An Unsustainable Solution

Yesterday’s Greek election has put in power, at least temporarily, the New Democracy party and their plans for further austerity which will enable Greece to obtain more of the much needed bailout funds from the EU.  Does the phrase ‘rearranging the deck chairs on the Titanic’ ring true here?  The election forces a coalition government with the socialist Pasok party which will equate to only a slight majority in the Greek parliament.  The leftist Syriza party which placed second in Sundays vote will still make for formidable opposition to the austerity measures going forward.  Greece’s $395 billion national debt is now 141% of its GDP and is clearly not fixable with austerity alone.  With its citizens now earning 30% less than a year ago and their government sponsored lifelong entitlements now in jeopardy, it seems to be wishful thinking at best that civil unrest will abate or that the mindset of its people will change in unison for the common good.

The focus will soon switch to Spain where they have recently received external funds to shore up their troubled banking system.  With unemployment now running at 25% in general and close to 45% for those 25 years of age and younger,  the banking system is hard pressed to collect on the troubled loans straining their system.  Spain’s national debt of $1 trillion is 78% of its GDP so for the time being there is a net productive economy working in their favor.  The real estate crisis straining their banks shows no signs of improving near term, and without a meaningful improvement in their employment situation, the debt to GDP ratio is likely to worsen.  Record borrowing costs for short term bonds will further constrain the governments’ ability maintain fiscal prudence.

Italy appears to be the accident waiting to happen with its $2.3 trillion debt running at 121% of GDP.  Like Spain, its borrowing costs are at record levels and adding additional strain to its already fragile economy.  Social entitlements are choking their system and there seems to be no willingness on the part of its unions or citizenry in general to rework the out of date guarantees of yesteryear.

With all of this going on around them, France elected as its president the committed socialist Francois Hollande.  One of his first acts as president was to roll back the retirement age to 60 from 62.  Socialists won the lower house elections this past weekend and now control 314 out of the 577 parliamentary seats.  A lower retirement age and more public service workers seems to be the winning formula for winning elections in France.  Hiking the tax rates for banks and corporations and imposing a top rate of 75% on its highest earners to pay for this largess makes little sense for a country with $2.2 trillion of debt and running close to 90% of its GDP.

There is far too much dependence on the EU to bailout and pay for this fiscal fantasy across the continent.  Although individually unique in many respects, these problems are collectively disastrous without fundamental changes of entitlement thinking.  People have to work longer and all have to be responsible for contributing more into pension and benefit funds.  The overtaxing of corporations and high earners only takes away the possibility of expanding the private sector workforce.  Social spending will always be a necessity at some level, but the sense that it is always someone else’s responsibility to pay for it is just wrong.  At some point the strongest members of the EU will say enough is enough and then the real trouble begins, because no matter how often you rearrange the deck chairs, the ship still sinks.

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