Thursday, November 17, 2011

Greece & The Euro-Zone

The French drove the campaign for the Euro thinking that with a unified Europe the incessant wars that have characterized Europe for a thousand years would stop and France would once again be the dominant force in Europe and Germany would be contained. Alas the Euro-Zone had fatal flaws from the outset and instead of France becoming the dominant force in Europe it has turned out to be the Germans. Now the Euro-Zone must dance to the German tune because it is Germany who has the money necessary to keep the Euro from collapsing and it is this power that is being displayed in the Greek Debt crisis now rocking the Euro-Zone. But Greece is just the tip of the socialist iceberg that is threatening Western Europe. Eastern Europe isn’t affected because they learned their lesson about Socialism and Communism from the USSR, a lesson Western Europe did not heed, so a review of Greek Socialism seems to be in order.

Greek Underground
For the 2004 Olympics it was necessary to install a modern transportation system in order to avoid the mass traffic jams that characterize Athens. The cost of this system was roughly $2.4M of which the Greeks paid very little with the bulk of the money coming from the Euro-Zone. One would think that the revenues from this system would eventually pay off the debt, but that is an outmoded capitalist concept. In Socialist Greece they have the “honor” system where they installed “honesty machines” where the passengers are urged to pay for their passage. Apparently the Greeks are not very honest because virtually no one pays so not only is the new underground not paying off the debt it isn’t even covering the maintenance costs – so the underground is totally supported by the government and the government is supported by tax revenues. In a capitalist country the government would simply raise taxes to cover the cost but Greece is a socialist paradise where taxes are more of a nuisance than a reality.

Greek Railroad
If the Greek Underground is a disgrace the Greek rail system is even worse and typical of how socialism operates. The average salary for railroad employees is an incredible $90,000 which includes cleaners and track workers. This is a salary treble the average private sector salary. The wages – just the wages – for the Greek railroad system is $750M but the annual ticket sales is only $120M. In a capitalist society this would call for immediate action but not in socialist Greece where the government is focused on employment and not profit.

Greek Tax Policies
While the Greeks aren’t paying for their underground tickets they aren’t paying their taxes either or at least no where near the amount of taxes they should be paying. In fact only 5000 people out 12 million admit to earning over $100,000 a year where studies have shown that more than 60,000 people have investments over $1.5 M and this doesn’t include money in overseas banks. How is this possible? Very easy since the individual taxpayer is allowed to state their own earnings for tax purposes and these are rarely challenged. Consequently many Greeks state their taxable income to be below taxable threshold of $15,000 even they own vacation homes, boats, and other luxury items. To call the Greek system corrupt is just accepted and is so accepted that there is a semi- official rate for bribes for passing false tax returns and each Greek family is estimated to spend an estimated $2500 per year in bribes. If this isn’t bad enough the Greek shipping magnates – some of the wealthiest people in the country are tax exempt because of the benefits they bring to the country even though the Greek shipyards are virtually idle employing about 500 people.

Greek Pensions
Naturally in a socialist country pensions are very dear to the people who expect the government to take care of them even if they don’t pay taxes or work very hard to earn the pensions. In Greece the retirement age is 50 with a pension of 95% of their last year’s earnings and this includes pastry chefs, radio announcers, hairdressers, and masseurs whose work is classified as “arduous and perilous” to justify the 95%.

Greek Schools
Once Greece was allowed into the Euro-Zone money began to flow into the country and into public life making life better for all Greeks. This allowed salaries to increase without requiring more production and this impacted virtually all aspects of Greek life including the school system. In a socialist country performance is not measured because the objective is employment and not efficiency. Consequently the Greek school system hired more people to manage the system so now that system is overstaffed and employs four time more teachers per pupil than Finland who has the highest rated educational system in Europe. Not surprisingly the teachers, who are in fear of being discharged are hopelessly ineffective so now parents must hire private tutors for their children.

