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Greeks Bearing Debts
A Heckuva Way to Bail Out Germany’s Banks

The eternal Greek crisis may be coming to a head again. The Wall Street Journal reports:

The steadily fraying finances of Greek households, which for years have made ends meet because of close-knit extended families and savings, form the backdrop to a looming showdown between the Greek government and its creditors.

The government, knowing voters’ exhaustion, is adamant that it won’t legislate a multiyear package of pension cuts and income-tax increases, which the International Monetary Fund says is the only way for Greece to hit its agreed-upon budget targets. The IMF says it can’t participate in Greece’s bailout program without such a package—or, alternatively, without large-scale debt relief from Greece’s German-led European creditors. Germany says the IMF must be involved, but that the time isn’t right for debt relief.[..]

The IMF is holding a hard line partly to put pressure on the eurozone to lighten Greece’s debt burden, say people involved in the negotiations. IMF officials have said Greece’s economy is already overtaxed.

New taxes that came into affect on Jan. 1 are squeezing household incomes further. Economists say even-higher income taxes—in the form of lower tax-free income allowances—could add to a mountain of unpaid taxes. Greeks currently owe the state €94 billion ($99 billion), equivalent to 54% of gross domestic product, and rising, in taxes that they can’t pay. Three in four Greeks can’t pay household bills on time, according to the 2016 European Consumer Payment Report, a private-sector survey.

Extended families often rely on grandparents’ pensions. Further cuts in that lifeline could end hopes for a return to economic growth. Unemployment remains more than double the eurozone’s average at 23%. About 74% of the jobless have been out of work for more than a year and thus receive no benefits.

It’s worth remembering that to a large extent, the German refusal to forgive Greek debt is designed to protect German (and French) banks that made huge and foolish loans to improvident southern neighbors—betting, in many cases, that if everything went south, the other euro nations would bail the banks out. Germany hasn’t bailed out its banks directly; instead, it and other northern partners have used the structure of the common currency to trap Greece in its current predicament, unable to leave the euro without triggering a huge crisis, nor to move forward economically within it.

It’s worth contrasting the German behavior toward the Greeks with the West German attitude toward East Germany. Since 1991, the Germans have poured over a trillion dollars into the eastern half of their country, and while there have been occasional grumbles, Germans have generally agreed that this was a sacrifice that ought to have been made. Even today, visitors to places like Dresden can visibly see the sums more prosperous parts of Germany are pouring in to share Germany’s prosperity and preserve German heritage. (And in Dresden in particular, you will probably also notice the large numbers of West German tourists coming to see a jewel of Germany’s common heritage, so long off-limits and in ruins.)

Though you might love all your family, you will do for your siblings what you won’t for your cousins. The EU experiment has been predicated on the notion that all Europeans are one people; German actions regarding the Greeks and the East Germans show that still is not so. There are tough choices still to be made (because they have been so long postponed) in the euro crisis, but it would be good to start with recognizing a few basic, if uncomfortable, truths.

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  • Genesis123

    I know I’m appealing to my own authority here, but everything I know and learned about economics and how financial system works tells me that this won’t be resolved until Greece leaves the euro, adopts drachma and drastically devalues. They cannot pay their debt. They cannot grow out of it (our strategy). So they must inflate out of it. It must happen. So it will happen. how long will Greek people accept the tyranny of the German State is the unknown variable.

    • Spencer

      As far as I’m aware, the problem with this is that Greece’s debts are denominated in Euros. The Greeks can exit the Eurozone and inflate their drachmas all they want, the Germans will smile and ask for that payment in Euros, please.

      But you’re right, Greece must, and will, leave the Eurozone as it currently exists. There is no alternative whatsoever, no other plausible outcome. Of course, the moment they do so, all capital and hard cash flees the country and the economy grinds to a halt quite literally overnight, a la Argentina 2002, and maybe some Greeks starve to death. Since this is inevitable, they may as well do it sooner rather than later. The question then is, does Greece then repudiate its debt, and move into the same leper colony that Argentina currently resides in? Or do they spend a few decades paying down the loans? I would recommend the latter course, as the Bundesbank is more likely to forgive the outstanding debt sooner than capital markets will forgive a sovereign default. What a mess.

      • Genesis123

        And Greeks will be able to tell German banks to GF themselves and get paid in drachmas. Oh there will be pain enough to go around. Still, it is the only realistic course of action.

      • LarryD

        I believe it was Thatcher who said “The problem with Socialism is that, sooner or later, you run out of other peoples money”.

        Greece has been living beyond its means for decades, the Greeks neither want to become as industrious (and disciplined) as the Germans, nor to settle for the standard of living their economy can support. Generations of Socialist government has inculcated some bad habits into the Greeks, and that’s part of the trap.

        • Andrew Allison

          It was, indeed, the Iron Lady. While it’s true that Greece has been living a champagne lifestyle on a beer budget for decades, it’s not entirely true that the Greeks are not industrious (they’ve been industriously avoid paying taxes for decades too), but that it’s a poor country that has been led to believe otherwise.

        • Eurydice

          If, by decades, you mean since the imposition of the Euro, then yes. The fiction that all EZ countries were as equally credit-worthy as Germany was damaging to every part of the system. Don’t get me started on Greek Socialist governments, but even under them, there were market constraints while under the drachma.

