Thursday, February 23, 2012

New Normal in Europe

The last attempt to cut another Greek rescue deal falls short on two counts. One, while it proposes a schedule of payments tied to performance benchmarks on deficit reduction and public sector restructuring, there is no way to properly audit the measures taken.  The speed at which new funds will be injected into the Greek public sector will forestall any attempt to properly develop governance mechanisms as these take time. Second, the payments are front loaded, which reduces the pressure to implement the reforms as time progresses. 

More fundamentally, this rescue attempt, as have others in the past, ignores a fundamental problem. That natural endowments, institutions, traditional sources of wealth creation, and standards of living vary greatly across the Continent.  There is no natural geographic or cultural entity called Europe.  Therefore, the rate at which economic development can expect to progress will greatly vary across the region.  For example, Greece is predominantly an agricultural economy.  Joining the EU shifted its trajectory of capital accumulation toward non-agricultural assets.

The rationale for the EU is that integration will improve trade and lift the standards of living for everyone.  But the initial public relations to get buy-in set up the expectations that this will happen quickly.  If the heady post-Berlin Wall period of East/West German integration was any indication, such expectations are wildly optimistic.  This was not helped by the initial integration funding provided to help the less developed members 'catch up' to their richer neighbors.  Rather than investments in enhancing the sources of wealth creation and fostering entreprenuership to exploit these assets, the sudden injections of cash merely fueled private spending to unsustainable levels.

The EU also made it possible for the flow of unrestricted speculative capital to those countries without the capacity to properly absorb it productively. Recall the real estate bubble that led to the current recession in the U.S. Imagine similar dynamics occuring in less financially sophisticated and accountable economies.  Capital ended up in real estate and large government projects that trickled down into unrestrained private and public consumption.

This is the new normal.  Until such countries as Greece decouple from the union, the haves will subsidize the havenots for the foreseeable future, and the havenots, feeding on the largess of their richer neighbors, will have little incentive for fundamental change.  The haves might feel self-righteous about all this but the havenots are the ones that really suffer because their trajectory toward economic wellbeing has been hijacked by well meaning 'do-gooders'. It's a turbocharged version of European socialism, but across countries...

2 comments:

  1. It's no different in principle from what we're experiencing in the States. After all, the Greek bailout pales in comparison to the welfare payouts to the banks, and if you include auto and insurance plus the other "extras" made available to the banksters, Greece recedes into the distance.

    But the larger point is that Greece is -- somehow by some magic hand -- being made the fall guy. The truth is that Italy's economy is FAR larger at 7th largest in the world, and its debt load is historic and crushing. Oh btw, I think France is up there too. Again, FAR larger then Greece.

    But somehow, this is never talked about in the msm.

    The truth is that the sick euro states are just some of the MANY holes in the dam that is the world economy AND NO ONE KNOWS which one will be THE ONE to blow a hole through the biggest bubble in the universe; the $700+ tril derivatives market.

    So all of this talk about de-coupling, or the macro talk about Greece being mainly agrarian and then having to shift gears once it joined the eu, are interesting theory. But the truth is that Greece is just one of the leaks amongst many in the damn.

    Oh, since you like "trivia" about Greece, don't forget, Goldman helped Greece cook its books so it could pass the "EU's Got Talent" entrance exam.

    Lie to get in, default, then lie some more to get welfare money. THAT's the new normal. Just ask Rick Wagoner.

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  2. The spotlight on Greece is because it was the first among the PIGS to threaten default. Greece, Italy or Spain are not really the point. The point is that monetary union can only work if the partners are roughly equivalent in their states of institutional development and fiscal discipline. Otherwise, it subsidizes poor productivity and distorts consumption patterns. Bottom line: Bailouts notwithstanding, EU was a bad idea and made worse by the inclusion of the less developed countries in the region.

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