The Welfare Kings of Europe

In spite of the fact that 85% of Greeks want to stay in the Eurozone, I was reasonably confident that Greeks would support Syriza to a first-place finish, and elect a new government willing to play chicken with the Germans. However Greeks — predominantly the elderly — rejected change (and possible imminent Drachmatization) in favour of the fundamentally broken status quo.

But although Syriza finished second, the anti-bailout parties still commanded a majority of the votes.

And New Democracy may still face a lot of trouble building a coalition to try to keep Greece in the bailout, and in the Euro . There has long been a rumour that Tsipras wanted to lose, so as to (rightly) blame the coming crush on the status quo parties. What fewer of us counted on was that the status quo parties wouldn’t want to win the election either. The pro-bailout socialists Pasok have thrown a monkey wrench into coalition-building by claiming they won’t take part in any coalition that doesn’t also include Syriza. This seems rational; when the tsunami hits, all parties in government will surely take a lot of long-term political damage. Pasok have already been marginalised by the younger and fierier Syriza, and Pasok presiding over an economic collapse (for that is undoubtedly what Greece now faces) would surely have driven Pasok into an abyss. The economy is such a poisoned chalice that parties seem willing to fight to keep themselves out of power.

And with more austerity, it’s only going to get worse. Once a society is hooked on large-scale debt-fuelled state spending, austerity in the name of government deleveraging is tough enough when the economy is booming, but during a depression as spending falls, tax revenues fall, very often producing (as has been the case in Greece, Spain, Portugal and the UK) even bigger deficits.

So let us not forget who the most welfare-dependent nations (i.e. the ones who would be hurt the most by attempting an austerity program during an economic depression) are in Europe (clue — it’s not Greece):

International economics is a fast game. It’s only sixty years since America was exporter and creditor to the world. It’s only fifteen years since the now-booming German economy was described as the “sick man of Europe”.

The same Euro system that is slamming Greece, Portugal, Spain and Italy today — in the aftermath of bubbles caused by easy money flowing into these countries as a result of the introduction of the Euro — could (if it were to somehow survive)  do the same thing to Germany in ten or twenty or thirty years.

A monetary union without a fiscal union is a fundamentally unworkable system and Westerwelle, Schauble and Merkel insisting that Greece play by the rules of their game is just asking for trouble. And trying to introduce a fiscal union over a heterogeneous, tense and disagreeable land as Europe is just asking for political trouble.

No matter how many nations are browbeaten by fear into committing to the status quo, it still won’t be sustainable. Greeks (and the other peripheral populations) can commit to austerity from here to eternity, but it won’t stop those policies resulting in deeper contraction, and more economic catastrophe.

But the collapse of the Euro would at most-recent estimates cost the core and particularly Germany a lot more than handing over the money to the PIGS. Eventually they will hand over the money to shield themselves from falling masonry. The real question is whether or not the entire system will spiral into pandemonium before Germany blinks.

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37 thoughts on “The Welfare Kings of Europe

  1. Pingback: The Welfare Kings of Europe [azizonomics] « Mktgeist blog

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  3. there are no “anti-bailout parties” in Greece. there are anti-austerity, anti-spending-cuts parties, yes. they would happily welcome any free bailout. that is a fundamental difference. if troika blinks, they could get their bailouts for free. pro-market commentators are distorting their own perception by hopes for change and will be shockingly dissapointed when supposed saviours turn to be cowards again. but they never aimed to be saviours.

    the “broken status quo” is not ND and Pasok, it is Syriza that wants to revoke labour law deregulation and protect particular groups of interest from losing benefits. should they come to power, don’t be surprised the very first thing they do is throw away pro-market deregulatory reforms, and then tax the productive. this is a labour-union party aiming at prolonging status quo, greedy for power but not stupid. the idea that voting against Syriza is “rejecting change” is nonsense.

