AHHH The French

The French just can’t seem to accept that they must actually work for a living and compete in the marketplace just like everyone else. Even more ironic is that Germany started its failed march to European dominance with the Franco-Prussian War and two world wars, but is now poised to achieve that goal without a shot being fired. The Germans live the good life (for European standards) by working hard and living within their means. Alas the French live the good life but seem to expect that the government should pay for it. The people think a 40 hour work week is exploitation and a 32 hour work week is as much as any employer should expect. Of course the problem with socialism is that eventually it cannot be sustained. The proof of this is being played out across Europe as the economies of Spain, Portugal, Ireland, and Italy teeter on edge of financial collapse. The economy of Greece has already imploded and threatens the Euro itself.

Now the French who view themselves as the dominant force in Europe are finding that not only are they not the dominant country, but that it is Germany calling the tune. Faced with the prospect of actually having to give up some of their benefits and actually work a 34 hour work week, they threw out President Sarkozy and elected inexperienced Hollande. Unfortunately Hollande had no real experience, had no real plan, never took Economics 101, but was sure his Gallic Charm would enable him to win over Germany, the tax payers in both Germany and France, without actually having to make any financial sacrifices. Alas his socialist economics seems to have failed him. The reality is that money will gravitate to the highest return and flee extortionate taxes.

Hollande felt that what was needed was higher taxes and that the rich should pay their fair share, a typical socialist position. In his view the fair share of the rich was 75% of their income, after all the rich should be forced to share their wealth with the workers. Not unexpectedly the rich simply moved their wealth out of the country. Renault moved 70% of their manufacturing to low wage Trukey and ArcelorMitta the French steel manufacturer shut down two furnaces in preparation of shutting the plants. The government’s response to this is to introduce a law forcing manufacturers to sell their idle facilities at a price established by the courts. Apparently the socialists seem to think that any sharp entrepreneur would jump at the chance to buy these facilities just to keep the workers employed.

Hollande was elected on the basis that he would preserve “the social model” while engineering an economic recovery. Neither Hollande nor the socialist electorate realized these are conflicting goals, especially in light of the high level of protection the French worker has. Nevertheless French unemployment is at a 13 year high with more layoffs coming. It is very difficult for an employer in France to layoff employees and it is very expensive due to the required severance costs. Consequently, when employers actually layoff people they are very reluctant to rehire and the tendency is to move those jobs overseas where it is cheaper and the rules more flexible. This means that reducing high unemployment is very difficult and takes a long time.

The Euro is in real danger and unless Hollande can get control of the French economy it may be unsustainable unless the Germans are willing to step up and bail him out. However, the Germans are tired of subsidizing the life of the rich and famous enjoyed by so many countries in Europe. Plus the Germans are also feeling the impact of the slowing world economy and may not be able to continue supporting these failing Club Med European economies. The stark reality is that socialism cannot work unless there are enough tax revenues to sustain the government programs. In a slowing economy the government must react in a business like fashion and reduce expenses which means cutting programs. When the people are accustomed to lavish government handouts this becomes almost impossible so it is now up to Hollande to show us how this is done.

