The one question that no statist has been able to answer yet is: when is government big enough for you? There is a related question: what price are you willing to pay to defend big government?
While we are waiting for an answer to the first question, today we can present a glimpse of an answer to the second.
It has now been three years since Grece embarked on an austerity path, forced upon them by the so called troika, the EU, the ECB and the IMF. The goal was twofold: first, to close the Greek budget deficit by means of tax increases and spending cuts and secondly to save the Greek welfare state. Obviously, the first has not happened and the second seems increasingly remote as well. In fact, the methods that the Greek government are using to try to close its budget deficit are actually destroying the welfare state in the bargain. And the outlook on the future is increasingly dim: the Greek government is now struggling with both a persistent budget deficit and an economy that is more or less in a depression-like free-fall.
Some libertarians would give a thumbs-up to the Greeks for at least having destroyed the welfare state. However, that destruction process is entirely lopsided: it removes government spending but keeps taxes high or even lets them go up. Government takes more and more but gives less and less back.
This bleeds the private sector dry of money, confidence and fortitude to grow and create new jobs. As a result, the prospect of Greece getting its economy back on track again is increasingly remote. Contrary to the beliefs of both friends of austerity and lopsided libertarians, Greece is not on a trajectory back to prosperity.
On the contrary: the situation is getting worse almost by the day. What matters now is to protect whatever remains of the country’s political and social stability; once the threats to the nation’s parliamentary democracy are eliminated the Greek government can focus on rebuilding the economy. However, in order to neutralize the threat from extremist parties like the Bolivarian socialists in Syriza or the neo-Nazis in Golden Dawn, the Greek government would need to stop the barrage of austerity against its own economy. It is precisely those macroeconomically self-destructive policies that are driving people into the arms of extremists.
With the exception of some minor delays in continuing its austerity policies, the Greek government is determined to press ahead with more spending cuts and more static attempts at raising more revenue. The troika, of course, is forcing Greece to do this, and the result is nothing short of horrific. GDP has been shrinking for five years straight, youth unemployment is approaching 60 percent and the national debt is on track to 200 percent of GDP.
Policy makers in Greece as well as in the EU should have realized a long time ago that this is a recipe for economic, political and social disaster. But while this might be something that Greek politicians know, their international creditors – primarily the IMF and the ECB – are not even considering an alternative to austerity. As Der Spiegel reports, their view of what Greece needs is entirely different:
Greece’s international creditors are calling for a new debt haircut for the country so as to bring down its massive debt load. This time, however, taxpayer money from Germany and other donor countries would be involved.
Greece has spent itself into this dungeon by recklessly expanding its welfare state. Then it taxed and regulated its private businesses into such a confined position that they in no way could provide the tax base needed for that massive welfare state. The combination of work-discouraging entitlements and stifling taxes and regulations made Greece particularly vulnerable to the international recession that began in 2008. Now the “international creditors” – meaning the troika – want taxpayers in other countries to prop up the crumbling Greek welfare stsate.
Very tasteful indeed. Back to Der Spiegel:
Resistance, not surprisingly, is substantial. For all of the uncertainty surrounding Greece’s future in the euro zone and the mixed messages regarding the political and economic reform process in the country, the math is actually relatively simple. Current plans call for Greece’s sovereign debt to drop to 120 percent of gross domestic product by 2020.
This is what they are hoping to accomplish with their austerity policies.
But the country’s debt load is 169 percent of GDP and it is expected to rise to 179 percent by the end of next year. In absolute terms, that is almost €350 billion ($451 billion). Paying that down will require nothing short of an extended economic miracle in the Mediterranean country, an eventuality not looking terribly realistic following five years of economic shrinkage and a sixth on the horizon.
Let’s put this in perspective. The point that Der Spiegel is driving home here is crucial to understanding the failure of austerity. In order to cut the debt ratio to 120 percent of GDP, Greece needs nothing short of a growth miracle. If they could average five percent growth per year, it would take eight years to get to the 120 percent mark – provided that the debt does not grow at all!
This is of course an entirely unrealistic scenario. You don’t turn around an economy in free-fall, plagued by austerity, and put it on a high-growth path from one day to the next. More specifically, as Greece itself proves, you cannot restore an economy so long as government takes more and gives less back each year. You need to get government out of the way on both fronts – you need to execute long-term oriented spending cuts and tax cuts together.
Back to Der Spiegel:
The other option? Another partial default. That, indeed, would seem to be the conclusion that Greece’s main international creditors have come to. According to information received by SPIEGEL, representatives of the so-called troika — made up of the European Central Bank, the European Commission and the International Monetary Fund — proposed just such a debt haircut at a meeting last Thursday held in preparation for the next gathering of euro-zone finance ministers.
Effectively this means that no one outside of a lunatic’s asylum and a government office will lend money to Greece anymore.
The proposal is not uncontroversial. At the beginning of this year, a similar debt relief plan resulted in just over €100 billion being shaved off of Greece’s mountain of debt. But that money all came from private investors. This time around, public creditors would be involved, meaning that taxpayer money from those countries which have stood behind Greece would vanish off the books. Several countries, including Germany, are opposed to such a plan, with representatives from a number of euro-zone member states saying they didn’t want to write off the money they have loaned to Greece as emergency aid.
And they are right on the money. It was not emergency aid. It was loans to feed current government spending, which the Greeks should have been able to fund themselves. If they can’t, it’s their problem, not the problem of German taxpayers.
The leaders of the EU and the ECB are very well aware of this, but they cannot let the Greeks take responsibility for their own situation. If they did, they would have to let Greece leave the euro zone, and that in turn would inspire more countries to leave. Apparently, the Eurocrats seem to believe that a serial exodus from the currency union would put the entire project in an embarrassing light – a correct assessment – and they are not going to let that happen. Now that they have exhausted their capacity to lend frivolously they are trying to raid taxpayers’ pockets by forcing them go forget that they ever lended money to Greece.
This is all getting surreal. How much is the Eurocracy willing to destroy to pretend that their project is still working? This question is acutely relevant; just to illustrate how alarming the situation in Greece has become, thanks entirely to the EU-ECB-IMF troika, Der Spiegel explains that the next progress report for Greece (on the nation’s efforts to bring its debt down to 120 percent of GDP)…
…will come to the conclusion that Greece should receive the next tranche of aid money, worth €31.5 billion. Otherwise, the country would slide into uncontrolled bankruptcy by the end of next month.
Let us summarize. Austerity has not saved Greece. It has taken a troubling economy into a free-fall and brought it to the very edge of uncontrolled bankruptcy and political collapse.
This colossal failure obviously inspires everyone to want to employ the same policies in other countries, right?