    • It is rejecting change, because whether or not we agree with Syriza’s political program (I generally don’t) it is a real change from the status quo. Personally I am not really pro-Syriza. There is no solution to Greece on offer, certainly not the bailout or continued austerity, but not Syriza’s program of socialism. I support Nigel Farage’s view that the best option for Greece is to leave the euro.

      • leaving euro – how is it different from from both bailout and austerity? they will hyperinflate, wipe out their middle class. inflation is taxation.

        it is interesting that private companies always do ‘austerity’ (i.e. cutting costs). I thought only keynesians believed gov economy works different than normal economy..

        • See, I tend to believe that the crisis has actually been fuelled by excessive private debt much more than public debt (look at the figures — private debt is far higher than public debt everywhere) and that with private industry already deleveraging quite steeply the economic contraction will only be worsened by simultaneous government deleveraging, which has been the case everywhere we look. I actually believe in state austerity to fight debt — but we need to begin during the boom phase of the economic cycle, which is the exact opposite of what governments have done in recent years racking up bigger and bigger deficits in the boom years and then trying to slash during the slump. This is just pure pain — higher unemployment and lower GDP, with no gain because deficits rise.

        • OK, I see you want to tweak the restoration process to spare some private companies from bankruptcy and spare some pain to people. but how is this different from bank bailouts? how do you know it will help? how do you know it won’t “japanize” their economy by prolonging this deleveraging process?

        • I’d the “tweak” is actually the austerity. If your society is not dependent on government spending, then this isn’t a problem. But if your society is dependent on government spending, the time to get off the drug is not following a crash during private sector deleveraging.

  4. I don’t see why social spending is bad as long as a society can pay for itself. What’s the point of human and economic developments? Isn’t all for the improving human living standard and care for more people in general? The goal a society getting rich is for the rich of a country, not just few capable individuals. And the few wealthy individuals do not make a country rich. In fact their wealth will shrink if the rest of the country fall apart.

    That said I don’t mean an unproductive lazy society should enjoy the fruit of other harder working societies. Is Sweden and Germany are able to support their social spending? If yes, then what’s wrong with that?

    Besides, what’s use of the trillions of the rich sitting in the banks for if not be used to create more wealth for the rest unfortunate? They can’t use all the trillion in their life time might just put into use for the needed.

    • I don’t see why social spending is bad

      – spending other’s people money on another people who lobbied for it isn’t quite fair.
      – it makes part of the economy dependent on gov as a customer, just like housing is now dependent on money printing. as soon as society can no longer pay fot it, such mutated and ill economy crashes badly.

      Is Sweden and Germany are able to support their social spending? If yes, then what’s wrong with that?

      no country in the world (except maybe for a few oil-rich countries at the moment) is able to support any social spending without issueing debt. even if we assume that a country can afford it, then who is that makes decision to spend or not: productive taxpayers or
      the beneficiaries? if productive taxpayers wanted to help the latter, they could do that via non-gov or charity. social spending is always devised by beneficiaries.

      • Social spending does not equal “spending other’s people money on another people who lobbied for it”. It is simply a joint decision by the people that it is better to do some things – like e.g. healthcare, unemployment insurance – together instead of each person for himself, in the sincere belief that everybody gets a better deal that way.

        Sure, some will have bigger needs than others and thus get a bigger slice of the cake. But nobody pays for a specific slice of the cake anyway. What everybody voluntarily pays for is the peace of mind of knowing that you never have to worry about these basic necessities, because however your circumstances turn out, you’re covered. Some of us feel that that’s well worth paying a bit of taxes for!

        This agreement with the basic principle of social spending doesn’t mean – obviously! – that everybody is in full agreement with the specific current tax level, nor with exactly what each tax dime is spent on. But that’s what democracy is for – to allow for a distribution of public money that is reasonably in accordance with the will of the majority.

