After The French Vote, Is This The End Of Europe?

WASHINGTON – The triumph at the polls for French regional elections of the right-wing National Front led by Marine Le Pen is to be taken very, very seriously. This is not just a knee-jerk reaction to the Paris shootings perpetrated by a small group of Islamic terrorists. This victory of the far right is an indication of a profound spiritual and moral crisis within France, a country that until yesterday was considered a true democracy, and a pillar of the EU.

The National Front 

The National Front is now poised to get control over many French regions. Right now, based on the recent vote, it is the largest party in France, even though by a small margin. The Socialist Party is badly beaten, and almost dead. The “respectable” conservative party, the Republicans, is running second.

This electoral contest is not over yet. It is possible that in the second round an improbable coalition of Socialists and Republicans may be able to stop the National Front wave.

Xenophobia and nationalism 

Still, what we have now is that a very large segment of the French society voted for an openly xenophobic, anti-immigrant, anti-Muslim, anti Europe, and anti-Euro party.

Look, there is no depth to any of this. But there is a lot of emotional intensity. This is right-wing populism, with tinges of a regression to uncivilized barbarism. But this is unfortunately the way in which a despondent and frustrated French society is giving political expression to its despair.

The solution to all this 

The citizens look at French economic decline, and at what they perceive as societal deterioration created by millions of mostly Muslim immigrants who cannot be assimilated. In fact, some of them turn out to be terrorists.

It is a bad mix. Economic decline, diminishing opportunities, mediocre leadership, and the perception that “the enemy within” will destroy us. Hence the popularity of an openly xenophobic, nationalist force that promises to fix all this –quickly and with harsh methods, if needed.

Civilized people will say that this is impossible. This madness cannot last. Common sense will have to prevail. The National Front will disappear soon, as it should. Well, the fact is that as France became weaker, the National Front got stronger. The politics of despair work for those who promise “solutions”, however unrealistic they may be.

Impact on Europe 

Whatever the implications for France, from a European perspective this political development spells disaster. If you go back a few years broadly speaking there was some, although usually tepid, support for increased European integration.

But now, with a decidedly anti-EU political force in a strong position in France, one of the key EU pillars, forget about any plans of further integration. Nothing important can happen within the EU without strong French support. All far-reaching initiatives are based on a prior agreement between France and Germany. The anti-EU National Front is now strong enough to make this agreement virtually impossible.

And bear in mind that the rise of the French National Front is not an isolated phenomenon. Indeed, if we review what is happening across Europe, we get an alarming picture.

Anti-EU sentiments on the rise 

In Hungary there is Viktor Orban, a would be dictator who talks about the need for an illiberal democracy. In Italy you have the Lega Nord, a nationalist, northern secessionist party now led by Matteo Salvini, and “5 Stelle”, a large anti-system party, led by Beppe Grillo. In Finland there are nationalists and xenophobes. In Denmark there is a growing anti-EU sentiment. In Greece you have the ultra right Golden Dawn party. In Poland the nationalists of the Law and Justice Party led by Jaroslaw Kaczynski just won the elections. Add to all this perennially undecided Great Britain that at some point will have to vote on whether to continue its membership in the EU or not.

And there is more. New parties on the left, like Syriza in Greece, led by Prime Minister Alexis Tsipras, and Podemos in Spain, while promoting a totally different political agenda, are certainly not pro-EU. Finally, consider the centrifugal impulses created by the strong support for independence in Catalonia and in Scotland, and “Europe” begins to look like a real political mess.

No real support for further EU integration 

What does all this mean? It means that the ideological and moral glue that kept Europe together, weak as it was, has gotten a lot weaker in the past couple of years.

The economic crisis, the EU-imposed austerity on profligate states, high unemployment, lower standards of living, the endless stream of refugees from Africa, and now Syria, coupled with more Islamic terrorism, created a sense of existential threat.

Hence the popularity of anti-system political forces that promise strong measures to fix all this, quickly. Whatever their vacuous agendas, these now stronger parties on the right and on the left share an anti-EU bias.

