This Time the Greeks are Looking for Gifts

The entire European Union is being rocked by the pending economic failure in Greece.  This Socialistic country with some of the most liberal labor laws in the world finds itself going hat in their hand to their fellow members of the European Central Bank, asking them to bail them out of their current financial crisis.

This scenario is being closely monitored in world financial markets primarily because Greece is one of the sixteen countries that use the Euro as their national currency.  Although the countries have agreed to a central bank and a common currency, they all operate their taxation and economic activities individually.  If the countries agree to bail out Greece, it will be against their initial agreement to NOT bail out any member with financial woes.  Of greater concern to member countries and to the foreign money markets is the precedent the bailout would set as Spain, Ireland, Portugal and Italy are right on Greece’s heels with their own weakened economies.

Standard and Poor’s, Moody’s Investment Services and Fitch Rating all have downgraded Greece’s credit rating due to the current deficit being almost 13% of GDP.  Their political system is rife with corruption, their economy has lost almost all of its competitive edge since joining the European Union and an estimated 30% of its economy is conducted on the black market.  Fully one third of all Greek citizens work for the government and the remainder cannot carry the tax burdens, so as David Smith, the economic editor for The Sunday Times noted: “tax evasion is the norm, more than half of population declare incomes that are below the taxation threshold and the loss to the Greek government is over 30 billion Euros annually.”  Just as the failure of Lehman Brothers triggered a world-wide financial collapse, so, too, might the bankruptcy of Greece, without the intervention of the European Central Bank, trigger a domino effect in an economically-struggling Europe.

California is drawing some unwelcome comparisons to Greece in their parallel economic crises.  Even though California represents over 14% of the United States economy, President Obama emphatically turned down Governor Schwarzenegger’s request for federal help recently.  This rejection of the Governor’s request was in spite of the fact that for the past several years, California has only received 80 cents on every dollar sent to Washington in the form of taxes while states like Mississippi, Alaska, and North Dakota have received $1.75 for every dollar those states sent to the nation’s coffers.  Leaving California reduced to issuing IOUs to pay their obligations.

Daniel Hannan, writing in The Telegraph, notes that he expects the European Union to put up 20-25 billion Euros to bail out Greece – but there are other ramifications to the bailout.  In addition to encouraging irresponsible behavior of individual nations in the future, there are considerations for Britain, Sweden and Denmark who opted out of the Eurozone and do not use the Euro as their national currency but hold shares in the European Central Bank.  In this case, Britain would be billed 2.9 to 3.6 billion Euros for their share of the Greek bailout.  They would have to borrow these funds at a time when their own deficit is 12.6 of GDP while Greece’s is 12.7 of their GDP.

The two largest economies in the European Union are Germany and France and the citizenries of both countries are opposed to the bailout of Greece.  Especially in Germany where workers might have to defer retirement two to four more years to age 69 while the labor unions in Greece are calling for a strike to keep their own retirement age at 61.

When many observers say that a failure to help Greece will only lead to a far larger crisis, others are issuing cautionary comments.  Otmar Issing, a former board member of the European Central Bank, says that a bailout would be disastrous.  He said that the creation of the bank and issuance of Euro currency was based on two commitments:  a guarantee of the European Central Bank and stable public finances.  Neither of which is demonstrated by Greece in their current situation.  He says let the International Monetary Fund bail them out.

Not only is the future of the Euro at risk in this Greek tragedy but the future of the European Central Bank and the economies of several countries hang in the balance.  The countries most affected are faced with another “too big to fail” dilemma.  Once again, we see a demonstration of how socialism and government intervention has placed an entire country’s population at risk and driven the real economy underground, forcing its citizenry to resort to deception when reporting income.

Greece may be the first country in the modern financial situation to bite the dust but they probably won’t be the last.  Their current long term debt is 110% of GDP and the United States is currently at 94% and expected to exceed 100% of our GDP by 2012.

Isn’t it time to allow the free market to work?