Thursday, October 6, 2011

Greece should default and restructure but the EU prefers a debt prison and the Greeks suffer Stockholm Syndrome

It is pretty obvious that Greece is insolvent, the EU/ IMF bailouts are increasing debt and the fiscal imbalances are deteriorating with the austerity measures that are pulling the country into a deep depression. The shrinking GDP reduces capacity to repay debt, so why these self-destructive policies and Greek government capitulation?

Rationally the Greek government would have long ago followed the road of Iceland, defaulted, abandoned the Euro and restructured its public debt in drachma. This would have facilitated necessary structural changes by creating favorable economic conditions for a recovery so everyone in Greece would have something to gain in rationalizing the public sector and opening up closed professions. This process would require reasonably five to ten years.

External devaluation is far less socially destabilizing than horizontal wage cuts and bilking pensioners, which is the infernal EU/ IMF remedy of ‘internal’ devaluation. The new currency would remove the vicious circle of the Euro and EU monetary policies that benefit the Core by undervaluation and gut the Periphery economies by bloating their trade balances.

What is unique to the Eurozone is that it employs deliberately deflation as a means of becoming 'competitive', considering flexible exchange rates as démodé. Conventional currency devaluation makes foreign imports more expensive, but local goods with high domestic content remain at same prices. Nobody has a direct salary cut, etc. It can be done overnight and immediately, there are results. It fosters domestic production and exports.

Admittedly devaluations do not address underlying structural problems, but they buy time for correction without undue social disruption. The EU system of 'internal' devaluation creates immediate social disruption, but actual improvement in competitiveness may take years. An insolvent member with a high debt load may collapse in the process.

Greece has a disproportionately large number of self-employed people. These people like their counterparts abroad tend to hold on to their income and under report for taxes. Choking these people to death economically not only destroys the heart of the Greek economy, but also Greek social fabric. Whatever income squeezed out of them is lost from other taxes like VAT in the deflationary spiral. Today these hapless Greeks face a similar fate of the Kulaks in Stalin’s farm collectivization.

The Eurozone has grave structural problems making it very unattractive for its members. Unlike the United States and England whose central banks were founded to facilitate the government debt, the European Central Bank serves the commercial banks, making government dependent on them for their debt operations. Basic criteria of statehood are the powers to create money, levy taxes, and declare war. Written by EU bank lobbyists, Europe’s constitution deprives Eurozone members of the money-creating function.

The locked up currency parities led to huge trade imbalances between the Core and Periphery, bankrupting a large part of the Periphery. The EZ economy is shrinking, and its own commercial banks are close to insolvency thanks to these foolish EU policies. This is creating a horrible train wreck. Even the US is heavily involved through the derivatives markets that cover sovereign default risk to backstop these weak EU banks.

The EU has been bailing out Greece to cover their commercial banks as a policy response to buy time for an elusive recovery. This also gets the US investment banks off the hook for the derivative default risk. The IMF/ EU/ ECB will eventually become the sole creditor buying out all the commercial bank debt.

The dilemma is that they will be holding worthless paper of countries that are totally barren economic landscape and perhaps even failed states from social disintegration. This why Victorian debt prisons were eventually abolished. History repeated is often a farce!

Lessons learned from this:

1.) Eurozone membership comes at significant social costs: less economic and political freedom for its members.

2.) Permanently lower living standards at least for the EZ periphery countries.

Generally the whole EU system suffers from chronically high unemployment and economic stagnation from the sovereign debt overhang that it generates. It is one of the worst performing regions of the world. It cannot compete either with the Far East nor the US.

1 comment:

  1. Quite interesting indeed!!

    You might think that we'll face golden-spounners effect?
    In my opinion we are about to swift in a somewhat communistic schema, whit the richmen and the pennies.