      • CapitalHawk

        They are actually better off defaulting. Argentina has defaulted on its external debt 8 times (about once every 23 years) in its history. The foreign money lenders always come back. Better to default than to live in poverty for decades. The Euro has been a boon for Germany and a horrible burden for southern Europe (Italy’s northern industry in particular has been very hard hit). The sooner those countries get out, the better for them and their people.

        • Spencer

          Perhaps. It’s certainly not question of whether or not they get out of the Euro – they will – but whether they continue to make debt payments afterward. I would think that Greece would only have to pay for a couple of years while complaining loudly, and the Germans would be shamed into quietly restructuring the debt away. Compared to the decades of higher interest rates Greece would pay in the case of a default, I wonder if the math favors that approach. But I admit to being out my of depth here.

          As for the Euro being a boon to Germany, I recall that German unemployment rates had been generally stuck at around 8-11% since reunification, with a significant jump after the Euro was implemented, as the strong Euro suffocated exports. After the chaos in the Eurozone brought down the value of the Euro, it seemed to jumpstart German exports. German unemployment rates fell drastically from 2009 forward and are close to 4% now. So perhaps it is the ailing Euro specifically that has helped Germany.

  • Observe&Report

    Continued membership of the eurozone has pauperised Greece, and will continue to squeeze the life out of its economy until it finally goes back to the drachma.

    • Andrew Allison

      You’re right to the extent that membership in the eurozone allowed Greece to borrow, and spend, money that it had no hope of repaying and the lenders eventually figured this out.

      • Observe&Report

        The way the IMF usually helps countries in Greece’s predicament is with a short term bailout to cover its immediate financial commitments, a substantial reduction in wxisting debt, a financial reform package to shore up its fiscal position, and a competitive devaluation to bolster exports and return the country to sustainable growth (sustainable in the sense that it isn’t funded by borrowing).

        Having ejected from power the politicians that got it into this mess, Greece was actually willing to go through with the IMF’s plans, including swallowing needed austerity and reform. But a competitive devaluation is incompatible with continued eurozone membership, and if Greece had been allowed to leave, others would have followed, resulting in the unravelling of the eurozone and the whole wretched EU with it.

        Thus, Greece is being bled dry ostensibly as continued punishment for past profligacy, but in reality to pay back German and French taxpayers and to keep the idea of pan-european integration alive.

        • Jim__L

          If this is what pan-European integration looks like, I doubt it has a future.

        • Andrew Allison

          Lenders should be repaid? What a quaint idea. The truth is that just as it cooked the books to get into the eurozone in the first place, Greece has been dragging its feet on the reforms to which it agreed in order to get the three previous bail-outs. Thant’s why the IMF is saying no more money without actual, as opposed to promised, reform. Of course the only ways out are for the lenders to continue to extend and pretend or write off their (admittedly imprudent) loans, Greece to exit the eurozone and devalue, or a combination of the two. The problem for the Greek people is that under any of these scenarios, there’re going to be no more loans and Greece will be force to live within it meager means.

          • Kevin

            True, but they can’t pay. Pretending with the right mix of taxes and spending cuts that they can just prolongs the crisis. Both the financial math and the firm of Greek society/government will prevent them from paying. If they were Irish or Germans maybe they could get out of it, but they are not and they can’t.

          • Andrew Allison

            Well yes, that’s more-or-less what I wrote in my reply to the first comment in this thread.

        • Kevin

          Agreed. And to deter the Italians, Spanish, Portuguese or others from trying this.

          Ultimately the lending countries and their banks are going to have to take a haircut here. (The borrowers will suffer too.) Prolonging this just prolongs the pain and delays any hope of recovery – not to mention destroying the EU.

          A clever political class in Germany would have disguised this reality as subsidies to southern nations for boarder security or something, and perhaps demanded prosecutions of those who falsified the books a decade or more ago.

  • Fat_Man

    And the Brits are stupid for wanting out?

  • Andrew Allison

    In this context, it’s worth comparing Greece with Spain and Ireland (and, closer to home, Puerto Rico). The latter two countries actually started to live within their means and are prospering, while Greece pretended to and is not. The outcome (default on the Euro loans and more misery for the population) is inevitable, the only question is the timing.

  • Jim__L

    “It’s worth remembering that to a large extent, the German refusal to
    forgive Greek debt is designed to protect German (and French) banks that
    made huge and foolish loans to improvident southern neighbors—betting,
    in many cases, that if everything went south, the other euro
    nations would bail the banks out.”

    Right. So the wise course of action was (and is) to… not loan the Greeks money, basically cutting them off.

    How does that differ from what the Germans and French are now proposing?

    • Andrew Allison

      Sadly, that’s not what the French and Germans are proposing. The EU wants to continue to extend-and-pretend. It’s the IMF which had drawn a line in the sand.

  • Joey Junger

    This article was short and stated the obvious, but I think the obvious needs to be stated and restated, because the Davoisie have thick skulls.

    Someone once said the purpose of social science was to spend a decade researching a topic just to say what everybody already knows. I wouldn’t have a problem if that were the case. Instead, we have intellectuals who devote their careers to telling people that what they instinctively know and think is wrong, and that rather than being loyal to thousands of years of common history, they should totally sacrifice their identities for cheaper I-pods and the convenience of not having to flash a passport when travelling through the common zone. But for the most part all popular Western ideology across a spectrum of issues (from gender to nationalism) is that you should never trust your eyes or your gut. Countries like Hungary and Britain are going to have to function as Katechons and bulwarks against this decay, and as things get worse in the Eurozone, people will start to believe their lying eyes and hopefully follow suit and also withdraw.

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