Shaky EU foundations 

Sure enough, there are strong, established, shared economic interests that keep Europe together. There is a large free trade area, a common currency, and a lot more. Yes, but “Europe” as a believable political entity does not exist.

At best, it is a “Supercharged Regional Chamber of Commerce”. This entity is held together by a myriad of agreements and binding rules. But these agreements are not understood or appreciated by the average European.

And now you have the emergence of powerful centrifugal forces that do not believe in the value of free trade and a common currency. They dream of rebuilding their own nations and protecting their economies. From their perspective, Europe is in fact a menace.

Yes, these are silly ideas. Regressing into protectionism in this era of globalization makes no sense. But it does not matter. These “political platforms”, such as they are, now have millions of believers.

A weaker Europe 

So, is it over for the Brussels technocrats, and all the EU supra national institutions? No, it is not over. But forget about any new momentum leading to further European integration. Above all, forget about all dreams of any process that will lead to a strong and assertive United Federal Europe. This will probably never happen.

May be Marine Le Pen and her opposite numbers across Europe are not strong enough to destroy all that has been created since 1957.

But they seem strong enough to make whatever Europe there is even weaker, and even more ineffective.

Greece: Anti-Austerity Tsipras Will Implement Austerity

WASHINGTON – The sovereign people of Greece, in their wisdom, just decided to give another chance to Alexis Tsipras and his Syriza-led government. And what is the political mandate?

New mandate for Syriza

Well, the new mandate is to implement the draconian austerity pact that Tsipras agreed to earlier on with Brussels. So, is Syriza now pro-austerity? Well, it did not use to be. In fact, it won an earlier election on a platform that strongly opposed most of the austerity measures agreed to by the previous New Democracy conservative government.

The story is complicated 

Now, let see if we can clarify all this. Tsipras won a previous national elections with a pledge to renegotiate the entire austerity/loans package with the EU/ECB/IMF. The negotiations were difficult, in fact messy. In the end, Tsipras fired his Finance Minister, (apparently to please Brussels). The EU finally came up with a “take it or leave it” package, which included lots of painful stuff (spending cuts, smaller pension, etc.). Tsipras did not like this at all. He ordered a referendum on the package, inviting Greek citizens to vote “No”. The vote was held. The “No” people won –by a huge margin.

And then, what? Well, then Tsipras, after a lot of noise, accepted, yes, accepted, another huge rescue package –with even more onerous conditions for Greece than the one he urged his countrymen to vote against in the referendum.


(Are you with me, so far?)

And who will implement this package on the Greek side? Aware of major dissent within his own Syriza ranks, Tsipras dissolved parliament and ordered new elections.

And what did the Greeks do? Did they vote Tsipras out of office, as he is manifestly guilty of having turned sides on the critical austerity issue? Again, please remember that the Greeks had previously voted for him precisely because he was the leader of the most strident anti-austerity party. Later on, they followed his wishes and voted “No” on the referendum on the package that the evil EU wanted to impose on Greece.

Given all this, what did the Greeks do? They voted for Syriza, his party. And so Tsipras is again Prime Minister. Except that his program is now the opposite of the one that got him elected the first time.

Anti-austerity is now pro-austerity 

So, here we go. The anti-austerity party is now pro-austerity. The Greeks were vehemently opposed to more fiscal pain when it was administered by a center right government. But now that even more brutal measures have been agreed to by a leftist government, the whole thing all of a sudden becomes acceptable.

This is a farce

If you think that this looks like the plot of a Hollywood farce, you are right.

In fact, it is a farce.

The entire Greek leadership is a farce. The EU leadership that actually believes to have “solved” the never-ending Greek crisis is a farce. And the Greeks who brought this calamity upon themselves are both actors and spectators in the same farce.

Unserious country 

The only thing is that, in reality, while some aspects of this story are indeed comical, there will be real suffering in a hapless country run mostly by thieves, ideologues, and clueless amateurs.

