Greece update: EU agrees on a bailout for Greece.

( The most significant point is that Greece is was already being bailed out by the EU and now the EU and IMF will officially bail Greece out if it runs out of other options.) As noted in earlier post, Greece is experiencing a sovereign debt crises. This whole topic is of interest as it is a microcosm of what is happening in the world and is a look at where the world economy is headed. Smaller entities such as businesses states(California), and nations(Greece) have been pursuing unsound fiscal policy and have come to a fork in the road: make reductions in the size of government or continue the same policies and growth of government that led them to this financial situation. Governments and Supranational organizations(SNO's) have responded to this by bailing these entities out. This removes any incentive for the businesses or nations to make any real change from the policies that led them to the point of needing to be bailed out. A recession or downturn, this is part of the business cycle, is where the economy is supposed to correct the misallocation of its resources and inefficient entities are supposed to FAIL. Bailing out entities, or nations, and not allowing them to fail prevents this necessary correction from occurring. This is building the world on an unsound economic foundation by tying the larger economic entities to the weaker ones and forcing the larger economic entities to assume the debt of the weaker entities, these bailouts are delaying the inevitable failure of these entities and is forcing the larger entities to share the same inevitable fate of the smaller entities--failure. We have to keep in mind that Greece is not the only country in the EU facing a debt crises. There are the PIIGS, Portugal, Italy, Ireland, Greece, and Spain. In response to the Greece's government making spending cuts, there have been strikes and civil unrest. The most recent ones included sixty thousand people marching in the streets doing the usual burning and trashing of the cities. If this rioting becomes more widespread, this could impact Greece's response to its financial crises by making it politically very difficult to make any real or meaningful reform to Greece's economic system. With America facing the real possibility of a debt-driven crises , pg 7, with its unfunded liabilities and health care, this could be a picture of what will happen when our government has to make painful spending cuts in social security--is it in its final stage?--and other social and welfare programs . Some states are already making spending cuts in many areas. There have already been minor nation-wide student protest, along with some communist, in response to tuition hikes and other education cuts that were the result of the fall in tax revenues. Americans are not yet at the level of dependence that the Greeks are on; but as noted in earlier post, we are getting there. (A couple of us on this blog are already there with most of our income coming from the government. Would you be angry if your benefits that you are "entitled" to are taken away? What would you do with out it?) I do know that a vast majority of Americans are not going to respond well to the social security cuts, health care rationing, and the coming economic near failure that are all coming our way. This is America so things can't get too bad.


According to this article, Greece is already being bailed out by the European Union,

Yet, the whole debate is misleading[If Greece will be bailed out by the EU]: Greece is already being bailed out by the rest of the union. The European Central Bank (ECB) accepts Greek government bonds as collateral for their lending operations.[1] European banks may buy Greek government bonds (now paying a premium in comparison to German bonds of more than 3%) and use these bonds to get a loan from the ECB at 1% interest — a highly profitable deal.

The banks buy the Greek bonds because they know that the ECB will accept these bonds as collateral for new loans. As the interest rate paid to the ECB is lower than the interest received from Greece, there is a demand for these Greek bonds. Without the acceptance of Greek bonds by the ECB as collateral for its loans, Greece would have to pay much higher interest rates than it does now. Greece is, therefore, already being bailed out

The other countries of the eurozone pay the bill. New euros are, effectively, created by the ECB accepting Greek government bonds as collateral. Greek debts are monetized, and the Greek government spends the money it receives from the bonds to secure support among its population.

Prices start to rise in Greece, and the money flows to other countries, bidding up prices throughout the eurozone. Abroad, people see their buying costs rising faster than their incomes. This is a redistribution in favor of Greece. The Greek government is being bailed out by a constant transfer of purchasing power from the rest of Europe.

The future of the euro is dark because there are such strong incentives for reckless fiscal behavior, not only for Greece but also for other countries. Some of them are in situations similar Greece's. In Spain, official unemployment is approaching 20% and public deficit is 11.4% of GDP. Portugal announced a plan to privatize national assets as its deficit is at 9.3% of GDP. Ireland's housing bubble burst with a deficit of 11.5% of GDP.

The incentives for irresponsible behavior for these and other countries are clear. Why pay for your expenditures by raising unpopular taxes? Why not issue bonds that will be purchased by the creation of new money, even if it finally increases prices in the whole eurozone? Why not externalize the costs of the government expenditures that are so vital to securing political power?

The EU has recently pledged support for Greece. What does this mean? A weaker economic structure for the EU that will lead to a much greater financial crises for the EU and eventually the world.

What is the future of the euro? As we have seen, the inherent incentives in the eurozone encourage destruction of the currency because deficit costs are externalized. Therefore, there are three main possibilities.

1. The Stability and Growth Pact is finally enforced.[This has never happened since it was created] Unfortunately, strong political resistance makes this possibility unlikely.

2. The more conservative member states refuse to continue bailing out the more profligate ones. The economically stronger states force the weaker ones to enter bankruptcy and to leave the monetary union.

3. Countries continue to increase their deficits, attempting to externalize the costs. They yield to the incentives and participate in a spending race, leading to a hyperinflation; and the euro moves closer to collapse.

