According to one of the last opinion polls before tomorrow’s election, the radical leftist party Syriza may get as much as 31 percent of the votes, twice the share they got in the May 6 election. This is a frightening perspective. It increases the likelihood that Greece will leave the euro. The consequence of a euro exit is that Greece will reintroduce its drachma which will be much weaker than the euro. This in turn is the equivalent of a dramatic and destructive currency devaluation. When currencies plunge, the first and most obvious repercussion is a spike in inflation. For Greece, this would come at the worst possible point in time, leaving the country with a socially and economically venomous combination of inflation, unemployment, high taxes and collapsing government entitlement programs.
Another consequence of a radically leftist government is that it would remove much of what is left of Greece’s opportunities to build prosperity for the future. Even though less delusional parties may still edge out the crazy fringe and form a modestly working, stable and functional government, the risk of a radical socialist regime is high enough to be taken very seriously – especially since the election results are likely going to be almost as difficult, parliamentarily, as the ones delivered in May.
For this reason it is crucial that we take a closer look at what the radical socialists in Greece actually want. The EU Observer has a good overview:
Greek leftist leader Alexis Tsipras on Friday (1 June) unveiled his economic programme if he is elected later this month, pledging to cancel the EU-sponsored bail-out and renationalise banks and companies.
Since the Greek crisis originated in too much government, it makes perfect sense from a bizarre leftist perspective to solve the problem by expanding government. If a government-run economy is the road to prosperity, then can someone please explain why Switzerland is more prosperous than North Korea?
But economists say his plans are unfeasible and mere electoral posturing. With polls indicating a close race between his radical-left Syriza party and the former ruling New Democracy party, Tsipras has presented the 17 June vote as a choice between the austerity programme attached to the €130 billion bail-out and his radical plan for Greece. “You either implement the bail-out or you cancel it. There is no such thing as a more or less evil bail-out, a more or less inappropriate medicine. New Democracy or Pasok did not want to cancel its implementation. We will,” he said in Athens.
The austerity policies have turned a bad situation worse. They have cut spending and forced more people onto welfare, which in turn has led to an erosion of the supposed gains from the austerity-driven cuts. The reason is obvious: the spending cuts under the austerity programs were not coupled with tax cuts, which led to an increase in the government’s drainage of resources from the private sector. And with more people on welfare there are fewer taxpayers and more takers of government entitlements, which leaves the economy one step further down the ladder that the austerity programs were supposed to pull Greece up from.
That does not mean that Syriza’s socialist policies will be better. On the contrary, they will just exacerbate the destructive role that government plays in the Greek economy.
Back to the EU Observer, which reports that Mr. Tsirpas, the Syriza leader,
vowed to keep Greece in the eurozone however, calling threats of a Greek euro-exit a bluff. Instead, he claimed that the bail-out itself “a mechanism of definitive bankruptcy and propelling the country into a voluntary departure from the euro area, the only exit that is institutionally viable.” “This false dilemma of ‘bail-out or drachma’ hides the real equation that the bail-out leads to the return of the drachma,” Tsipras said.
In effect, what he is saying is that the EU is forcing Greece to leave the euro zone. This is the story we have heard all along from Greece, so there is nothing new here. Expect a Greek euro exit if Syriza gets to appoint the prime minister after the election.
And now for the truly scary part:
According to his plan, if he is elected Prime Minister, all austerity measures would be revoked, restoring all social benefits. To pay for this, Tsipras would seek a moratorium on his country’s debt payments until the economy comes back on track. Banks would be re-nationalised, energy, transport, telecommunication and other strategic companies would also be taken over by the state. Price controls for basic items such as milk and bread would be put in place.
He will not be able to do any of this so long as Greece is part of the euro zone, and probably not if they are part of the EU either. So either he is playing a very cynical game for political power, or he really wants to take his country out of the European Union (and definitely out of the euro zone).
The entire package he presents is a recipe for complete economic disaster. Mr. Tsirpas wants to eliminate the Greek government’s debt held by national banks by simply letting government take the banks from their private owners. This is even worse than the kind of takeovers where governments in America and Europe have assumed control over private companies for “bail out” purposes: here, it is a matter of getting hold of good assets and eliminating your own debt.
A government taking over a bank to eliminate what it owes that bank is like me demanding that I get ownership of the bank that lended me money for my car loan.
But even if Mr. Tsirpas seizes all Greek banks and utility companies, his government will still owe foreign banks money. He intends to deal with that by instituting a debt payment “moratorium”, which of course will have the not so insignificant consequence of putting the Greek government on the lending black list for years to come. And since Mr. Tsirpas is going to restore the welfare-state entitlement programs that were cut during the austerity period, he will need even more revenues for the already deficit-plagued government budget. His solution to that will be to:
a) Raid the nationalized companies for every dime they have;
b) When the bank accounts in the seized companies are empty, max out taxes on everyone and anyone who is doing anything even remotely productive; and
c) When his higher taxes have brought the economy to a screeching halt, let the monetary printing presses work overtime.
Which is essentially what Hugo Chavez has done in Venezuela, a country that has suffered under 25-30 percent inflation for several years now.
To top it off, Mr. Tsirpas wants price controls on “basic items”, which is exactly what Chavez has done in Venezuela. The result? Food shortage!
Greece is in big, fat trouble. The last thing they need is a big, fat government that makes their trouble even bigger and fatter. Instead, Greece needs free-market reforms, tax cuts and elimination of regulations that stifle free competition. It is hard to execute such reforms in a country that is in such an economic mess as Greece is, but it can be done.