Wednesday, 8 December 2010

Keep The Patient Alive

The European Union’s remedies for the economic problems of Greece and Ireland remind me of the American military approach to Vietnam. Destroy entire villages in order to ‘save them from communism.’ The EU and IMF efforts to rescue the Greek economy from its well-noted self inflicted wounds seem to be destroying any chance the country has to achieve any growth at all, let alone the growth required even to begin to repay its debts.

The indictment of the Greek economy is very long, and every one the charges is valid. Irresponsible borrowing, bloated government sector, ridiculous bureaucracy, interesting national accounting, failure of tax collection, protection of several industries, over-generous pension system, corruption, etc., etc. In short, Greece had preserved in aspic the last Soviet economy of Europe. It was a colourful museum display, but sadly ill-suited to the real world. The announcement late in 2009 that the country would have trouble repaying its debts was merely the rude awakening from the decades-long nightmare suffered by anyone who had tried to do business in Greece.

However, the self-righteous anger of the Germans and others at having to bail out this fiscally-challenged distant relative is overdone. Their mutually exclusive insistence that Greece do a root-canal on its entire economic structure by becoming, well, more German and simultaneously repay its debts on time is ensuring that Greece slides ever deeper into a hole from which it will emerge only with great difficulty.

Anyone who can count to 10 without using his fingers knows that Greece will have to, at the very least, reschedule some of its debt and get an extension on repayment of the €110 billion European bailout. The economy has ground to halt. Consumers aren’t spending what little cash they have. Banks are hoarding their funds and not lending very much. Even the almost daily demonstrations have lost their zip.

Sales of electronic consumer goods were down 30% in October. Car sales in September were down 44% in September. These figures, bad as they are, don’t tell the whole story. One leading retailer told me the damage extends beyond declining sales. Suppliers, once happy with long payment terms, are now demanding faster payment. Insurance cover for the goods is getting more expensive. Terms of whatever bank loans he gets are becoming more difficult. All of these issues cause a company’s cash to drain rapidly.

The only items that seem, based on observation, to have resisted sales decline are cigarettes and coffee. Coffee bars are filled with people – and smoke. Greece did at one time enact a non-smoking law. But the public outcry about having to cope with the unbearable stress of changing their economic lives without the comfort of a smoke was too much for any government. Besides, in a country where no one can collect income tax, how zealous are they going to be about stopping someone from lighting up in a restaurant?

The long term prescription for the Greek economy is correct. All the deeply ingrained imbalances absolutely must be corrected, but right now the patient needs food and water if it is not to become a permanent ward of the European Union. Exactly how this is accomplished is a problem for the European leaders, but the reform process must be accompanied by a serious amount of cash if the Greek economy is to reach sustainable recovery.

The trouble is that the leaders of the European Union appear as confused as the man on the street. The prime minister of Luxembourg and the Italian minister for the economy and finance recently wrote an essay in the Financial Times that called for issuing Euro-wide bonds. In the very same newspaper the German finance minister poured cold water on that idea. The next day German Chancellor Angela Merkel officially drowned the idea at birth. EU president Herman Van Rompuy says ‘something’ must be done. He says the fate of the European project is at stake. With so many people hyper-ventilating it is difficult to plot a smooth course.

Austerity alone is not going to solve the problem. Trying to force austerity on people like the Greeks who associate it something cold and northern is a little like forcing Ann Widdecombe into one of Carla Bruni’s bikinis. There will be slippages. Sooner rather than later the people of Ireland, Greece, Portugal and Spain simply will no longer accept the degradation of their life styles for what they believe is only the salvation of the banking system. This could open the door to large-scale social upheaval and the emergence of people with dangerously simplistic answers. Then, instead of carefully planned re-scheduling we could wind up with immediate in-your-face defaults as a popular policy tool. Argentina provides a clear example of the attractions of this course for unscrupulous politicians. The results for the financial stability of Europe would be much more severe than voluntary, carefully planned action.

But the first goal should be to keep the patient alive. In contrast to the Europeans the Americans seem to be focusing on immediate health issues as the Federal Reserve continues to pump money into the economy. Long-term therapy is a luxury usually reserved for patients who at least have a pulse, and right now the economic pulse of Greece and others barely registers.

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