FT: “Corbyn Is A Disastrous Choice”

WASHINGTON – Here is how The Financial Times sees the election of Jeremy Corbyn as the new leader of Britain’s Labour party: “Jeremy Corbyn’s resounding election of the Labour party is a catastrophe for the British center-left…Under Mr. Corbyn, New Labour looks dead and buried and the party’s chances of returning to power remote at best….This is a bad day for Labour and worse for the country”.

How did this happen? 

Well, not much room for equivocation here. Bad leader. Bad choice. Bad for the country.

Well, having noted that, how could this happen in Britain, supposedly a mature, in fact sophisticated, democracy? How is it possible that supposedly mature adults would choose as the leader of the main opposition party a man who believes in really silly ideas like nationalisations, and in social justice achieved via income redistribution? Corbyn is also anti-American, while he would like to get the UK out of NATO. He speaks well of Hamas and Hezbollah, while he is an admirer of the late Hugo Chavez, Venezuela’s semi-dictator and the man who led the country into a real economic hell.

Indeed, how is this possible? We have seen other anti-establishment, extreme leaders and brand new parties (Syriza, Podemos) emerging in Europe. But mostly this has happened in really beat-up countries such as Greece or Spain. All in all, Britain, while not doing splendidly, is way ahead of Southern Europe.

Unhinged militants 

So, why are Labour rank and file, those who elected Corbyn, so unhinged? Regardless of any consideration about the almost impossibility to win a future general election with such an extreme-left leader, why is it that so many British citizens believe that Mr. Corbyn’s redistribution ideas are actually modern and appropriate?

Inequality above all 

It is true that most capitalistic economies are facing wider and wider income gaps. Very few rich got very rich, the rest are barely getting by. Yes, this is true. And this is a real issue. But the idea that taking money away from the rich, while redistributing to the poor or semi-poor, will really help all British citizens to be more prosperous is a dream.

In fact, the main problem facing most mature democratic societies is low growth and a bloated and inefficient public sector. Lack of growth, not inequality is the main problem. We need to broaden the economic base and enhance participation. More people working.

Focus on growth, not inequality

Europe, America, Canada, Australia and many other countries need to understand that their leaders must do their very best to foster broad-based economic growth. This means improving access to education, flexible labor markets, deregulation, lower corporate taxes, incentives for entrepreneurs and innovators.

In essence, exactly the opposite of what Mr. Corbyn and his enthusiastic supporters advocate.


Can We Find Decent People To Fix Our Democracies?

WASHINGTON – Democracy and free markets anyone? By this I mean opting for a real republican government with fair rules, transparency, honesty, and constructive debates. And office holders who really believe that their job is to further the public good, while allowing private citizens who play by clear and fair rules to engage in whatever activity they may be interested in.

What happened to liberal democracies? 

Does any of this still exist? The answer is a qualified yes. However, the real article is almost extinct. There are only approximations. Unfortunately, most self-described liberal democracies are only distant relatives of the original model.

In most Western countries, citizens mistakenly believe that it is perfectly alright to bend the political process and the state institutions so that they will provide for them, or at least subsidize them. This entitlement mind frame is a perversion of any honest notion of the state as guardian of the public good. And yet, the “welfare state” model is now the standard, with plenty of intellectuals willing to affirm its legitimacy and high moral standing.

Welfare and statism 

To make things worse, the welfare state goes hand in hand with a statist economic model. Many people do not believe that public institutions should limit themselves to the role of impartial arbiters and enforcers when economic rules are broken. No, the state should run things, (banks, utilities, airlines, railways, factories), or at a very least dictate via minute regulations how they should be run.

All this amounts to a state that got bigger, more expensive and more powerful, and in most cases more wasteful. As a consequence, some people in charge of powerful institutions that control huge assets or resources have enormous power. And this often unchecked power is an open invitation to corruption.


