Wednesday, May 5, 2010

Now these Greeks were not afraid of a little austerity!



Today the world was treated to a (and I know this phrase is much overused) Greek drama. As is well known the Greeks have been living beyond their means for quite some time and at last the German Ants have decided to rescue the Hellenic Grasshoppers from the fruits of their own fiscal profligacy. Whether this drama becomes a tragedy or farce for the bondholders will largely become clearer tomorrow when the Greeks vote on whether to accept the austerity measures that the EU and the IMF will demand of them as conditions for their aid. There is an EU summit tomorrow to discuss this and then the German Parliament has to vote on it Friday which should put it over the top.

In the interim the world has been treated to the spectacle of the Greek public sector unions raising a ruckus over the deep cuts in their salaries and pensions that the austerity package requires but which will still leave Greece with a 150% debt to GDP ratio by the end of 2013 so even with the $145 billion it’s still touch and go. It’s hard for me to understand what these guys are so mad about. The austerity measures the IMF and the EU are asking for are Draconian (another classical Greek reference) but they are nothing compared to what would happen in the event of an actual default. I think that these protests are more likely to do with general frustration rather than a specific policy which means they are likely to blow themselves out and the Greeks will get on with it.

That said I think there is something to be learned from all this. I tend to agree with most pundits that even if this particular episode is resolved sovereign credit issues are with us to stay both in Southern Europe and eventually throughout the developed world. At the end of the day the problem is this: Western societies are built on the assumption that the standard of living that developed here during the period of Western supremacy is a permanent state of affairs. For this to be true, the addition of several hundred million industrial and service workers to the global economy in India and Asia should have no effect on the standard of living. Naturally this is not in fact the case, the global market clearing price for a year of work in a factory is now well under $10,000 per year.

This is a disaster for the West, particularly the uneducated who are likely to take to the streets. Unable to cope with reality, our politicians have decided to try to use the relatively sophisticated financial infrastructure we have in the West to transfer the wealth of current bondholders and with them future taxpayers into the present to maintain the old living standards. This can be done for a little while, but not forever.

What Greece and its’ angry mobs are telling us is that the game is up.

3 comments:

the real nick said...

Your conclusion is a little simplistic and only half true if the West was competing with the emergings BRICS etc. in all areas and especially in manufacture - which it is not. As long as Europe in particular can manage and sustain the 'flight to quality' and market and export it then the decline won't be that steep.
Your conclusion is true of course for countries like Greece or Portugal which do not actually produce much except picture postcard worthy backgrounds and sweet wine.

Jeffrey Smith said...

I was discussing the Greece situation with some colleagues a few weeks ago and pointed out that are *own* debt levels and deficit are unsustainable and will require higher taxes to deal with in the future, which will have a negative effect on the stock market, among other things.

Their response was basically "that would be a disaster, so it won't be allowed to happen."

And a similar attitude in Washington and the rest of the nation is what makes it *more likely* to happen, in my opinion.

Anonymous said...

Hi Ken,
Interesting analysis

Add to the mix that most Greece debt is held by foreigners who are apt to rush to the fire exit together... things are bound to get messy.

A teacher who tells the children to stop playing and start doing homework is an unpopular teacher indeed