Does any of this sound familiar? Is America on a similar path to financial disaster? Consider the power of the unions who demand ever higher wages without increasing productivity and quality. Consider the educational system now dominated by unionized teachers who are turning out graduates who cannot read, who have no clue of history or geography. Consider the growing underclass supported by first one welfare program than another. Consider the large pensions and salaries being paid to public employees that far outstrip those of private industry. Consider the growing demand by the underclass for higher taxes on the rich to pay for their welfare system. Consider the growing interference by the government with private industry. All of these things are indications that our government is slipping inexorably into the financial quagmire that we find in Greece.

Wednesday, November 16, 2011

Germany Resurgent

Historically Europe has been the battleground of the West with France and Germany playing dominant roles with Britain and Russia playing important but secondary roles. This pattern has existed up until 1991 with the creation of the Euro-zone which was intended to link Europe financially in an effort to prevent any future wars due to the interdependence. This effort recognized the nationalism within the zone so the interdependence was strictly financial. It left borders intact along with languages but most importantly it left financial controls intact, meaning financial policies continued pretty much as they had in the past but with a common currency.

Unfortunately Europe has been held in thrall by its socialist programs – generous social programs that rewarded workers with lavish health and retirement benefits without demanding a great deal of work. While the taxes have been high in order to support these programs tax collection has been a challenge and the great national game has been to avoid paying taxes. The result has been the cost of government has far exceeded the revenues and the imports have exceeded exports. But the European problem isn’t totally theirs alone. China manipulates its currency keeping it an artificially low rate which drives its export based economy. The US has allowed the government to increasingly get involved in the financial structure which has caused instability both at home and abroad. But the serious problems remain in Europe because the objective of the common currency was unification and stability and the creation of an economic power – United Europe – to rival the United States – politically and economically. All of these objectives are seriously threatened.

The Maastrict Treaty created the Euro as a common currency but left the countries control of their individual fiscal policies. This meant that the countries in the Euro-zone had their own tax policies and would not share banks but would share interest rates. This allowed countries like Greece to continue their socialist programs supported by borrowed money but without any control over the value of money. In effect the Euro remains under central control but at the expense of national sovereignty. The result is the fiscal crisis in Greece and the imminent crises in Italy, Spain, Ireland, and Portugal. But these financial problems are jeopardizing the objective of a Unified Europe as well as the Euro itself, because of the resurgence of nationalism.

The Maastrict Treaty was intended to unify Europe and suppress the nationalism that has plagued Europe since the fall of Rome. But unlike the other members the German economy was designed to be export based unlike the other members in the European Free Trade Zone. . Germany became the dominant financial force in the Euro-zone and the unwilling source of financial support for the less responsible members. This is a role the German people quickly tired of as they couldn’t see why they should subsidize the irresponsible Greeks while the Greeks see the Germans as manipulating the financial system in their favor. The first bailouts by the Germans did not go well with the German people and when it became obvious that more bailout money was needed the Germans demanded action. The result was the creation of the European Financial Security Facility (EFSF) which raises money on the bond market and funnels that money to the weak Euro-Zone members, but the EFSF is run by Germany and it is the Germans who call the tune – not the French and certainly not the weak governments who depend on German money.

With the EFSF in place Germany can demand economic reforms before loaning money and are doing so. These reforms are austerity reforms which strike at the very heart of the socialist programs in place in these countries. In effect they can’t continue as they are without financial aid and they can’t get this aid without meeting Germany’s demands for reform. At a stroke and without firing a shot Germany has achieved the control over Europe that has been it’s objective since Bismark. The result has been a rise of nationalism that threatens the Euro and the concept of a unified Europe. At the very least the generous socialist programs that the Europeans have enjoyed for a long time cannot survive without extreme restructuring. This means fewer government jobs, longer work weeks, reformed pension plans, and higher taxes that are actually collected. These reforms are being resisted in Greece and Italy but when implemented will bring them more in line with the rest of the world. The question of what the European Union might become is now less relevant that can it survive at all without significant changes.—changes dictated by Germany. Welcome to the Fourth Reich.