Posts Tagged ‘public debt’

As of last night, it appears there is agreement on bailing out Greece.  Between Europe and IMF (which depends on the US for 25% of their funding), Greece will get about $150B worth of loans (paying a 5% interest rate)  in order for them to meet their current debt obligations (private investors demand an 8% interest rate given the risk) and internal needs.  In return for these loans, Greece has bitten the bullet and will dramatically cut salaries and pensions… temporarily.

I think it important to state a few facts about Greece.

• They rank second from the bottom on the Index of Economic Freedom (highly socialized economy).
• They import 3x more than they export (net users).
• Their government has overspent tax revenues by at least 15% each year for the past 5 years (spent more than produced).
• They have a debt level that is at least 125% of what they produce in a year in GDP .
• Public services account for 40% of their published GDP (so about half of their “GDP” is value productive).
• 42% of those between 55-64 are employed versus 52% in Europe and 62% in the US (few work).
• Tax rates on income are some of the highest in Europe (over 40%)
• Their fertility rate is below replacement rate (i.e. aging population that retires early).
• Their government spends over 12% of their GDP on pensions, double the US, second only to Italy at 15%.

So, with that little amount of information, what is the likelihood that Greece can pay off these loans?  Remember, in the agreement as formed last night, Greece only needs to get their spending down to 103% of their tax revenues by 2014.  In other words, they will still spend more than they make.

Now on to the dramatic cuts.  Riots were all the rage over the weekend as pensioners and union employees protested the expected cuts in entitlements and the anticipated rise in taxes.  The question that hit me was, who are they protesting against?  It’s a democracy from what I understand.  They are the ones benefiting from the large promises they made to themselves (early retirement, large pensions, free healthcare, etc) from which they are the sole providers of the funds for those promises.  Their government officials only act as the transfer agents; taking tax dollars from the few that work and place it into the hands of all in the form of entitlements.  Most likely, they are protesting that their guardians, their providers, are no longer able to borrow money to pay for promises that had no reasonable economic foundation supporting them.

I was struck by a quote in this article,

“These are the harshest, most unfair measures ever enacted. That is why our reaction will be decisive and dynamic. You can’t always make the workers pay for the results of failed policies,” Stathis Anestis, spokesman for Greece’s largest umbrella union, GSEE, told The Associated Press.

I find this to be very circular:  People are protesting because they cannot fund the promises they made to themselves.  (I just don’t see how this loan solves anything or how this ends well for anyone).

This is worth reading…

From yesterday’s Wall Street Journal page A6…     Europe’s Social Benefits Are at Risk

The article mentioned above describes the growing public debt, the weak economy, and the need to rethink the large social programs that have become the norm within the European community.

To get some historical context for this, you could read the European Commission’s Social Agenda from April 2002.  It opens with ”Since the Lisbon European Council of March 2000, the European Union has focused on raising its performance and transforming itself into the most competitive and dynamic economic area in the world.”  It is filled with wonderful goals, objectives, desires, etc for how to make a better, more prosperous Union.  That’s all good, actually great intentions, but their means to achieve those goals were completely opposed to those objectives.

They mention the dictation of giving workers say on corporate restructurings making job flexibility all but impossible.  (Speaking to some of the companies I am close to, they avoid having facilities in Europe as they would need to get the workers’ permission (almost) to be laid off and then the costs linger for some time afterward).  They mention increasing the pension system and the healthcare system.  All great programs to have but how do you pay for them?

Well, it turns out it’s through higher taxes (which become higher costs to operate in Europe).  And what if companies avoid placing jobs into the Union due to costs of operation being too high?  Then tax revenue growth suffers as economic activity is muted.  In that event, government tax revenue is lower than anticipated and the social program costs are higher than expected (since employment doesn’t hit the objective set as companies shun the area).  Since funds are still required, it leads to higher public funding through other means; public debt. 

Hmmm.  Where are we seeing all that, as described above, occur right now?