Corruption in turn has the effect of a chronic, debilitating disease. It is nasty parasite that eats up resources, while engendering cynicism and sometimes despair. Who will have the enthusiasm to think about starting a new business when they know that at each step of the way there will an intrusive bureaucracy run by voracious corrupt officials demanding bribes?

Well, this is the picture. In some instances, it gets to be too much. And people protest, loudly. (Witness what is going on right now in Brazil, with daily street protests and demands for the impeachment of President Dilma Rousseff).

Ironically, even semi-dictators complain about corruption. Vladimir Putin commented that there is way too much corruption in the recently annexed Crimea. Think of that. According to Putin, the once oppressed ethnic Russians of Crimea, instead of showing gratitude towards their Russian liberators, engage in all sorts of shady practices. The level of corruption in Crimea is now so bad that even Putin thinks it is way too much.

Here is the picture 

Well, without being too gloomy, here is the picture. Europe is slowly sinking under the weight of unsustainable public debt. Indeed, lacking enough revenue, this is the only way to finance all the benefits. Too much debt weighs on the economy. Too many regulations impede innovation, business formation, and therefore the creation of new employment. A bloated public sector fosters waste and corruption.

These days, confronted with economic stagnation, lack of opportunity and high unemployment, people are restless and unhappy. This being the case, they could opt for better political leaders.

But no, they do not do this. With few and limited exceptions, no way that any political force proposing to go back to the original free market, liberal democratic model could get vast popular support and succeed. “Yes, reforms may be nice, but don’t even think of touching my benefits”.

Looking for a “Big Man” 

As real world solutions are excluded, the only alternative seems to be escapism. Yes, let’s elect someone —A Big Man— who will make all this go away. Let’s elect someone who will tell us that we are the innocent victims of a vicious cabal made out of corrupt politicians in bed with exploitative financiers. And then we have all the illegal immigrants who steal our jobs, not to mention unfair trading partners who cheat. Therefore, let’s elect someone who will clean house, throw all the rascals in jail, and start fresh. (Of course, the magic broom will steer clear of all my benefits and subsidies. And don’t you dare raise my taxes).

Hence the appeal of Beppe Grillo and his 5 Stelle movement in Italy, the National Front in France, Podemos in Spain, and Syriza in Greece. And, most recently, the British Labor Party choose as new leader Jeremy Corbyn, an old (age 66), unreconstructed Socialist whose ridiculous ideas have the fresh fragrance of the 1950s.

Bad news from America 

But what about America, the reliable bastion of democratic capitalism? Bad news from that front. Right now, in what is supposed to be a serious exercise aimed at selecting candidates for President, the leading contenders on the left and on the right are people who in ordinary circumstances would be dismissed as laughable populists.

Bernie Sanders and Donald Trump 

But no, they are not dismissed. They are in fact adored. On the left, Vermont Senator Bernie Sanders is an eccentric museum piece, a socialist who talks with passion about income redistribution. On the right, businessman Donald Trump argues passionately that he is really smart, while everybody else is stupid; and this is his main qualification for becoming President.

All this is disheartening. Confronted with this detachment from reality and consequent lowering of the level of policy debates, many commentators argue that this is a “healthy rebellion” against an ossified political system dominated by worn-out elites made out of professional politicians.

“You see, the people got fed up with the establishment, and so now they vent their frustrations by supporting populists who make outlandish claims. Perfectly understandable, no?”

Venting frustration is not smart 

No, not at all! While we can understand that frustrated people may engage in foolish behavior, this does not make foolish behavior smart. It is in fact stupid and destructive. If we accepted this logic, then we should accept as “normal” the fact that some unemployed workers become thieves, while others become alcoholics or drug addicts.

Indeed, lets agree that “the system is inefficient and corrupt”. Let’s assume that this is true. Well, then let’s try to find more honest and more competent people to run it.

Electing Jeremy Corbyn in the UK, or Bernie Sanders or Donald Trump here in the US will solve nothing.

