About causes and effects.

To overcome the economic downturn its causes need to be identified. The wording used must not camouflage an inconvenient reality. Often, this criterion is not met. The presentation and the inferred conclusions are not realistic nor are they entirely honest.

The crisis has two centers. One is the United States; the other is “Europe”. Due to its politics, the malady is unlike previous ones. Therefore, traditional remedies fail. For this reason, those that follow stock prices notice that frequently when pure economics suggest a market move, stocks head in the opposite direction than anticipated. 

An oddity is that the enterprises carry price tags that do not fit them. Quoted firms that produce “real things” show decent profits. The more so if we consider the head wind of the gyration of exchange rates and regulations. While this is the case, the share price of well-managed firms that produce wanted wares at a reasonable price might fall. That happens even if their business is better than the asset’s price. Price earnings ratios ignore the “rules” of textbooks. This tells that there is an underlying problem that expresses itself in the economy but whose roots are elsewhere. 

What is broken is the political system that had penetrated the economy. The failure’s cause is that the political class reacts to glitches with more interference. Especially so when the cause is an error of a political remedy. 

In such cases the assignment of responsibility with which the recovery begins, is resisted. The state’s managing classes –whether “right” or “left”- agree on a postulate while they search for excuses that avoids analysis. It is that the market system of “capitalism” based on individually owned capital is failing. The insinuation that ignores a century’s evidence is that state held capital is the solution. Not collectivism has failed, so that more intervention remains the solution. The political replacement of market forces, - more of the medicine that did not work - is said to be the ladder out of the pit. 

In America, politics had encouraged lenders to make what would have been bad loans without the pressure to act. Welfare by house ownership created a new reality. Throwing money at borrowers created the impression that risks could be discounted because government has suspended the rules of prudence. Easy credit drew buyers into the market that could not afford their purchase. The artificial demand exploded prices and that led to a bubble. The process propelled itself and real estate profits fed the illusion of safe transactions. Chimeras diminished risk perception and distorted the relationship between price and value. Reality reasserted itself once there were more sellers at inflated prices than buyers.

European politics created its own crisis. The motor came from the wish to shorten the way to a centralized European entity. The organic growth toward a confederation was to be stimulated to produce a federation. Politicians of all parties have staked their public life on the project. The bureaucracy cheered as such projects preempted slow convergence from the grass roots up. 

The Euro as a common currency emerged to express the political will to generate unity. However, the currency without a country was not an expression of achieved unity but of the will to create it by economic means. The € is a head whose matching body was to grow like the limbs of some animals can. Revealingly, the stubborn attempt to ride the dead horse has not ceased in the light of the now unfolding systemic malfunction. 

Politics overriding economic realities in the pursuit of a unity that the “subjects” do not want, remains a goal. The trial balloon of “Eurobonds” – certificates based on high German credit worthiness but with a “Greek” content- were shelved temporarily. Such bonds will be issued once people get used to the idea. This will slow the sinking but not plug the leaks. Then, too rescue these assets, an “economic government” for “Europe” will be imposed. This instrument of redistribution dear to those that will administer it is meant to be the first organ of a European government. Whether these projects will be realized depends on the extent that the crisis can be exploited and on the submissiveness of those that are to pay.

When we seize up the muck that blocks the cart, we tend to concentrate on Greece. The significant part of her calamity is that she is not alone. Hardly any EU state meets the membership requirements of the € zone. Germany, the guarantor of all bailouts is included. It began when Europe launched and extended the € although hardly anyone qualified for it. Yes, there were sanctions, but as we see, their enforcement lacked a mechanism.  In comparison, a house of cards appears to be a stable structure. 

Why the built-in toothlessness, and how come that late entrants, such as Greece, were allowed to cook the books? Statist programs are easy to realize if the EU gets extended powers. The centralization of authority and spreading of the zone of control empowers bureaucratic institutions. That can happen relatively unhindered, as these agencies are remote from the people that are represented in national entities.

The moment’s solution is simple. The “North” will pay and the Greeks will do their bit. The “North”, -mainly the Germans who also have an “illegal” deficit- is to cover Athens’ due payments. The donor lends money so that the interest on his investment can be repaid. It is a version of musical chairs. Someone lands on the floor as an infected source vouches for a disabled party. This deal is supposed to create the confidence that is needed to master the crisis. “Anesthetics” seem to be a more proper term.

While the Germans guarantee loans, the Greeks are to reduce their growing red ink. Much of this involves reducing the bureaucracy. In the abstract, the idea is good but it ignores the extent of public sector jobs. Ditto for protected activities that cannot stand the competition that follows upon deregulation. The long-term benefit is considerable but will not be appreciated by the man in the street. This is why he is angry and striking. 

Bureaucrats need to seem busy. Frequently, their actions preempt what society is able to provide. If so, the job is faster performed and cheaper than under a bureau’s tutelage. The benefit of dismissals might be that the limitations which stifle society are removed. The problem: more than 80% of jobholders have “tenure” and cannot be fired. State jobs became a human right in a reform-resistant system that bought loyalty by handouts and featherbedding. Third world productivity at first world prices is the upshot.

Along with reduced expenditures, Greece is to raise its tax revenue. Although the EU scrutinizes compliance tax revenue has declined. The amount due, 16% of GNP, is to be collected by special agents. Tellingly, the arrears grew in six years from 11 to € 37 bn. Last year only 64% of the money could be collected. Regardless of a worsening situation, the EU reported significant progressso as to be enabled to transfer billions. 

Higher taxes will lead to a wider gap between the amount declared and collected. However, the collectors are organized. This will make it hard to shake up the system. There is more. State salaries will be cut by 40%. Retirement incomes by 30%. Millions of low-income individuals will have to pay taxes. No surprise that Greece fails to meet its goals and that an emaciated society resists with growing disobedience the starvation diet to which it is subjected. Nose-diving incomes could make Greece ungovernable.

Greece’s not entirely unique plight confirms that, if we distribute not what we have earned but what we have not yet created, then there will be less to divide. For long, the € zone’s cheap credits suspended this law. The time when you could have your cake and eat it and second servings too, is over. A recovery faces two obstacles. First, the EU’s political class is unprepared to acknowledge its mistakes and therefore it resists the admission of bankruptcy. Second, a way of life has developed that includes bad habits. Benign corruption with mass participation is one of these. Stopping cold turkey will hurt and anger those whose standard of living must drop and who are asked to abandon their accustomed ways.