Topic: International Economics and Development

The Security Implications of Grexit

This weekend’s news was dominated by the sorry tale of Greece, where a referendum on whether to accept the terms of a new European Union bailout failed by a landslide. Now Greece’s Eurozone creditors face the uneasy choice between offering a more generous bailout plan, or accepting a Greek departure from the Euro.

Sunday’s referendum was just the latest debacle in the five-year tug-of-war between Greece and other Eurozone members. The ruling Syriza party has been openly hostile to the austerity-focused conditions of EU bailout loans – which run counter to their left-leaning economic agenda – as well as to the EU negotiation process itself. The spur-of-the-moment referendum was itself largely a surreal PR stunt: the deal voters were evaluating had in fact been withdrawn by the EU prior to Sunday’s vote.

Unfortunately, the situation in Greece is untenable. Banks remain shut, and ATM users can withdraw only 60 euros a day. The country defaulted on its IMF loans last week, the first advanced industrialized economy to ever do so. An emergency summit of Eurozone leaders is convening on Tuesday to hear new Greek proposals, but it is unclear whether German leaders in particular can be convinced to accept a more generous bailout deal. Failing that, Greece will begin its Eurozone exit, creating turmoil in international markets.

But as I wrote over at CNN.com, “Grexit” would result in more than just financial problems. Greece’s exit from the Eurozone is likely to draw it closer to Russia, with security implications for other EU and NATO member states.

Ties have been growing between Athens and Moscow in recent months:

“During his visit last month at the St. Petersburg International Economic Forum, for example, Greek Prime Minister Alexis Tsipras spoke of the Greek and Russian relationship, hinting that Greece was “ready to go to new seas to reach new safe ports… the Russian energy minister just recently announced a $2.77 billion pipeline project in Greece, and Moscow followed this with an informal invitation to Greece to join the BRICs’ New Development Bank.”

Given its current economic problems, Russia cannot afford to bail Greece out entirely. But it could certainly provide funding for sizable infrastructure projects.  

In the short-term, Grexit would certainly be a boon to Russian propagandists:

“allowing anchors on Russian state TV to highlight further evidence of the decline of the European Union and of Western civilization more broadly.” 

And in the longer-term, a Russia-friendly Greek government could even act as a spoiler within the EU and within NATO, including a veto over any extension of sanctions on Russia.

Until this point, the White House has largely avoided commenting on the Greek crisis, other than reassurances that U.S. banks are largely insulated. But as Eurozone leaders make the final choice on Greece’s future, U.S. leaders would do well to consider how a Grexit could impact U.S. security aims in Europe.

You can read the whole piece on the security implications of the Greek crisis here.

What Greek “Austerity”?

It’s hard to find anything written or spoken about Greece that doesn’t contain a great deal of hand wringing about the alleged austerity – brutal fiscal austerity – that the Greek government has been forced to endure at the hands of the so-called troika. This is Alice in Wonderland economics. It supports my 95% rule: 95% of what you read about economics and finance is either wrong or irrelevant.

The following chart contains the facts courtesy of Eurostat. Social security spending as a percentage of GDP in Greece is clearly bloated relative to the average European Union country—even more so if you only consider the 16 countries that joined the EU after the Maastricht Treaty was signed in 1992. To bring the government in Athens into line with Europe, a serious diet would be necessary – much more serious than anything prescribed by the troika.

Social Security Fund

Greek Marxists versus the IMF

With the failure of the Greek government to make a scheduled payment to the International Monetary Fund (IMF), we have moved from high drama to low farce. The Marxists who are running the show in Athens have scored a first: Greece is the first so-called advanced economy to miss an IMF payment in the Fund’s 71-year history.

It was all so predictable. The Marxists in Athens did what Marxists do: they ramped up the rhetoric. Yes, the IMF became a “criminal syndicate,” certainly not the type of organization that the current Greek government would dare to pay.

As for the IMF, it drew a line in the sand after realizing that it had been way too lenient and generous with Greece. Under normal conditions, the IMF is supposed to be limited to lending up to 200% of a country’s quota (each country’s capital contribution made to the IMF) in a single year and 600% in cumulative total. However, under the IMF’s “exceptional access” policy there are, in principle, virtually no limits on lending. For example, the loan made to Greece in May 2010 was worth an astounding 3208% of Greece’s quota – by far the highest percentage recorded for a loan made to any member country.

So, the high drama of the past few months had to end in a farce – and it has.

Greece Is Being Taxed to Death

American news stories about the Greek financial collapse frequently echo complaints of government employees and their supplicants about “budget cuts.”  In reality, Greek government spending rose from 44.6 percent of GDP in early 2006 to 54 percent in 2010 and 59.2 percent in 2014 (although this is partly because private GDP fell even faster than government spending).  Military spending is particularly lavish in Greece, second only to the United States within NATO as a percentage of GDP.  

What is rarely mentioned in all the one-sided confusion about “austerity” is the other side of the budget–namely, taxes. 

As if Greece didn’t have enough troubles, the Troika (International Monetary Fund, European Commission and European Central Bank) has promoted capital flight and a brain drain (exodus of skill and talent) by offering more and more loans to Greece in exchange for an increasingly suicidal blend of brutal taxes on both labor and capital.  The table shows what happened to key Greek tax rates in the past few years. 