        (And this is another reason why the ongoing dilution of democracy, where the people feel that their leaders are representing their constituents less and less, and themselves and an elite group of cronies more and more, is so dangerous. If society is no longer perceived as “by the people, for the people”, then why should we contribute anymore? Why should we pay taxes, do our civic duties, obey the laws, without this sense of community? But I guess that’s exactly how people already feel, in less fortunate places than up here in Ultima Thule where an echo of this old sentiment still lingers.)

        • “nobody pays for a specific slice of the cake” and “joint decisions” (i.e. nobody votes for specific tax levels etc) is exactly the mechanizm that leads to l “spending other’s people money on another people who lobbied for it”.

          the problem with this kind of social agreement is lack of feedback loop that forces spending into balance, because there’s always someone who hasn’t yet paid for this and that specific piece of cake. or there’s always one more bond auction to hold…

        • Great comment, Borjesson. Makes me yearn for the days when it was at least sort of like you describe in the U.S., before the top 1% decided to take everything for themselves.

      • “the problem with this kind of social agreement is lack of feedback loop that forces spending into balance”

        Balance, or lack thereof, in public spending has little to do with the level of welfare, in my view. There are always things for governments to squander money on, if they’re so inclined. And conversely, a government can always choose to live within their means, regardless if their spending is on welfare or on warfare.

        Here in Sweden for instance, as discussed previously on this blog, there is something called “överskottsmålet”, the surplus target, which mandates that the government should run a yearly surplus of approximately one percent of GDP, on average over an economic cycle. Since it was instigated back in the 90’s, this target has been religiously adhered to by all governments, left or right.

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  8. the wealthiest 20% 0f greeks dont pay tax.
    Thats the biggest problem, and no-ones coming up with any solutions. Greece is one big scam, with the majority being screwed to suit the interests of a large, politically connected, internationallyl-minded group of well off, wealthy upper middle and upper class parasites.

    Those people live as well as anyone in Europe. Their greed has f*cked the global economy, they’re almost as guilty as wall Street.
    I’m f*cking sick of them.

  9. Interested to know what would happen if a government defaulted on its National Debt, and refused to play the game? Would there be riots, civil disobedience, food shortages and energy black outs, or would the people continue as before only now they would be less burdened by debt?

    • Iceland did it. I personally think it’s more honest to do a negotiated default with creditors than unilaterally defaulting by debasement.

  10. All institutions are failing at present due to massive corruption at all levels and in all markets.

    The best social systems seems to be those which socialize those institutions where economies of scale can be used to provide universal services more efficiently [non-profit] in order to lower the cost of living/doing business, e.g., health care, transportation, utilities, etc., and a healthy private sector with transparent capital markets that reward success and PUNISH failure.

  11. This same Euro experiment is the only one that at least acknowledges the problems and tries to deal with them. I think the EMU redemption fund is a good idea and might work – and at least has the mechanism to revert over time to fiscal prudence. The alternative is just the systemic reset where goldbugs sell their gold when the panic is at its height (while all the other members of the middle class – not interested in economics – get wiped out), after which follows more of the same. I noticed Taleb agrees with my comments some time ago, that the EU is better off just *because* of that chorus of contradictory voices.

    What’s the problem with experiments? If we did not experiment we’d still be living in caves. Switzerland (a mini-EU as I called it in those comment) had civil wars ~100-200 years ago. As James Rickards said, the Euro is a half-baked pie. I’d keep it in the oven a little more. Then again, these are just my thoughts and opinions (though I’m not the only one) – and I’ve not been browbeaten.

    • Another thing: I’m not sure the main title – and probably the crux of the article (and Krugman provided graph) tell any interesting story. What’s wrong with social expenditure? Or are we mistaking social expenditure with the size of the public sector, and living beyond your means? John Mauldin called Sweden a model for the so called not-socialst-USA. Because in Sweden all social liabilities are transparent and always linked to the performance of the economy. I can try to find the article.

