Europe’s Greek Showdown: The Sum Of All Statist Errors

The politicians of Europe are plunging into a form of ideological fratricide as they battle over Greece. And “fratricide” is precisely the right descriptor because in this battle there are no white hats or black hits—-just statists.

Accordingly, all the combatants—the German, Greek and other national politicians and the apparatchiks of Brussels and Frankfurt—- are fundamentally on the wrong path, albeit for different reasons. Yet by collectively indulging in the sum of all statist errors they may ultimately do a service. Namely, discredit and destroy the whole bailout state and central bank driven financialization model that threatens political democracy and capitalist prosperity in Europe——and the rest of the world, too.

The most difficult case is that of the German fiscal disciplinarians. Praise be to Angela Merkel and her resolute opposition to Keynesian fiscal profligacy and her stiff-lipped resistance to the relentless demands for “more stimulus”   from the likes Summers, Geithner, Lew, the IMF and the pundits of the FT, among countless others. At least the Germans recognize that if the EU nations are going devote 49% of GDP to state spending, including nearly a quarter of national income to social transfers, as was the case in 2014, then they bloody well can’t borrow it.

Notwithstanding the alleged German led austerity regime, however, that’s exactly what they are doing. Germany has managed to swim against the surging tide of EU public debt, lowering its leverage ratio from 80% to 76% of GDP in the last four years. Yet the overall debt ratio for the EU-19 has continued to soar—meaning that the rest of the EU drifts ever closer to fiscal disaster.

Euro Area Government Debt As % of GDP

Indeed, Germany’s frustration with the rest of the European fiscal sleepwalkers is more than understandable, as is its fanatical resolve not to give an inch of ground to the Greeks. Or as Merkel’s deputy parliamentary leader, Michael Fuchs told Bloomberg,

There is no way out” for Greece from its treaty obligations….. conditions set for Greece by The Troika (EU, ECB, IMF) for bailout funds “have to be fulfilled…. That’s it, very simple.”

This isn’t just teutonic rigidity. It’s actually all about the so-called capital contribution key—-the share of the EU bailout fund that must be covered by each member country in the event of a default.

At dead center of Greece’s $350 billion of debt is $210 billion owed to the Eurozone bailout mechanism. Germany’s share of that is 27% or roughly $57 billion. Yet the prospect of tapping the German taxpayers for some substantial part of that liability in the event of a Greek default is not the main problem—-even as it would mightily catalyze Germany’s incipient anti-EU party.

The real nightmare for Merkel’s government is that the next two largest countries in the capital key are on a fast track toward their own fiscal demise. So what puts a stiff spine into its insistence that Greece fulfill the letter of its MOU obligations is that if either France or Italy is called upon to cover losses, the whole bailout scheme will go up in smoke.

There is not a snowball’s chance that the already faltering governments of either country would survive a capital call from the EU bailout funds. Indeed, the prospect of a partnership with Marine Le Pen and Beppe Grillo is undutedly what was on German Finance minister Schaeuble’s mind when this picture was snapped during his meeting with Varoufakis.

Just consider the delusionary partners Germany has at present—even before any Syriza-style election upheavals. In another of his patented outbursts of truth over the weekend, the Greek finance minister suggested that Italy was next and that it too, will discover “it is impossible to remain inside the straightjacket of austerity.”

That drew an immediate response from Italy’s Economy Minister, Pier Carlo Padoan, who tweeted to the world that Italy’s debt is “solid and sustainable”.  

Is he kidding? Italy’s GDP is dead in the water and has been since 2007. Yet it has continued to run massive budget deficits—about $75 billion this year alone–so its debt to GDP ratio has gone nearly vertical.

Indeed, the very notion that the trend shown below has any resemblance to a “solid and sustainable” fiscal posture is indicative of  the sheer corruption of discourse that has been introduced by the Keynesian commentariat and the policy apparatchiks of the EU, IMF and Washington.

Their specious claim that all is well in Italy rests on the fact  that it has close to a “primary surplus” before interest payments.

So what! The undeniable fact is that Italy is borrowing heavily year after year to pay its interest, and is thereby impaling itself in a debt trap. That is, a situation so hopeless that no imaginable Italian government can stop the fiscal hemorrhage—- owing to the fact that the vast scale of the tax increases and spending cuts that would be necessary to reverse the debt spiral would be too toxic politically to accomplish.

And that’s the crucial point. The Keynesian modelers can always make the debt curve bend downward by assuming that the vigorous application of more of the same poison—deficit finance—can magically cause Italy’s “aggregate demand” and GDP to spring upwards and grow out from under the debt. But Europe’s fiscal crisis is no longer about whiteboard policy options; its about the absolute breakdown of fiscal governance.