The problem of creating prosperity with lending is that at some time, the lenders are going to try to get "their" money back. The fact that the vast majority of the money lent was created out of thin air through the practices of fractional banking, or that much of the money was lent for useless, if not downright evil, purposes is conveniently forgotten when the enforcers are sent out to collect--or break some legs.
Greek-Style Austerity Would Be Hell for Germans
By Yasmin El-Sharif and Stefan Kaiser
Tough times are ahead for the Greeks, with the government raising taxes, cutting social benefits and selling off state enterprises. Berlin has led the European pack in demanding the measures from Athens. But economists say Germany would be overwhelmed if it were forced to implement similar measures.
The Germans are always way ahead when it comes to austerity measures -- at least when it comes to having an opinion on what cuts other countries should make. The multi-billion-euro austerity package passed by the Greek parliament on Wednesday largely came about because of pressure from Berlin. In recent weeks, Chancellor Angela Merkel and other European Union leaders had repeatedly said that additional aid for Athens would be contingent on more belt-tightening.
The result is a radical austerity package that will mean some €78 billion ($113 billion) in savings and additional revenue by 2015. Some €50 billion will come from privatizations and another €28 billion through tax increases and cuts to social benefits. This comes on top of savings of almost €12 billion last year, when more than 80,000 public workers were sacked and those that remained had their wages cut by 15 percent. Pensions also saw a 10 percent reduction.
The Germans see the Greeks' need to scrimp as self-evident. But could the Germans themselves cope with such penury? Experts are skeptical. "When one considers how much we Germans bickered over €5 more or less for Hartz IV (welfare benefits), it's easier to understand what we're demanding of the Greeks," said Ulrich Blum, president of the Halle Institute for Economic Research (IWH). "Such cuts would also cause problems for the German government in terms of its ability to run the country."
To envisage how such a program would burden the country, a little math is involved. Together with last year's austerity measures, the Greeks hope to save €40 billion by 2015 using tax increases and spending cuts alone. That doesn't sound very dramatic, but the figure alone reveals little. To gain a real sense of the Greeks' savings efforts, one has to look at it in relation to gross domestic product -- the country's entire economic output. Then it becomes clear that within just five years, the Greeks want to cut spending by the equivalent of 17 percent of their total GDP in 2010.
Similar Measures Would Crush German Economy
Applying this to Germany would amount to a savings goal of €425 billion -- a gigantic sum that would mean the complete collapse of the German economy. "Removing that much money from the economy in such a short period of time would kill everything off," said Gustav Horn, head of the Macroeconomic Policy Institute (IMK).
In order to reach savings of over €400 billion, Germany would have to slash spending in the areas where it has the highest expenditures -- many of which are essential to the fabric of German society and its social-welfare model. The country would have to cut some €71 billion each year in the period until 2015.
Just to give you an idea of what would be involved in order to make savings of that magnitude, if the German government cut state subsidies for pensions, say, it would save around €80 billion a year. Slashing unemployment benefits in addition to this would bring the total savings to €120 billion. Another easy way to save money would be to simply close all the country's kindergartens, schools, universities and other educational facilities. After all, they cost the federal, state and local governments more than €100 billion each year.
The political and social price for such radical reforms would be enormous. Pensions and civil servant salaries are sacred cows that neither state-level governments nor the federal government would slaughter. And public workers already crippled the nation's universities, hospitals, and administrative offices earlier this year when they went on strike to demand higher wages. The kind of chaos they would cause if their wages were slashed is unimaginable.
If the government chose not to make cuts, the only remaining option would be tax increases. But such a measure would garner only a comparatively small sum. If the so-called "solidarity surcharge," levied to pay for the costs of German reunification, were to be doubled from 5.5 percent of an individual's income tax to 11 percent, it would raise a measly €13 billion.
Charging the full 19 percent rate of value-added tax (similar to sales tax) on goods such as books and food, which are currently taxed at a reduced rate of 7 percent, would bring in a maximum of €25 billion. But increasing the rate of VAT to 25 percent, as has been suggested, would rake in some €70 billion -- assuming people would consume as much as they do today despite the higher prices. moreOf course because the crises in the European Union is mathematically absurd, the organizations that perpetrated this failure of fourth-grade arithmetic face either radical redesign or collapse.
Unless it's reformed, Europe's project is doomed
Europe is in a dire situation. If it doesn't address the underlying causes of the Greek crisis quickly, Europe's political project will face the same fate as communism and the US Confederacy, writes James K. Galbraith. 08.07.2011
The collapse of the Soviet empire in 1989 and of the USSR in 1991 have become walled off in Western minds as events from an alien time and place.
But they should remind us that the architecture of human governments is not eternal. Communism was once a powerful threat to its capitalist rivals. But when circumstances change, the bright hopes of an age are prone to crash in disillusion.
Europe was a bright political project at the formation of the European Community and again when it expanded at the end of the Cold War. Its purpose was not so much power as peace: truly a noble vision.