      • Well, I would guess that the likeliest outcome is that the pie will be kept in the oven. But right now the pie does not have sufficient ingredients — the Euro does not really have a well-established mechanism (fiscal union would achieve this) for dealing with the problem of trade balance disparities — so it is hardly being cooked as intended, and getting those specific ingredients for the pie to cook will be politically troublesome. But less troublesome, I suppose, than breaking up the union. So eventually, they will agree on the right ingredients. After a lot more pain.

        The point of the inclusion of the graph is that German society would be in even greater trouble than Greece if the shoe were on the other foot, as they have more welfare dependency per capita than any of the PIGS.

        • I would say another possible outcome is the printing of a Geuro while Greece stays in the EZ. Some say this would be a gift to the Greeks because they would get to keep their Euro-wealth which would not happen under an EZ-exit scenario.

        • In the long run, they cannot afford it either. I personally think Germany and German bunds are in something of a bubble. If I was Europe’s economic dictator (a role I would neither advocate nor accept) I would be pushing an austerity program in the core to offset stimulus in the periphery.

        • Well neither the US can, but then again the treasuries are the safest haven right now aren’t they? What I’m saying is that the US has no credible plan to reduce its debt, nor the will. Empires don’t back down easily. The EMU redemption pact could (a wild guess) restore confidence if it has a credible plan towards sustainability and could redirect some of those mega-imaginary-wealth money towards these bonds. Not to say that it would have gold backing, and the gold price could rise to cover more of the bonds. Alternatively, the price of gold could be set above the current market one. This is just like a monetization of debt with a twist: gold is there to ensure (to a certain degree) that after the monetization episode there are no more jokes.

        • If it’s adopted as intended it’s a step in the right direction, but it’s still not fiskalunion. As I say, eventually they will take the necessary measures, the question is how much damage will be caused in the meantime by meanwhile sidestepping the politically troublesome questions and problems.

        • AEP, while positive about the EMU redemption pact said it’s not a fiscal union at all, but actually a limited (OK if 20 years is limited, then again, it could be extended and morph into something else) enterprise designed to restore the Maastricht rules. I don’t believe a fiscal union is necessarily required as long as those structural deficits and debt limits (Maastricht) are enforced (and yes, I know Germany was the first one to break them). And some other measures would be required so that we don’t have a banking system driven bubble blow up and then clobber the balance sheet of the sovereign state (as has happened in Spain).

        • Oh and another thing: those graphs may be misleading depending on what they count. By looking at your latest graph and the Krugman-one, one might conclude that Sweden is screwed will the US is fine (intuitively). Quite the contrary, because the US unfunded liabilities are to the tune of 200 trillion according to some sources while Sweden (AFAIK, after what I read) basically has no unfunded liabilities (liabilities are linked to the performance of the economy). Other things: US public debt is well over 100% since that graph was generated, and that is if we assume all figures are correct. I’ve read opinions on how the actual debt at all levels (US) is actually much higher but hidden due to various accounting tricks (then again, this might apply to other countries as well, but I’d guess that chorus of contradictory voices must have uncovered a good portion of those in the EU).

        • This system has failed for all kinds of reasons, not to mention total global banking insolvency, so I am not sure why you guys are speculating as to how to put Humpty Dumpty back together again.

          Either you continue depleting global savings to zero through interest payments to the parasites, or, swallow the necessary medicine, shit these vermin out and get on with starting over.

          No matter how one rearranges the deck chairs, the Titanic is going down.

  12. I have constantly written to the Australian Treasurer Wayne Swan (supposed to be the words best Treasurer, cough) and said they should abolish the welfare system, a d its costly office space, computer infrastructure and inept bureaucrats and replace it with an efficient Debit Card system. People who lodge a tax return and have a minimum income level would qualify for a minimum payment issued weekly. The automatic keynesian stabilisers could be juiced up in times of lower aggregate demand. It is the most efficient helicopter drop you could imagine and would be paid for from treasury reserves in times of high economic activity and inflation.

    But so many bureaucrats would lose their job administering the current system!

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