Analyzing the Real Greek Failure
By Staff News & Analysis - April 29, 2010

Greece has long lived beyond its means and spent much of the last two centuries defaulting on its debts. Joining the euro was meant to put an end to all that. However, it merely seems to have exacerbated its problems. It was no surprise to any economist that the European Union, at first, refused to allow the country to join the euro when the new currency started in 1999. Quite simply, its debts were too high and inflation was out of control. By 2000, the EU finally allowed it to join, though there were suspicions at the time that Greece was operating a "limbo dance" – squeezing its figures to hit the stringent euro criteria, only for them to flip back to dangerous levels once it had entered. Indeed many believe Greece simply lied about its figures to gain entry. At the time its inflation was 4 percent, much higher than the European average, and was suffering from one in ten people out of work – a higher figure than currently in recession-hit Britain. By joining the euro, however, it suddenly enjoyed substantially lower interest rates, because it was able to borrow in euros. – UK Telegraph

Dominant Social Theme: Irresponsible Greece!

Free-Market Analysis: The Daily Bell covers dominant social themes, and one of the biggest such is the presentation of nation states as people. Of course, we're guilty of this too because it's hard to cover world events without ending up writing "The U.S. did this … France did that … the EU did the other thing." It's a kind of short-hand. But where it gets you into trouble is when you start to speculate on motives and offer up analyses that feature national behavior.

Of course, this particular power elite dominant social theme demands such nomenclature. Writing that nation-states make decisions, rather than individuals, is a mild form of brainwashing in our opinion. One soon gets the idea that the nation-states represents its people, and that those at the top of the state are entitled to speak – and make decisions – for everyone else. Thus it is that artificial geographical regions somehow become anthropomorphicized.

The article excerpted above falls into this pattern, in the sense that it attempts treat an economic problem as a national one when – from our point of view – the analysis, while cogent, ought to be applied more narrowly. We're not sure that Greece, anymore than Spain or Portugal, etc., spent beyond its means as a whole. What we are inclined to suggest is that the elites running Greece did so, and had a reason to do so. Here's some more from the article:

"Whereas during the 1990s, Greece frequently had to pay out 10 percent or more (18 percent in 1994) to borrow money, its rate fell dramatically to 3 percent or 2 percent. Ben May, Greek economist at think tank Capital Economics, said: "Their mistake was to go out, borrow money and use it to fund huge wage growth, rather than pay down its already substantial debts."

"Greece went on a spending spree, allowing public sector workers' wages to nearly double over the last decade, while it continued to fund one of the most generous pension systems in the world. Workers when they come to retire usually receive a pension equating to 92 percent of their pre-retirement salary. As Greece has one of the fastest ageing populations in Europe, the bill to fund these pensions kept on mounting. …

"Tax evasion, endemic among Greece's wealthy middle classes, meant that the Government's tax revenues were not coming in fast enough to fund its outgoings. Hosting the Olympics in 2004, which cost double the original estimate of €4.5 billion, only made matters worse."

In the above excerpt, economist Ben May is quoted as explaining that "Greece" borrowed money internationally to fund wage growth rather than pay down debts. In fact, Greece did no such thing. The political class DID borrow additional money however because the markets allowed. The Greek political elites then used this money as a kind of bribe to buy labor peace with its large private and public unions. The money that Greece spent was money used by the political class for its own benefits and purposes. It's highly doubtful from our point of view that the average Greek (not in a labor union, anyway) benefited from all this getting and spending.

Nonetheless, it is the average Greek who will suffer the consequences of the elite's use of the fiat money system for its own purposes. In fact, a central banking oriented fiat money system is always unfair this way. Those closest to the monetary system benefit inordinately from it. Those furthest away end up footing the bill.

When the EU brought Greece into the fold, the Greek government received funds that were supposed to go to pay down debt so that the Greek country's debt-to-government-income ratio would fall into line with the larger debt-to-revenue profile on which the EU was insisting. But despite the rather sincere public stance, the reality was that the EU did not manage the money it provided.

During the boom part of the EU business cycle in the middle of the first decade of the 2000s, the economic expansion papered over the reality of what had been done with the EU money. What actually had happened was that money had been doled out to a series of interest groups – unions and others that supported the part of the Greek political elite that was in favor of EU membership.

As the EU crisis expands, there will no doubt be much more written on it using countries as a convenient short-hand for the people existing in them. In fact, while one may realistically write about a national or regional culture, it is a great deal more difficult to generalize about national actions. These actions, taken on behalf of the state, may well be generated by a handful of individuals who are actually pursuing their own self-interests but justifying them in the name of the "state."

The trouble with public, or central-banking-based fiat money is that somebody, or some group of somebodies, will always have more control over the fiat-printing than the public at large. And this group will inevitably seek to clothe their self-interest in the mantle of the state. Often, the press will oblige, writing about this decision or that one as if the decisions taken were intended first of all to benefit the general public. In fact, political decisions rarely if ever take the "general public" into consideration except after the fact.

Investors trying to figure out where the European mess is headed (and we think it is going to get worse before it gets better) will do well to look at it from the standpoint of individual political elites. They will also analyze the difficulties from the point of view of a power elite that is seeking, we believe, to solidify control over Europe from a political as well as economic standpoint. The big question that needs to be asked – the one emerging anyway – is whether the European situation (and the West's economy generally) is spinning out of control, despite the power elite's efforts to maintain the status quo of the current central-banking/fiat money system.

Alternatively, one could suppose, if one is of a sufficiently suspicious mindset, that the elite is not going to be able to stabilize the system and that it will badly degrade, either willy-nilly or on purpose. Those that believe the current instability is not coincidental will certainly be on the lookout for further currency consolidations and various schemes that unite failing currencies into larger currency blocks. We are not prepared to say that the financial crisis was engineered, but we notice that these crises usually end up with governments and their central banks being more, rather than less, empowered.

Since we don't think the current system works very well, we would tend to be skeptical of solutions that further concentrated power and wealth. If such solutions get a hearing and are placed into law, we would venture that further economic chaos would not be far behind. The failure of the Greeks, and the PIGS generally, is not a failure of "countries" but of the elites that run the countries and their fiat-money central banking systems.

After Thoughts

To the degree that these elites will use the financial crisis to further concentrate power and wealth, we think that increased, monetary chaos is a possibility. If, on the other hand, national economic elites allow a semblance of a marketplace for money to operate, perhaps the situation can be salvaged. A private gold and silver standard would be most useful in this regard. Further consolidation of the money system under, say, an IMF regime, would not be.