that way he won’t be the bad guy for whatever he does and it further reinforces the notion that Greece was the founder and inventor of democracy and they proved it by hobbling together a referendum vote at such short notice and what Germany is forcing them to do is undemocratic, unethical and immoral. The message was received by Frau Merkel but it hasn’t softened her stance about the subject. After all, Frau Merkel is from tough stock too, she was born and raised in the former East Germany under tough Soviet occupation, she’s risen to the top of German politics, stayed there and earned the respect of her peers and world, she didn’t do that by being nice, accommodating or even likable. She got there and stayed there because she’s tough.
It is now Friday, July 10th in Europe, they have 2 more days to come to a resolution. It is the wish of Greece and the troika that Greece remain in the EU but they are not letting them retain their membership without a cost, the question is, is the cost worth the reward?