But that noble project was built on an end-of-history economics, on frozen-in-time free-market notions and on dogmatic monetarism linked to arbitrary criteria for deficits and public debt.
In the wake of a global financial meltdown, these no longer serve. Unless they are abandoned soon, they will doom Europe as surely as communism doomed the empire of the East.
Europe's structure is also suspended between two stable formations: the federated nation state and the international alliance. This in-between structure is called a confederacy, and it is something that was tried and which failed in North America on two occasions, most recently in 1865.
The South lost the US Civil War, in part, because it left too much power in state hands, and so could not in the end raise the funds or the men required to keep its armies in the field.
And following defeat, it took almost 70 years - until Roosevelt's New Deal in 1933 - before sufficient measures were taken to begin to overcome the dire poverty and economic stagnation of that region. This history too has been walled off in modern minds.
The distinctive European combination of millenarian economic ideas and unstable political structure faced a powerful shock from the global meltdown. With vast holdings of toxic US assets, investors sought to cut their losses by selling weak and small sovereigns: Greece, Ireland, Portugal, Spain.
Thus yields soared on those debts, while they fell simultaneously on US, German, French and British bonds. There was no sudden discovery that Greece was ill-managed or that Ireland had had an unsustainable construction boom. Those facts were known. The new event was the meltdown, the flight to safety, and the waves of predatory speculation that have followed.
Therefore what happened was a solvency crisis of the banks, as always happens in debt crises.
It was true in the 1980s, when the Reagan administration, no less, felt obliged to prepare a secret plan to nationalize all the major New York banks should a single major Latin American debtor declare default. It was true in 2008-09, when preventing the imminent collapse of Bank of America, Citigroup and others trumped all other US policy concerns.
It is obvious that the entire recent thrust of European policy has been to find ways to paper over the problems of Europe's banks: with phony stress tests, with new loans, with loud talk, with denunciations of profligacy in Greece or anywhere else - with anything except an honest examination of what lies at the heart of the problem. moreAnd here Weisbrot reminds us how the Euro was always just another right-wing (Predator Class) crackpot idea that was even goofier (it that is possible) than Supply-Side "economics" or the Laffer Curve.
Paradox in the EuroZone
Why the Euro is Not Worth Saving
By MARK WEISBROT July 13, 2011
The Euro is crashing today to record lows against the Swiss Franc, and interest rates on Italian and Spanish bonds have hit record highs. This latest episode in the Eurozone crisis is a result of fears that the contagion is now hitting Italy. With a two-trillion dollar economy and $2.45 trillion in debt, Italy is too big to fail and the European authorities are worried. Although there is currently little basis for the concern that Italy's interest rates could rise high enough to put its solvency in jeopardy, financial markets are acting irrationally and elevating both the fear and the prospects of a self-fulfilling prophesy. The fact that the European authorities cannot even agree on how to handle the debt of Greece – an economy less than one-sixth the size of Italy – does not inspire confidence in their capacity to manage a bigger crisis.
The weaker Eurozone economies – Greece, Portugal, Ireland, and Spain – are already facing the prospect of years of economic punishment, including extremely high levels of unemployment (16, 12, 14 and 21 percent, respectively). Since the point of all this self-inflicted misery is to save the Euro, it is worth asking whether the Euro is worth saving. And it is worth asking this question from the point of view of the majority of Europeans who work for a living, i.e., from a progressive point of view.
It is often argued that the monetary union, which now includes 17 countries, must be maintained for the sake of the European project. This includes such worthy ideals as European solidarity, building common standards for human rights and social inclusion, keeping right-wing nationalism in check, and of course the economic and political integration that underlies such progress.
But this confuses the monetary union, or Eurozone, with the European Union itself. Denmark, Sweden, and the UK, for example, are part of the EU but not part of the monetary union. There is no reason that the European project cannot proceed, and the EU prosper, without the euro.
And there are good reasons to hope that this may happen. The problem is that the monetary union, unlike the EU itself, is an unambiguously right-wing project. If this has not been clear from its inception, it should be painfully clear now, as the weaker Euro-zone economies are being subjected to punishment that had previously been reserved for low- and middle-income countries caught in the grip of the International Monetary Fund (IMF) and its G-7 governors. Instead of trying to get out of recession through fiscal and/or monetary stimulus, as most of the world's governments did in 2009, these governments are being forced to do the opposite, at enormous social cost. The insults added to injury, as with the privatizations in Greece or "labor market reform" in Spain; the regressive effects of the measures taken on the distribution of income and wealth; and the shrinking and weakening of the welfare state, while banks are bailed out at taxpayer expense – all this advertises the clear right-wing agenda of the European authorities, as well as their attempt to take advantage of the crisis to institute right-wing political changes.
The right-wing nature of the monetary union had been institutionalized from the beginning. The rules limiting public debt to 60 percent of GDP and annual budget deficits to 3 percent of GDP – while violated in practice, are unnecessarily restrictive in times of recession and high unemployment. The European Central Bank's mandate to care only about inflation, and not at all about employment, is another ugly indicator. more