We no longer understand what this is all about 

But then, why are socialists, populists and demagogues so in fashion, these days? Why the appeal of politicians who loudly promise easy fixes? Very simple: because many members of our societies have lost the meaning of the fundamental values that make republican government possible.

A republican government is supposed to manage the sectors that individuals cannot take care of on their own, while allowing people to freely live theirs lives. Government should take care of the truly needy; but it is not a philanthropy tasked with delivering plenty of goods at no cost. Government has costs that need to financed through fair taxation; but it is not a mechanism for redistributing wealth.

Government should be about the protection of individual rights, within clear and transparent rules. Government should allow all law-abiding private citizens to engage in wealth-producing activities. In other words, I can do my own thing, but this pursuit positively excludes taking advantage of others.

We got ourselves in this mess

Sadly, we forgot all this. And so we are caught between our deep dissatisfaction with our sorry-looking, stagnating democracies and our inability to see that we got here precisely because we lost our understanding of what the state is, and what it should do. 



Optimistic Mood In Athens?

WASHINGTON – News reports from Athens indicate that the Greeks are feeling much better these days. Since the recent elections that brought the far left, anti-austerity Syriza party into power the mood has improved. People look more confident. The coalition government enjoys sky-high popularity, 70% in some polls.

All is well in Athens

It would appear that to most Greeks the “We shall not pay you” approach embraced by Prime Minister Alexis Tsipras regarding Greece’s catastrophic debt looks proper, realistic and reasonable.

And there is more. The new Greek government now stated that it intends to collect war reparations from Germany on account of its brutal military occupation of Greece during WWII. (Never mind that the whole issue of war reparations from Germany had been settled a long time ago).

We are rich!

So, here we go. All of a sudden, a miracle! Greece is doing well. It will not pay its debts to Europe, at least not all of them, and not according to a schedule agreed upon by the previous Greek government (that obviously was not looking after the best interest of the suffering people). And now it stands to get a fat financial settlement check from the Germans. What do you know. How fast things can change. From debtor to creditor, overnight!


Look, to some extent I understand that the Greeks may want to cling to childish fantasies. But I hope they wake up soon. Improvident Greece will not get out of trouble only because it elected a populist Prime Minister who promised during the campaign that he knows how to fix this gigantic debt issue.

Just like before?

Hoping to get some relief here and there from the much maligned creditors troika (EU, ECB, and IMF) is one thing. But the Greeks now seem to really believe that austerity has been abolished by their vote. They seem to believe that by electing a new government their debt somehow vanished. Therefore, the civil servants who lost their jobs because of budget cuts will get them back soon. People will retire early, with full benefits, just like they used to. All entitlements will be restored, and all will be well.

As I said, we can all be excused for engaging at times in wishful thinking. For sure, all of us would like to imagine that unpleasant troubles we are facing will miraculously vanish. But this Greek collective denial seems to have pathological proportions.

Greece is bankrupt

On its own, Greece is totally  bankrupt. Its debt is now 175% of GDP. Unemployment is at 25%. Youth unemployment is at 50%. The economy is weak. The country’s very economic and financial survival today, and for many years to come, will be tied to the good will of its European creditors. (The total EU credit is $ 210 billion of the $ 340 billion Greece owes now). The notion that after having taken all the money from Brussels (EU) and Frankfurt (ECB) the Greeks now have the option of not paying back, without any consequences, is ludicrous.

But this seems to be thinking in Athens. After all, the new Prime Minister was elected on the basis of his campaign promises to fix all this. Therefore, the Greeks expect him to negotiate a good (and certainly painless) solution with the European creditors.

I suspect that this euphoria will not last long. The EU partners may be willing to extend terms and relax some conditions. May be. But they are not going to forgive this massive debt. And I believe that even the option of forgiving some of it is out of the question.

The impact of a Greek default

That said, the prospect of a Greek default, very real now, is not at all pleasant. The portion of the Greek debt engineered via the Eurozone bailout mechanism is $ 210 billion. Germany is on the hook for 27% of that. And that is $ 57 billion. France’s share is $ 42 billion. And Italy would have to absorb a loss of $ 37 billion.