France, The Euro and Beyond

I have been fascinated by the impact of some of the recent events which have rocked the world economy. Of course the first is the reaction by the Greeks to their failed socialist economy which can only be described as denial. The denial being that socialism is a viable governmental form when the costs outstrip the revenues. Their solution is to blame the Germans, blame capitalism, blame the banks, blame anyone and everyone except that person they see in the mirror. So they threw out the government and their austerity program and are now happily returning to their old ways without any idea whatsoever of how to pay for anything. Like all socialists they seem to believe that the “government” will pay for everything by taxing the rich. Of course all of the rich in Greece left a long time ago and when they joined the Euro-zone they gave up their control of their currency, this was a small point which they ignored in their haste to expand their Club Med life style. Now we see the same plan developing in France – that is a total denial that socialism doesn’t work. The French refuse to sacrifice anything to austerity. They feel they are being exploited by being expected to work more than a 35 hour work week and to retire at 62 rather than 60. They know that capitalism is evil and socialism guarantees that the government will always be there for them. Of course they are a little vague regarding where the government gets the money to pay for their benefits other than from the “rich” meaning companies because any individual with any substantial income has already moved his assets out of the country. Furthermore, the socialist government has made it so difficult to lay anyone off that no business will hire new employees. Instead any new jobs are being sent offshore where it is easier to control the staffing. The current thinking in France is that socialism provides for everyone assuring everyone an equitable share of the wealth. Anyone who doesn’t grasp the benefits of socialism must be selfish and greedy, and this brings us to the Euro. Money is an abstraction whose only value is what we collectively give it and the ability of the issuing government to ensure that value, so the dollar, the pound, the yen, and other currencies are monetary instruments guaranteed by their governments but not so the Euro. The Euro is an artificial currency with no specific government guaranteeing it and no specific European government can print new Euros – hence the problems in Greece, Italy, Portugal, and throughout most of the Euro-zone to a greater or lesser extent. The Euro Zone is dominated by socialist governments whose consistent policies have been oriented toward maximum employment with the least amount of work and the most generous benefits. However, the party is ending because none of the Euro-zone countries can sustain these benefits based on their revenues which mean they must be reduced. These austerity programs are not popular but if they are not implemented the Euro-zone can collapse France is the most recent country to refuse to accept these austerity driven reductions in benefits. France was one of the driving forces behind the creation of the Euro-zone thinking that they would be the dominant force. This turned out to be a gross miscalculation because their socialist policies focus on employment and not on productivity. . The unintended result ironically has been higher unemployment as companies refuse to hire new people unless forced to. The wages are inflated relative to the output so these companies look overseas for growth which results in a double strike at home—higher unemployment means less tax revenue and higher unemployment costs. The government expands as new government jobs are created and with these jobs comes greater bureaucracy and with that bureaucracy comes lower productivity and an incentive for employers and investors to move overseas. Today the Greeks are voting to decide whether to continue their Club Med economy or to adopt some measures that would keep them in the Euro-zone. Either way the party has ended because the piper must be paid. A return to the Drachma will certainly cause rampant inflation which will create serious problems but staying with the Euro will force serious austerity measures which will effectively demonstrate that socialism cannot be sustained over the long term. Will the French get the message? Will the socialists in Europe get the message? Only time will tell.

The Euro-Zone Crisis

So the 27 member Euro-Zone members did not reach an agreement on any solution to the ongoing Euro-Zone debt problem and Chancellor Merkel and Germany are being seen as killing the Euro. Why this surprises anyone is a mystery because Germany is the only stable and successful economy in Europe – or at least Western Europe. Essentially the solution has two parts – strict rules governing the fiscal and economic policies of the members and the issuance of “Euro-Bonds”. These bonds would be supported and guaranteed by the Euro-Zone members.

This seems simple and straightforward unless of course you are German. The Euro-Zone members are in love with their socialist programs, they like their 6 week vacations, short work weeks, high salaries, and early retirements. Even feeble attempts to rein in some of these government programs has led to riots in Greece and Italy – the governments might see the necessity for these changes but the recipients – the voters – do not. Of course the German voters see things quite differently since they are the hardworking taxpayers whose taxes have already gone to bailing out Greece and their irresponsible financial commitments. The German taxpayers are simply tired of being the financial savior of countries whose irresponsible financial programs have left them virtually bankrupt and expecting Germany to bail them out.

The Euro-Bond is a great solution for those irresponsible countries because the bonds would be guaranteed by the collective membership. Of course the largest guarantor would be Germany while the greatest abusers would be given breathing space without making any major changes to their cradle to grave programs. Chancellor Merkel sees this as a bad idea and at best a band-aid because it would merely avert the immediate crisis without actually improving the long range economic situation plaguing Europe.

The reality is Western Europe is not competitive in the world markets. Only Germany has an export economy supported by hard working taxpayers, while countries like Greece have tax policies that are laughable. In Greece the individual taxpayer is allowed to simply state how much they earned so the tax revenues don’t even approximate the cost of their government programs. The French – like most socialist governments – see employment as the objective rather than productivity and competitive position. So their solution has been to reduce the work week hours to well under 40 and any thought of increasing that has led to near riots. The supreme irony there is that France still sees itself as a world power and a peer – if not superior – to Germany. Of course France isn’t a basket case like Greece but it is nowhere near the economic power house of Germany.

Germany is emerging as the dominant force in Europe and is rapidly accomplishing the objectives that they failed to achieve in two world wars. Germany is increasingly determining the policies that Europe must follow and the only European government that seems immune to German dominance is the UK. The Fourth Reich is being born.

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.

Greco-America
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.

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.