I am no expert, but it seems like to me that another option under the point B above is for the weaker nations to remain in the EU and for the economically stronger nations to be given greater authority to intervene in the economically weaker nations' economies--this has happened to some extent now and not in a way that will prevent a further pursuit of bad economic policies on the part of the smaller EU nations. That was the point I made under my original post: that this situation could lead to a EU with a stronger political structure but one with a weaker economic structure--much like the recession in America led to more government involvement in the economy.

Will this economic crises lead to the end of the welfare state in Greece? The Greece government is making some spending cuts and reduction in the size of its government, but I don't think this is a long term or real shift away from the welfare state as the reductions are not big and no fundamental change in Greece's welfare state will occur. Greece is being bailed out to some extent by the EU and later by the IMF. Now a real bailout or some formal form of assistance is now a reality. The EU and the IMF are removing any incentive for the smaller EU nations to not run up debt which will lead to a weaker EU economy. Taking into account how the Greece people are reacting, the fact that the EU is preventing a collapse, and the statement below by Mises, I currently believe that this will not lead to the end of the welfare state in Greece; but instead, possibly the expansion of it to the greater EU.

But neither a low standard of living nor progressive impoverishment automatically liquidates an economic system. It gives way to a more efficient system only if people themselves are intelligent enough to comprehend the advantages such a change might bring them.

I don't see the Greek people comprehending this fact until the whole system completely collapses, this won't be allowed to happen. In this case, supranational organizations are actually allowing Greece's welfare state to continue to exist by preventing any major changes because they are bailing them out to some extent now and will be expanded later. This action by the EU and IMF is preventing the current welfare state from collapsing. This is necessary for any real change away from unsustainable government to occur and is preventing any real fundamental change from occurring: the EU and IMF are protecting the status quo. This situation parallels what the American government did by bailing out the banks. This market interference by governments is the crises of intervention as noted by Mises,

All varieties of interference with the market phenomena not only fail to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which-from the point of view of their authors’ and advocates’ valuations—is less desirable than the previous state of affairs which they were designed to alter. If one wants to correct their manifest unsuitableness and preposterousness by supplementing the first acts of intervention with more and more of such acts, one must go farther and farther until the market economy has been entirely destroyed and socialism has been substituted for it.

Most of the major economic powers in the EU are socialist leaning, so how can a union of these nations led to a union based on the free market? The only way to avoid the current EU system from becoming socialist, or a command system, is for a decline of government intervention. Current events indicate that this will happen until a complete collapse occurs.

The smaller EU nations now have no reason to not pursue reckless fiscal policy with the EU pledging a bailout for Greece. They know that maintaining the prestige and existence of the EU is more important to the larger EU nations than enforcing a strong economic union--this union will be maintained at all cost.

It was also a comedown for the French and the European Central Bank, which had opposed turning to the IMF out of fear it would damage the euro's prestige and show that Europe was unable to solve its own financial woes.

To put this change into perspective, this transition of the mixed economies of the world turning towards a command system is not anything new to human history:

It is a poor makeshift to call any age an age of transition. In the living world there is always change. Every age is an age of transition. We may distinguish between social systems that can last and such as are inevitable transitory because they are self-destructive.

According to this guy, what is happening in Greece is a major shift in the world economy, "As Mohammed El-Erian, the CEO of giant bond fund manager PIMCO, wrote in the Financial Times on March 10:"

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily -- and excessively -- through the narrow prism of Greece. Down the road, it will be recognized for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects.[emphasise mine]

On the implications that America's march towards socialism will have on the world economy,

"In a socialist system in which there is neither economic calculation nor capital accounting nor profit computation, there is no room left for managerial activities either. But as long as a socialist commonwealth is still in a position to calculate on the
ground of prices determined on foreign markets, it can also utilize a quasimanagerial
hierarchy to some extent.[...] It has already been pointed out in what sense interventionism liquidates itself and must lead to socialism of the German pattern[That gave rise to Hitler]. Some European countries have already reached this phase, and nobody knows whether or not the United States will follow suit[We now know the answer.]. But as long as the United States clings to the market economy and does not adopt the system of full government control of business, the socialist economies of Western Europe will still be in a position to calculate. Their conduct of business still lacks the most characteristic feature of socialist conduct; it is still based on economic calculation. It is therefore in every respect very different from what it would become if all the world were to turn toward socialism. [Human Action, Mises pg 86]

The whole world is turning towards socialism or a command system. America will take some major steps back from its march towards socialism in the coming elections; but in the long run, America and the world will still be marching towards socialism. This system will be forced upon the world due to its weak economic structure that is leading to a Wiemar-type economic situation. The current mixed economic system can not last a a permanent system. It will eventually give way to either capitalism or totalitarianism.

What does this mean to you? Nothing of importance for a least a decade or more, although I now question if it will happen sooner. Sovereign debt is a ticking time bomb. These recent developments will be of concern to one latter down the road when America and the whole world is facing the very same situation that Greece is. The beginning of this new world system started long ago and we are now in the middle of the transition to this new system. This is a look at the events that are shaping the economic future of America and the world; and if my point above is correct, it would indicate that these sovereign debt crises will lead to international governing bodies with stronger political powers and a global economy with a weaker structure due to the fact that the governments like the EU are preventing and delaying the inevitable world economic failure or cleansing, and by delaying this from happening it is setting this inevitable economic failure up to be a much worse failure than it would have been if these entities had been allowed to fail.