Monday, August 29, 2011

Greek mythology

Here is a series of countries, add the next name: Ireland, Portugal, Greece, Spain, Italy.... Of course, these are members of the Euro currency zone that are at or near default on their economies. The next one on the list by the way is France, that also has a grand deficit, but has so far managed to crawl along without help. The worst case so far has been Greece. Ireland has been helped out by loans from the rest of the Eurozone, particularly Germany and France. Luckily Britain did not join the Eurozone, but has a huge deficit of its own.

But, Greece is the linchpin, the country of just sufficient size and financial crisis that could draw the whole Eurozone down with it. How did it get so bad? Two things, first Greece lied when it joined the Eurozone, according to the requirements no country was supposed to have greater than 3% deficit compared to its GDP, but Greece said it had 3.3% and was allowed to join. Actually at that time it had 8.5% that would have made it ineligible, but the expected rewards were so great that the Greek Government simply lied. Apparently everyone involved knew that they were lying, but preferred to evade the issue. The second reason why Greece is near default is that its citizens do not pay taxes. It is estimated that only 15% of taxes are collected by the State, everyone, from the top to the bottom evades taxes. Apparently one is allowed to own a boat in Greece without paying taxes as long as it is used for commercial purposes. Almost everyone in Greece owns a boat, and guess what, they are all used for commercial purposes. The socialist Government of George Papandreou knowingly overpaid for social welfare, for example, the Athens underground that cost billions of dollars to modernize, is used essentially for free by its patrons (they are supposed to pay if they want to). Also, everyone was given an extra month's salary just for completing 10 months of work. It was this kind of nonsense that has driven the Greek economy into near default. So far it has been saved by over 100 billion euro grants from the European Central Bank, actually tax money mainly from Germany and France. However, even that amount is not nearly enough to stop the fall into default. This is a real Greek tragedy.

The problem is that because it joined the Eurozone, Greece cannot itself devalue its own currency. So to prevent the euro from failing the whole Eurozone has to save Greece's economy. And this while at the same time saving Ireland, Portugal and possibly Spain. The trouble is that when they conceived of the euro, the countries that joined did not take into account the need to buttress the euro in face of possible default. While the US monetary system is an integrated one, and the US has the Federal Reserve, there is no equivalent in the Eurozone, or at least there wasn't until Germany and France recently came up with the idea of a 300 billion euro slush fund to bail defaulting eurozone countries out. So far this hasn't been really tested, but it is not likely to be enough if Spain and Italy also go into default. We recently went to Greece and had a great time. Soon vacations there may be a lot cheaper.


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