"Striking Greek workers shut down transport and tried to storm parliament as lawmakers passed 4.8 billion euros ($6.5 billion) in budget cuts, including wage reductions, needed to trim the region’s biggest budget deficit…
Seventy-two percent of 530 people surveyed by Public Issue for Skai Television said they disagreed with a drop in bonus- vacation payments, while 68 percent opposed a value-added tax increase. Sixty-two percent said Greece will see social unrest in the next year, according to the poll broadcast yesterday.
The additional budget cuts aim to save 1.7 billion euros through a 30 percent reduction to three bonus-salary payments to civil servants, a 7 percent overall decrease in wages at wider public-sector companies and a pension freeze. The reductions are accompanied by an increase to 21 percent from 19 percent in the main VAT tax as well as in alcohol and tobacco duties." Link
What happens in this country when Social Security and Medicare can no longer make payments?
Don’t worry because Santa Claus is already packing his bag full and coming to the rescue!
Germany will launch a “rescue package” worth about 30 billions euro. That’s about 1% of the German GDP. It’s not a popular decision (and pretty myopic in light of the easily foreseeable consequences) and chances are it won’t be enough and will have to be increased even before starting. Even if Greece were to somehow manage to really cut spending it will be caught in a loop: taxes will have to stay the same or even increase thus scaring away both domestic and foreign capital. Greek investors don’t have to flee to fiscal havens in the Caribbeans: they can just move their capital, legally, to another EU country with a better overall situation. Under present rules there’s nothing the Greek government can do to stop them. As pensions and wages are frozen they will feel the heat of consumers price inflation, which is raising all through Europe at a frankly alarming pace and which cannot be stopped. Frankly I am not so sure about social unrest: yes, there will be angry crowds on the streets but I bet it will be nothing a bit of old fashioned political chicanery won’t be able to cure. A small and relatively harmless border incident with Turkey or Macedonia will probably be enough to calm waters and take a little heat off the military, whose top secret and probably gargantuan budget (about 5% of the GDP) won’t be touched by saving measures. Failing that the EU will probably close both eyes and allow Greece an “Italian solution”: legally cook the books.
But Greece is nothing. The big issue is Spain. If Germany bails out Greece it will have to bail out Spain too. Spain’s situation is even more complicated than Greece’s and Spanish banks, some of whose are among the largest of the Continent, already had to be bailed out in 2008. 1% of the German GDP won’t be enough. Another “Italian solution”? Probably and since you can fool all people all the time it will work. Just stop talking about it in public and the problem will go away.
What will happen to the US? It’s easy. Presently your government is doing what governments all over the world have done since the dawn of civilization: see how far they can go before being stopped by popular reaction. So far they’ve done amazingly well. The system won’t collapse, trust me. If inflation starts to raise its nasty head it will be all too easy to blame it on oil producing countries (isn’t the US one? [;)]), speculators, tax evaders and the Chinese. And people will be taken in again.
I think the fundamental problem of Greece is that are nowhere nearly enough suckers in Greece. There just isn’t anyone to fleece. The witty Greeks figured out very soon how the system works and instead of toiling for others rushed to get some lard for themselves in a government or a government-guaranteed job. So their system is very resistant to reform because there are in it just as many net winners as there are net losers - until the day it all goes to hell.
Ultimately yes, although I think Greece is the most important trigger. Spain’s total present debt is relatively small, at around 55% of GDP, although this should be factored in with Spain’s poor economic performance. The latter detail should make it more liable to sovereign default sooner, if its creditors lose faith. This is why I think that Greece is really a catalyst; if Greece fails, creditors will lose faith in other governments, as well.
We really should stop measuring debt as a % of GDP. GDP is not the state’s income. Debt should be measured as a % of tax receipts. That way we could compare California and Illinois to Greece and Spain.
Yes, Spain debt is smaller but even the EU and the ECB agree the huge problem is unemployment (20% overall and rising [:|]). People without a job cannot pay taxes and get unemployment benefits. Then there’s the problem of an economy depending too much on a single sector… that’s why I say 1% of the German GDP won’t be nowhere near enough. Either Spain finds a new source of revenues that won’t scare investors away fast or they are set to become the Sick Man of Europe again.
But if there’s a European country set for default I say Iceland. They solved none of their problems nor learned anything and the only reason they have been rescued is because European banks stood to lose too much from even a partial default. They haven’t done anything to build a solid recovery nor attract foreign capital since touching public spending is verboten. As problems in the euro zone continue to grow there will be less resources available to help them except from the Bank of England which is already in a very tight spot. And once the balls get rolling there’s not telling when and where they’ll stop.
Advice: if you have any kind of government issued bond sell before the end of the year.
I enjoyed the read. There is one lil point I want to mention. You write that some things are linked to inflatioin, so that printing money won’t help with them.
But never fear, there is a way to print your way out of that problem too. After all, who decides what the rate of inflation is? Official govt statistics, right? So they can say it is less than it really is, as they do nowadays as a matter of routine.
People will wake up eventually, perhaps when the article beside the artificially low unemployment numbers is one with Kim-Jong asking you to eat grass.
What is really scary to me is how the greek people actually wants government to spend more and more, as if they never heard about the concept of debt. They got so high in the state spending that they can’t note that they are the ones who actually produce the wealth that the state misallocate.