The Bear’s Lair: Beware of Greeks demanding gifts

“We are not worried. Our team is strong. We have Icarus in the wings” chortled Greek leftist Alexis Tsipras after his election victory. You’d think a Greek would remember that Icarus fell to a watery grave when his wings melted – the country’s education system is clearly not what it was. All the same, apart from a few cheap laughs, it’s worth reflecting what his victory will bring both Greece and the rest of Europe.

Greece has been a problem for the EU ever since it joined in 1981. The 1980s prime minister Andreas Papandreou was both highly corrupt and thoroughly anti-Western, and developed considerable skill in sucking subsidies and special deals for both Greece and his cronies out of the Brussels bureaucracy. (At that time Greece was both small and much poorer than any other EU member, so playing to the liberal conscience in Brussels generally worked well – it was only taxpayers’ money, after all.)

By 2008, buoyed by EU subsidies, Greece had achieved a per capita GDP of $32,000. That was higher than all of central Europe and about three times the level of its neighbors Bulgaria, Macedonia and Romania, all of which had been capitalist for a couple of decades by then and were considerably better run.

As an indication of how badly Greece was run even before Tsipras won last week’s election, you can look at the ratings for the country by Transparency International, the Heritage Foundation and the World Bank, which between them cover the gamut of political/economic belief in the West. On Transparency International’s Corruption Perceptions Index, Greece ranked 69th in 2014, equal with Bulgaria and Romania and below Macedonia. That’s actually a 10-place improvement over 2010 – center-right prime minister Georgios Samaras had some genuine if modest progress to his credit. Heritage International’s 2015 Index of Economic Freedom ranked Greece an appalling 130th, hugely below its Balkan neighbors, all of which ranked in the 50s. Finally, even the World Bank’s left-friendly 2015 Ease of Doing Business ranking put Greece at #61 compared with Bulgaria, Macedonia and Romania at #38, #30 and #48 respectively.

Given those ratings, prepared by agencies varying in their worldviews, it’s clear that Greece’s purchasing power gross national income per capita, recorded by the World Bank at $25,700 in 2013, is still far too high compared with its fellow EU members Bulgaria at $15,200, Romania at $18,400, or better-run non-member Macedonia at $11,500. History has repeatedly shown that there is a limit on the living standards that can be achieved in kleptocratic states, in which there are few returns for legitimate innovation and business capability and massive rewards for insider dealing and corruption. Greece has since 1981 managed to suck resources out of its richer neighbors to raise living standards artificially far above that limit. Tsipras intends to demand a redoubling of that resource transfer; he must be resisted.

Tsipras is right that it is impossible to achieve through government cuts the further austerity needed to get Greek living standards to their appropriate level. The necessary adjustment must instead be achieved by Greece leaving the euro and allowing its currency to float downwards. Northern European taxpayers have been supporting this mess since 1981. Tsipras’ election, against a government that was at least modestly improving Greece’s position, means that it is time for them to stop doing so.

Tsipras has promised to increase tax compliance, as well as restoring many of the cuts in social programs that were made in the last few years. However, tax increases have already been tried by the previous government; while raising the tax to GDP ratio four percentage points to 33% from 2009 to 2012 that ratio appears to have topped out at that level and to be unable to rise further. Given Syriza’s hostile attitude to private wealth, it’s likely that tax flight will soar following their election and that Greek tax compliance, already abominable, will fall to hitherto unimagined levels.

After four years of grinding austerity, Greece is currently running a “primary surplus” on its budget. However this is a spurious statistic, much loved by spendthrift Brazilians; it actually means the country is running a massive deficit when interest on its huge debt is factored in. Given the likelihood of capital flight (which after all is a big problem in Russia, which ranked far above Greece on the Heritage survey and immediately below it on the World Bank one) tax collection is likely to decline rather than increase. Needless to say, one would be mad indeed to start a small business under a Syriza government. So a Greek debt crisis appears unavoidable, even with a helpful degree of laxity among the EU’s paymasters.

Giving in to Tsipras would be bad news indeed for the euro’s future and indeed for that of the EU. Spain’s Podemos, which professes the same mad-left belief system as Tsipras’ Syriza, would be immensely strengthened, probably sufficiently so as to win the next Spanish election, due later this year. Italy’s feeble attempts at reform would halt altogether, as the innumerable special interests in that country would see a chance to preserve their privileges by leeching off northern European taxpayers. France would probably tip over into the ranks of the leechers from the shrinking group of northern European resource generators.

In such circumstances, the euro would be doomed. It’s one thing to decree in an academic vacuum that a common currency requires income transfers from the richer states of Europe to the poorer; it’s quite another to require such transfers in hard cash from the honest burghers of Munich, Amsterdam and Helsinki to prop up Tsipras and his corrupt leftist looters. Redistribution schemes are generally of pretty dubious morality. In this case the doubtful morality would be plain for all to see, and revulsion to it would be infinitely reinforced by a rebirth of nationalism, in itself healthy but devastatingly bad for trans-national projects such as the euro.

The other alternative would be to throw Greece out of the euro, which should have been done five years ago. It would probably not be necessary to throw Greece out of the EU; there are now enough corrupt ineptly-run Balkan members of the EU (with more to come) that Greece’s approach to life sticks out less among the EU’s other members than it did in 1981.

In 2010 it was disclosed that Greece was nowhere near fulfilling the Maastricht Criteria for euro membership and never had been and that its 2001 entry into the euro had been accomplished through accounting fraud abetted by Goldman Sachs. Rather than propping Greece up with huge subsidies and a debt renegotiation, on promises of better behavior in the future, the EU authorities should have realized that behavior sufficiently better as to solve Greece’s problems was most unlikely to occur, and would cause huge political damage if it was attempted. Had Greece been thrown out of the euro in 2010, its necessary decline in living standards would have been imposed by devaluation of the “new drachma” rather than by the EU or its own government, and so much less political damage would have been caused.

If Greece were to exit the euro now, its currency the “new drachma” would decline rapidly to 50-60% of its previous value, as Greek living standards were brought in line with those of its neighbors in Bulgaria, Romania and Macedonia. Following this move, Greek small businesses would find their possibilities immeasurably increased and exporters would thrive, while imports became very expensive indeed for the Greek population. Of course, with Tsipras in power the benefits of this devaluation would almost certainly be absorbed in state bloat and yet further corruption, so that Greek living standards would decline yet further, but that’s what the silly people voted for; they deserve it.

Meanwhile, the euro itself would be immeasurably strengthened, as the other weak sisters, seeing the decline in Greek living standards, would redouble their own efforts at public sector austerity. Provided Podemos was defeated in Spain later this year (which would be more likely to happen, since Syriza’s success had led not to further handouts but to Greek impoverishment) both Spain and Italy should be able to right their economies with only modest additional effort. The recent revulsion against profligacy in France suggests that there, too, a Greek sacrifice should produce sufficient improvement.

This strengthening of the euro would not remove the political difficulties of the EU, notably the blatant expansionism of its monstrous bureaucracy, but it would provide the great majority of Europeans with a better, more disciplined future than would be available through more handouts. It would at least allow the euro to stagger on towards the next crisis, rather than collapsing as would be the inevitable end-result of a Greek bailout.

“Beware of Greeks bearing gifts” (Timeo Daneos et dona ferentes) wrote Vergil in the Aeneid two thousand years ago. The EU hasn’t seen many gifts from Greece since 1981; instead there has been a steady procession of Greeks demanding gifts, ever more urgently. It’s time for the handouts to stop.


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)