If Greece goes bankrupt, staying within the Eurozone or after a messy exit, these EU countries have lost their money. Germany may be able to absorb the blow. But shaky France? And almost equally indebted Italy? I am not so sure.





Mountains of Debt in Greece…And In China

WASHINGTON – There is nothing promising in the outcome of the “European Tour” taken by Greek Prime Minister Alexis Tsipras and Yanis Varoufakis, his Finance Minister. Winning an election on the basis of a populist plan to resist Brussels’ mean spirited austerity is one thing, negotiating real debt relief when you are poor and weak is quite another.

Greece is ruined

We could discuss all sorts of possible options. But I see no workable solution that will satisfy both Greece and its creditors. The fact is that Greece is ruined. In part because of its idiotic policies, and in part because of counterproductive EU-imposed medicine, Greek output declined by 25% in the years since the troika-engineered (EU-IMF-ECB) rescue. As its GDP sank, its debt to (real) GDP ballooned. It is now at 175% of GDP. This is far worse than Italy at 130%.

Now you tell me how can a small, non competitive, unproductive economy get out of this mess. And keep in mind that Greece is surviving only thanks to the bailout provided mostly by its EU “partners”. That’s $ 286 billion obtained at favorable conditions, in exchange for a promise to implement structural reforms that would reduce public spending, privatize assets, and more.

No more austerity?

However, now the Syriza leaders want to stop, and in fact reverse, the EU-imposed austerity. They want to increase public jobs, (all this implies increased public spending), give everybody in Greece a raise, and renegotiate the terms of their gigantic loans.

This is impossible. But it is also unrealistic for the rest of Europe to believe that the Greeks –with this government in charge– will be disciplined and pay back little by little all what they owe, according to plan.

Greece will never pay back

Greece will never pay back this debt. Especially since now its elected leaders tell the people that it is not really the nation’s fault. Greece was somehow tricked by rapacious foreigners. It is all a big conspiracy, you see.

The fact is that Greece is essentially bankrupt. The bailout obtained from its EU partners has now become an inflammatory political issue. It is impossible that this anti-austerity, far left, populist government will forget all its campaign promises and enforce the existing –extremely unpopular– agreements.

Will Greece literally go bankrupt? Will it be forced to get out of the Eurozone? Will it voluntarily leave? I have no idea. But I find it hard to believe that this far left government in Athens and the rest of Europe will find a mutually acceptable, workable agreement that will allow creditors to be paid and the Greeks to be happy.

China is worse

Well, if Greece is bad news, give a look at China. Its fantastic GDP growth in the last few years was driven in large measure by an unprecedented construction boom financed entirely by debt. And this building frenzy, totally disconnected from real demand, led to “ghost cities” with no people, empty shopping malls, and plenty of under utilized infrastructure. This is “malinvestment” on a colossal scale. Yes, it made GDP go up. But none of this is real.

Fake growth

As bad as Greece is, China is certainly far worse. In only 14 years, China accumulated $ 26 trillion in new debt in order to get mostly fake growth. As David Stockman observes in his Contra Corner, (China’s Monumental Debt Trap—-Why It Will Rock The Global Economy, February 5, 2015), China’s GDP doubled since 2007. Its growth expanded by $ 5 trillion in just 7 years. Yes, but in order to get there, it increased its debt by $ 21 trillion. In other words, for every $ 1 dollar of new growth, China added $ 4 of new debt.

This is not going to end well. Here is how Stockman sees it:

“In any event, China’s $10 trillion of GDP is exactly at the Greek bulge stage. It’s not replicable and sustainable unless the bosses in Beijing truly do intend to pave the entire country.”

