Crisis Management And Reality Denial

Duly Noted

The luxury of public affairs ignorance supports cheating elites.

Two weeks ago the writer posted a piece here to discuss some overlooked reasons for bad governance. The essay assigned some responsibility to an electorate without an interest in its own fate, an indulgent political culture based on ignorance, and the neglected ability to render rational decisions. Since then, what is conveniently tagged to be the Greek crisis, has become a festering sore. Newly, the puss had broken through the bandages that, by catering to unconcerned citizens, political healers have applied in lieu of a genuine remedy. The purpose of the maneuver was not to help Greece but to hide the helper’s political responsibility.

Regarding the failing economies whose visible tip is associated with “Greece”, the malady and the applied medicine do not match. The ailment, long denied and then bagatellized cannot be covered up any more. Driven by the illusions of ambitious political elites, a number of EU-zone societies have been misled to live above their means. Greece had the misfortune to become the visible peak of an iceberg. For years now, expanding the EU and within it the Euro, seemed to be an easy way to become upgraded. Today it is apparent that, on the solid foundation of Styrofoam, no political-economic skyscraper can stand. 

Several hundred billions have been “invested” to prop up the collapsing edifice and to restore the appearance of normality. Given the resistance of the calamity, a reassessment of our ways to handle disasters is warranted. Instead, the response to failure is to inject into the organism more poison in the hope that ultimately it might “work”. The insertion of “more” to attain the hoped for response reminds one of the tactic of the First World War. The carnage of the Western Front came from the fantasy-deprived repetition of failed moves. It was expected that after an even greater input, more of the same would bring better results. 

The contemporary equivalent of not admitting the inefficiency of attempted solutions has clear symptoms. One is to avoid diagnosing forthrightly the cause of present vicissitudes. This reluctance is followed by applying remedies that, at their best, might moderate the imagined illness but that worsen the real crisis we actually face. Both errors, ignoring what one knows and persevering in doing what does, does not fit the situation and are tied to a political cause. 

Some temporarily tolerated deficits can be of use. Spending borrowed money for profit-oriented investment that caters to an anticipated future demand, is useful. If the investment creates new productivity, then the ability is created to return the outlay with a reward to all. We should know that, obviously, borrowing to finance non-productive political pet-projects implies that the repayment will hardly be forthcoming. Increasing employment by creating tens of thousands of government jobs as Hollande has promised, tells what is meant. Approval and imitation by Obama will not change the facts. Newly, such schemes are sold as “growth” projects that are allegedly the alternative to harmful “saving” measures. In these cases, the term is used to misrepresent the substance.  

In violation of the above common sense rule, some countries, such as Greece, were encouraged to borrow cheap money. Credit was made cheap by the politics of eurocracy that skewed the relationship between borrowing costs and the returns on the investment. The costs of borrowing corresponded to a “northern” risk and productivity. The undertaking ignored the implicit possibilities at the place where the money was directed. This encouraged consumption spending and increased future outlays. These latter reflected the real obligation and the costs of eventual reimbursement without increasing the ability to generate the funds to repay the debts. The legitimacy and sense of this procedure is questionable even if the “Eurobonds” now in the pipeline would institutionalize the abuse under a pleasing label. Could it be that a recipe that contains the virus, which caused the original ailment, will cure the patient?

Essentially, public spending to reward the ruling party’s voters by extending “free” benefits and the creation of sinecures completed the picture. Now Brussels wants to “save” Greece to cover up its own responsibility. However, its earlier help has only expanded the state sector. That policy came at the expense of productivity. After all, once you have an expanding bureaucracy you need to create something for it to regulate. Therefore, the funds pumped in lowered output but by regulating something that worked by itself and rose unit costs to the core EU’s level. Together with the growing deficit, this would have felled the economic elephant which Greece is not.

Lending by financial institutions took money by paying northern rates to their depositors and handed it at southern rates to creditors. The prudent wonders whether these “investors” are entirely without blame. The political systems of the north admitted for political reasons economically unqualified countries. Then, pressured by their political error, they ignored the growing risk even when the creaking of the edifice became deafening. Therefore, the political movers of the EU are to be blamed for the bankruptcies that are now being covered up by lending (borrowed) billions. The held continues to hide what does not respond to therapy under thickening bandages.

Once the borrower cannot make his payments for the old VW, the solution is not to lend him more to cover the costs of a new Beemer. Effective crisis management, if it is to go beyond the next election by postponing the day of reckoning, demands a change of tactics. Rather than misspending trillions after billions have already been shredded, an unmerciful assessment of the errors is needed. The results need to be shared with the voter in whose pocket the hole is being cut. Thereafter an honest correction of the course away from the shoals needs to be presented. That demands that the faults of the hither system be admitted and that the responsibility of the makers of policy need to be stated. At the end of the process of hanging out the laundry to dry, the extent of the sacrifices to be made must be communicated. 

It does not take much fantasy to guess that the exercise of pouring clear water into the glass means the end of numerous political careers, undermines the power of several parties,  and terminates some personally profitable strategies. Heads will be rolling because the era of bribing voters with their own money must end. The givers that were really takers will be out of business once the public awakes and statesmen will talk “blood, sweat and tears” instead of promising palliatives.

As things stand, elections are still won –as France and Germany and what the campaign in the USA indicates- by telling inventive tales worthy of Andersen’s pen. Yes, the voter is lied to and he enjoys hearing soothing lullabies. In part, this makes him a victim of his elected leaders. For this reason, the citizen’s responsibility should not be ignored. He has proven himself distractible and gullible even though the unpleasant reality has been accessible. That reality does not dissipate if the bearer of bad news is decapitated. A crisis postponed is not a crisis prevented. How radical the reaction will be once the reckoning takes place is anyone’s guess. The worst-case scenario is not the pain that comes after the accounts are made but that, at that moment, those who had the courage and common sense to sound the alarm bells earlier will again be overheard.