  Current Previous
Corporate Tax Rate 26.00 20.00
Personal Income Tax Rate 46.00 40.00
Sales Tax Rate (VAT) 23.00 18.00
Social Security Rate 42.01 29.05

Do You Hear the Drivers Honk?

Last week, taxi drivers in France protested the Uber ride-sharing service by blocking access to airports and train stations, erecting barricades, destroying vehicles, and assaulting rival drivers in confrontations that led to injuries. American celebrity Courtney Love Cobain, caught up in the chaos, tweeted: “they’ve ambushed our car and are holding our driver hostage. they’re beating the cars with metal bats. this is France?? I’m safer in Baghdad.”

The government of France then responded to the violence in oh-so-French fashion: it arrested Uber’s executives

My Cato colleague Matthew Feeney wrote the whole story up and you should go read his Forbes piece now. My humbler role is to set the episode to music, by way of a tune you may have found hard to get out of your head if you’ve ever seen Les Miserables

Do you hear the drivers honk
Smashing the heads of random chaps
It is the music of a people
Who will not give way to apps

When the tapping of a screen
Summons a ride with just their thumbs
It is the future we are fighting
When Uber comes

When technology disrupts
The cozy pasture where we graze
We’ll challenge it with fisticuffs
And self-serving Luddite cliches

[repeat chorus:]

When the tapping of a screen
Summons a ride with just their thumbs
It is the future we are fighting
When Uber comes.

[thanks to Rogers Turner and John Strong for suggestions on the lyrics]

Washington and Havana Officially Restore Diplomatic Ties

It was long overdue. After over half a century of unsuccessfully trying to bring about regime change in Cuba through isolation, President Obama announced today that Washington has reached a deal with Havana to reopen embassies on July 20th.

There was a lot of posturing in the process, particularly from Cuba. At some point, the island’s dictator even said that restoring diplomatic ties would not be possible unless, among other things the United States returns Guantanamo and pays economic reparations for 50 years of embargo. In the end, it came down to the removal of Cuba from the U.S. list of states that sponsor terrorism and an agreement about the movement of U.S. diplomatic personnel around the island.

By restoring diplomatic ties, removing Cuba from the terrorist-sponsor list, and relaxing some elements of the embargo and the travel ban, the Obama administration has gone as far as it can using its executive authority. Lifting the outstanding elements of the embargo and travel ban is a prerogative of Congress. As it is, it looks unlikely that a bill in that regard will reach Obama’s desk for the remainder of his term.

Polls show not only considerable bipartisan support for Obama’s policy toward Cuba, but also a majority of Cuban Americans favoring rapprochement. Sooner rather than later, Congress–and the Republican presidential field–will realize the futility of sticking with the status quo.

Under no circumstances should we deceive ourselves on the current nature of the Cuban regime. It remains a Stalinist dictatorship. Dissidents are still harassed and arbitrarily arrested. The much-hyped economic reforms announced by Raúl Castro eight years ago have been too timid and seem more aimed at allowing Cubans to survive in the private sector without becoming prosperous.

However, political and economic isolation failed at weakening the Castro regime. American policy actually strengthened the Cuban government by providing itself as a scapegoat for Cuba’s disastrous economic policies and as a victim of U.S. aggression, thereby rallying support from all over the world.

Despite the embargo and travel ban still remaining in place, this is a historic move by the Obama administration.

Greece: A Financial Zombie State

Banks in Greece will not open their doors Monday morning. Greece has been moving towards this dramatic final act ever since it was allowed to enter the Eurozone with cooked fiscal accounts in January 2001 – two years after the euro was launched. One Greek government after another embraced the idea that it did not have to rein in fiscal expenditures to match revenues because Brussels would cover any shortfalls. That idea appeared to have worked, until other members of the Eurozone realized that the entire European project would fall apart if it became a transfer union.

This realization was brought into sharp focus by the bailout demands of Prime Minister Alexis Tsipras and his left-wing coalition government. Brussels finally realized that if the demands of the Tsipras government (read: Europeans must pay for Athens’ largesse) were met, the Eurozone would morph into a giant moral hazard zone. So, Brussels was forced to throw down the gauntlet: enough is enough.

Where does Athens go from here? Well, to quote former President George W. Bush, as he observed the unfolding financial crisis in 2008: “If money doesn’t loosen up, this sucker could go down.” Well, “W” had a point. Changes in the money supply, broadly determined, cause changes in nominal national income and the price level.

Since October 2008, until the Syriza party took power, the broad measure of the Greek money supply (M3) contracted at an annual rate of just over 6%. And as night follows day, the economy collapsed, shrinking by over 25% since the crisis of 2008.

Since the Tsipras government took the helm, the monetary contraction in Greece has accelerated. This means that a Greek depression of even greater magnitude is already baked in the cake.

And that’s not all. It is going to get worse. The total money supply (M3) can be broken down into its state money and bank money components. State money is the high-powered money (the so-called monetary base) that is produced by central banks. Bank money is produced by commercial banks through deposit creation. Contrary to what most people think, bank money is much more important than state money. In Greece, for example, bank money makes up just over 84% of the total money (M3) supply.

With banks so wounded, Greece is destined to become a financial zombie state.