“In fact, the Chinese economy is addicted to construction, and its rulers can’t seem to let go—-even as they recognize they are heading straight toward the wall. At the present time, nearly 50% of GDP is accounted for by fixed asset investment—–that is, housing, commercial real estate, industry and public infrastructure. This ratio is so far off the historical and comparative charts as to be in a freakish class all of its own. Even during the peak “take-off” phase of economic development in Japan and South Korea this ratio never exceeded 30% and did not dwell there for long, either.”  [bold added]

“So China is caught in a monumental debt trap. Its rulers fear social upheaval unless they keep pumping GDP—and the associated rise of jobs, incomes and financial asset values—-with more credit and construction. Even then, they know better and have therefore hop-scotched from credit restraint to credit curtailment almost on alternate days of the week.”

“But now the edifice is beginning to roll over. Housing prices are falling and new footage put under construction has dropped by 30% over the last three months—something which has not even remotely happened during the last 15 years. At the same time, the consequent cooling of demand for construction materials and equipment is evident in China’s faltering industrial production numbers and the global commodity deflation that has resulted from its vast excess capacity in steel, shipbuilding, cement, aluminum, copper fabrication and all the rest.”

Economic growth is a political mandate 

Yes, the trap is that China’s unelected leaders need to deliver sustained economic growth in order to legitimize themselves. But since it is impossible to generate genuine 7% growth (let alone the 10% we were used to see in China) year after year, they faked it. Local governments borrowed in order to finance more jobs-creating construction. The unprecedented construction boom in turn generated a boom in steel, cement, copper, you name it.

How long can this crazy act last?

Syriza Victory Is Not A Solution For Greece

WASHINGTON – As expected, Alexis Tsipras and his Leftist Syriza party won the Greek elections for a new parliament. After having struck a coalition agreement with the much smaller Independent Greeks (Anel) party, Syriza has a clear majority. Tsipras is now the new Prime Minister.

Voters choose

Fine. Voters get to choose their leaders. What is not at all clear is what will come next. Syriza campaign was all about rejecting the EU-imposed austerity packages that Greece was forced to accept in exchange for a gigantic $ 270 billion (240 billion Euro) bailout package put together by the EU, the European Central Bank, and the International Monetary Fund, (the “troika”).

Not without cause, Tsipras and his allies complained loudly that austerity alone will not give Greece a chance to regain its strength and chart a course back to economic growth.

Austerity alone will not do

All right. Austerity alone is bad medicine. But then what is the right mix? This is not at all clear. For the moment we can expect that the new Greek leadership will try to renegotiate the terms of the bailout packages in order to get more flexibility and therefore more breathing room.

And they may get this from Brussels. Or at least some of it. But the real test for a leftist, populist political force is to concoct a credible, sustainable economic growth plan. And I doubt that Syriza has even the slightest idea of how to do this.

Which way to economic growth ?

If this or any other Greek government could convince German Chancellor Angela Merkel, the ECB, the EU and the IMF that less austerity would allow Athens to launch a successful economic growth strategy, they would all support a renegotiation. After all, if the Greek economy starts growing again, the chances of Greece actually paying back its debt improve.

No real changes

The problem is that the Greeks most likely will pocket concessions from their creditors and then prove unable to change the country’s economic fundamentals.

Unfortunately in Greece there is a bad combination of strong trade unions that usually push for protecting the status quo, entrenched special interests, crony capitalism, corruption and lack of venture capital that will support new enterprises. In good times, this means economic stagnation. In bad times (and these are horrible times) this means decline.

If the Greeks now believe that by changing government they have voted themselves out of debt and into prosperity, they will soon realize that it is not so.

Greece Once Again Threatens Europe’s Financial Stability

WASHINGTON – Greece is again in the news, and for bad reasons. Early elections (to be held on January 25) had to be called by Prime Minister Antonis Samaras. This is what is prescribed by the Greek Constitution when Parliament fails to elect a new President of the Republic. Early elections have raised the prospect on a new anti-austerity political majority headed by the leftist party Syriza.


