What follows are verbatim quotes from Paul Krugman’s article today in the New York Times.
“Yes, there are big failings in Greece’s economy, its politics and no doubt its society.”
“Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means.”
“Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average.”
From that Krugman concludes:
“But those failings aren’t what caused the crisis that is tearing Greece apart…”
“The Germans and the European Central Bank [must] realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation…Greece will basically go down in history as the victim of other people’s hubris.”
In Krugman’s world, wherever that is, if a nation is ridden with corruption, allows extensive tax evasion and has a habit of living beyond its means for years, then when the money runs out it’s someone elses fault. With thinking like that the man could become president of the United States.
And then the economist turned journalist asks why the U.S. doesn’t have “the kind of severe regional crises now afflicting Europe?” His answer is “that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.”
So the reason America remains on a relatively sound footing is because we support failures automatically.
THE PARTHENON, 2 MILES and 26 CENTURIES AWAY
Right across the street from the Parliament building in Athens there stands an outdoor café. Many times I have sat and sipped Ouzos at that cafe watching the changing of the guard as one stoic protector of the palace replaced another. They strut and stomp across the plaza then placidate themselves in front of those little wooden houses that look like they belong more in cartoons rather than standing as bastions of government. There are two guards. Each carries an unarmed rifle. They don’t protect anything of course; it’s a show, a demonstration of sorts.
I wonder where they are now. Today the demonstrations are in the same place but they are of a different kind. There are fires on the plaza. Did they burn those silly little guard houses, I wonder. I do know, however, that the protesters burned the German flag. They didn’t burn the German flag because Germany contributed more funds than any other European nation to help Greece out. They burned the flag because Germany stopped. Feed a hungry bear and he will lick your hand. Stop and he will bite it off.
The root problem in Greece is not financial; it is cultural. If the Soviet Union was the triumph of Communism, then Greece is the triumph of Socialism. The country has a history of economic distress. In 1922 the government decreed that 50% of all privately held money in banks had to be given to the government. The national treasury gave bonds in exchange, to be repaid on 20 years with a nominal interest rate of 6 ½ %. Neither interest nor principle were ever paid. The people bailed the country out, involuntarily. It happened again in 1926, four years later another bailout. In 1932 the country declared a moratorium on their international debt. Bailed out again, this time by the international community, again involuntarily.
Should the world do it again? For humanitarian reasons, perhaps we must, but for how long and how much. Philanthropy overdone eventually becomes license for continued misbehavior. It is Europe’s problem and Europe is doing its best to solve it. Germany enjoys the largest and strongest economy in Europe so the cross falls primarily on the German people to bear. We empathize. We have been there.
“A common European currency is a preposterous idea and we will have none of it!” Such was the steadfast position of Margaret Thatcher’s government. For sheer entertainment the proceedings in the British House of Commons have no peer in government. The Prime Minister stands up and speaks briefly. The Sub-Prime Ministers moan loudly. When the Prime pauses, the Sub-Primes leap from their seats, some of them that is. They plop down as fast as they pop up, like bubbles in a boiling stew.
One minister refers to another as Right and Honorable and then lambastes him (or Her) with the sharpest sort of insults and both sides have a hearty laugh. They talk about each other, in front of each other, but not to each other. Like two kids tattling on one another to their mom, the ministers tell everything to a man wearing a silly looking wig. A strange lot, the British.
The issues under siege in this clip are, first, the European Union which Thatcher sees as a looming federation robbing the individual nations of their sovereignty bit by bit, and secondly, the specter of outright Socialism.
Investing in stocks is risky. Investing in bonds is safe. Sovereign bonds are the safest because they are backed by the full taxing power of the nation. Investors in Greek sovereign bonds just lost half of their money. The U.S. stock market will soar when it opens. So much for safe.
When a nation has depleted the wealth of its citizens, who can they tax? When a country’s full taxing power becomes near worthless who will lend them money they cannot pay back? When a corporation goes bankrupt it sells some assets, perhaps all. When the Soviet Union went bankrupt they could no longer keep their satellites under control. When members of the European Union go bankrupt the functional nations pay the bills of the squandering nations. How long and how often will they be willing to do that?
The shelf life of the Euro is shorter than that of the dollar, but that’s not saying much unless we stop following Europe into the dustbin of insolvency.
The European Union is an experiment in transnational socialism. The wealth of Germany, Europe’s most productive nation, is being “spread around” among nations that produce less and spend beyond their means. Good behavior is being punished and bad behavior rewarded. Violent riots are breaking out across Western Europe. But the people aren’t rioting for a solution; they are demanding continuation of what caused the problem.
Only private industry creates the wealth of a nation. Government consumes a portion of that wealth to pay for the services and benefits it provides its citizens. In socialistic Democracies like those of Western Europe the government portion grows slowly like a painless cancer until it threatens vital organs. Then it turns from painless to painful and that’s when riots erupt. The people deny the sickness while demanding a cure. That is where Europe is now.
It is difficult to create a common currency among sovereign nations whose cultures are as diverse as those of Greece, Germany and England, just to name three. The British recognized this and chose to keep their own currency. America is a nation of diverse people sharing one national pride. Whether you are from Maine, Iowa or Arizona, you consider yourself American first and a Mainer or Iowan second. Not so in Europe. A Frenchman considers himself French, period. A European citizen feels no pride in being a member of the European Union in the way an Iowan farmer is proud to be an American.
The Euro was vying to replace the Dollar as the standard currency for international trade only months ago. Now it is apparent the chances for that to occur are dim. It would take a profound change in the diverse national cultures within the Euro zone to build the base required to make the Euro as solid as the dollar. It didn’t happen over the last thousand years. It won’t happen over the next thousand either.
America’s race to embrace socialism has been thwarted. Now it needs to be reversed lest we end up in the tank with Europe. We have time. We can do it.