Wall Street has rallied on news of the European Union's latest intervention, an initiative that many are hoping will avert both a Greek default and an EU banking crisis. Key to understanding this most recent legerdemain is that it has temporarily avoided a chain reaction of insolvency yet solves precious little.
The latest agreement involves three components: leveraging the power of the 440 Euro already committed to the European Financial Stability Facility (EFSF), erasing 50 percent of Greek debt and requiring European banks to significantly boost capital levels. Putting aside the question of where the money will come from, it seems that, if successful, this plan should be enough to calm the markets in the near term. However, the plan should be viewed as a temporary solution to more systemic problems in Europe.
It is temporary because it treats symptoms and not causes. In Greece, the tax system is a sham. For many years the liveliest party-talk in Athens and Crete has been about delicious and entertaining ways to avoid declaring income or disclosing assets. Two things necessary for an effective tax system are a sense of shared responsibility by citizens and effective enforcement. Greece lacks both. Moreover, chicanery and bribery are de rigueur. If you have to deal with the government, Greeks will recommend a "fakelaki," which means little envelope.
Greek unemployment is high and taxes for those who pay are increasing. The economy is struggling with austerity measures that aim to bring government spending in line with income. Even with a 50 percent haircut of its indebtedness, Greece may still need to borrow just to afford its costs of debt service.
On Oct. 27, a victorious Greek Prime Minister George Papandreou appeared on television to announce, "We negotiated and managed to erase a very important part of our debt. Tens of billions of euros have been lifted from the backs of the Greek people."
Across Europe banks still can't provide for their own funding and liquidity needs, remaining reliant on loans from the European Central Bank.
I'm reminded of a bumper sticker that read, "If you're not outraged, you're not paying attention."
Greece will be walking away from billions of euros it borrowed and promised to pay back. It is reneging on money borrowed to finance a quality of life it couldn't afford. It welshed on billions owed to its creditors rather than rudely inconvenience its citizens by collecting taxes. Yet, their prime minister announces this dastardly, despicable deed with a single-finger salute as if he'd just delivered his people from slavery.
Citizens across Europe are left holding the bag. European taxpayers, like American taxpayers during the U.S. financial crisis, have been cosigned without their consent to alleviate wreckage not of their making. And Mr. Papandreou waves.
Runaway arrogance is happening again. The culpable culprit has transferred consequence to the innocent. The vastness of this sort of debt may prove literally unbearable.
Alas, Greece is not alone. Italy, Portugal, Spain and Ireland are all competitors for this race to the bottom. Housing bubbles in Spain and in Ireland exceeded ours in the U.S.
Outrage is so much more fun when we can direct it at someone else. In the U.S., our deficit continues to grow at an alarming pace, and our national debt mounts. Federal government spending far outpaces its receipts as we borrow and borrow to pay for a growing government and all of the services it provides.
Carmen M. Reinhart, senior fellow at the Peterson Institute for International Economics, and Kenneth S. Rogoff, professor of public policy and professor of economics at Harvard University, studied debt data from 44 countries over 200 years. Their study, "Growth in a Time of Debt," found relatively little association between public liabilities and economic growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth.
The current U.S. debt, including the unfunded liabilities of Social Security and Medicare, greatly exceed 100 percent of GDP.
It is important to note that Greece and other impaired EU members live without the control of monetary policy that the United States enjoys. Said another way, we can pay all of our debts by printing as much money as we like. And that works as long as other countries and businesses accept our money in satisfaction of our obligations. Typically this behavior leads to inflation. Everything has consequences.
Outrageous as the Greek situation may be, it could foreshadow our own fate. It is imperative that the United States be able to afford the lifestyle and government we choose. Anyone who has run afoul of a credit card company can attest that payback or default is inevitable and almost always painful. U.S. debt accumulated today will be the obligation of future generations who will live less well as they struggle to repay our bills.
What should be done? Elected officials and business leaders must act responsibly and rebuild trust with their electorate. Budgets need to be balanced and met. Culpability must be reattached to consequence such that doing the crime will once again result in doing the time. If you lead an investment bank to the brink of ruin and require a taxpayer bailout, you should lose your job in disgrace and you sure as hell shouldn't collect a bonus.
A sign next to the clock in my 10th grade biology classroom read "Time is passing. Are you?" America, time is passing, and we are not!
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