Syriza, led by Alexis Tspiras, is ahead in the polls, even though it is not clear how it would fashion a coalition in order to have a majority in Parliament. Still, assuming that Syriza prevails, then it is almost inevitable that Tspiras will reopen the complicated financial arrangements (with spending cuts, huge new credits and debt reduction in the mix) reached with the European Central Bank, the European Union and the International Monetary Fund that have allowed Greece to avoid bankruptcy.

Simply stated, Syriza believes that the draconian spending restriction imposed by this package are too strict. The Greek people are suffering too much. Therefore a new leftist majority would want to reopen the deal, in order to give Greece a bit more breathing room.

Where is the money?

On the face of it, this whole idea is preposterous. Greece got into serious trouble because of its fiscal irresponsibility mixed with thievery and corruption. Until 2009 It kept on borrowing, while willfully falsifying its real deficit and debt numbers. The country has an uncompetitive economy. Its employment numbers were inflated by the number of people in totally unproductive but somewhat remunerative public jobs. Adding more public spending and/or employment without changing the economic fundamentals would amount to a temporary alleviation. It is clear that this “let’s spend some more policy” is no economic growth strategy.

Still, be that as it may, could a winning leftist majority pull this off? Well, it seems that the Greeks have bargaining power. And this power rests on the financial damage that would be caused to the rest of Europe by a Greek default and/or messy exit from the Euro.

If Greece goes…

In other words, here is the threat: “If we go down, we bring you down with us. So, be careful.” Indeed, the consensus in Europe is that a Greek financial debacle would cause intolerable pain in France, Germany and elsewhere. Too many EU financial institutions have invested in Greek deals and Greek debt. The losses would be painful. This being the case, a new anti-austerity Greek government may have enough leverage to get what it wants –a lessening of the austerity constraints– without paying any price.

Weak Eurozone

Well, who knows how things will turn out in the end. But one thing is clear. This is a never-ending bad story. Beyond Greece, the fact is that the Eurozone is inherently weak. If a third tier, semi-bankrupt economy can threaten the stability of the entire currency union, something is wrong.

And what is wrong is that the Euro is a common currency that imposes all sorts of constraints on inherently weak countries that have no basic agreement among them on fiscal and economic strategies aimed at achieving real growth.

A union of the poor

The Euro is a poorly designed monetary alliance that links mediocre and semi-destitute countries. The semi-destitute (Greece, Spain, Italy and Portugal) are supposed to follow a low spending and smaller government diet. But the fact is that beyond lavish public spending that creates fake employment, and therefore fake income, these countries have almost nothing.

No credible growth strategy

There is no credible, self-propelled economic growth strategy in Greece or Italy. It would take a major revolution to radically transform labor markets, to create incentives for new businesses and to concentrate resources in R&D, so that competitive new products could be successfully launched.

None of this is on the horizon. Admittedly, the austerity policies imposed by Europe are no picnic. They mean lower standards of living, without a real prospect of any real improvement. But the leftist populist idea whereby there is, of course, a free lunch is no better.

Who will pay?

Let’s assume that Syriza wins the January 25 elections and Greece wins its political battle with Brussels and Frankfurt. So the new Prime Minister Tspiras will manage to obtain a reduction of the austerity measures previously imposed. Fine. And then what? Who is going to pay for the added cash doled out by the Government to make the people feel better? There is no money. This policy shift could only be financed by issuing more debt. Yes, this means adding new debt to the old. Is this a strategy? Sadly this is the best that one can find.

A strong currency assumes strong countries

Leaving Greece aside, the sad truth is that a currency union by itself cannot magically create wealth. It can be a good instrument to create synergies among economically interdependent countries already tied by a variety of economic and commercial agreements. But the implicit assumption is that these countries are doing well. If these countries are doing poorly, or very poorly, a currency union is no substitute for better economic growth strategies.

Until Europe will remain the prisoner of disastrous statist policies centered on inefficient public sectors, the Europeans will never get out of this mess. The ECB clever manoeuvres are not –and cannot be– a substitute for policies that generate real wealth.