The Welfare Mentality and Dealing With Greece

Right From the Start

Right From the Start

According to European financial markets managers, the “bail out” of Greece began in 2009. In fact Greece has been sliding into bankruptcy for decades. That’s what happens when, in spite of weak economic growth you continue to grow the size and cost of government through welfare programs. It is accelerated by rapid increases in the number of and benefits for government workers. And the coup de grace is a pension system that is both economically unsustainable and politically immune from change.

The recognition of a future European Union (EU) bailout was recognized almost immediately after Greece accepted the “euro” as its common currency. Acceptance of the euro required certification of certain economic conditions by Greece. Those conditions included recognition of the nation’s debt structure, budget deficits and inflation rate. One of the premier requirements was that the government debt load remained at sixty percent or less of its Gross Domestic Product (GDP) and that its budget deficits remained at three percent or less of GDP.

Greece had experienced historical budget deficits for decades that were ten percent or greater of GDP. However, magically, those budget deficits dropped to within the three percent range in the years immediately preceding adoption of the euro. For whatever reason the EU accepted Greece without questioning its economic data. But shortly afterward, and when the damage had already been done, the EU began a series of audits that demonstrated that Greece’s debt load and deficit spending were substantially higher than reported and significantly in excess of the requirements for participation in the euro. After several such audits the Greek government promised the EU that it would seriously examine its financial condition and undertake the steps necessary to bring it into line with the EU requirements. The promises have been reiterated regularly and acted upon never.

As the economic situation in Greece continued to decline two things happened. First, the EU began a continuing series of loans and other economic measures to prop up the Greek financial system. And second, the Greek governments continued to grow government and increase benefits for welfare recipients and public employees. The latter annually exceeded their ability to pay and the debt – already greatly in excess of its ability to pay – increased. So bad was and is the Greek system that it must borrow more to repay existing debt and the interest payments on the debt.

Is any of this sounding familiar?

The Greeks have steadfastly refused to implement any of the economic reforms, including scaling back pension and welfare benefits, insisted upon by its EU partners as a condition for further financing. So entrenched is the Greek refusal that it elected a socialist government that campaigned on refusing any reforms short of borrowing more money. The new Syriza government under Prime Minister Alexis Tspiras has gone so far as to blame its lenders for its financial difficulties. In typical leftist ideology the cure for what ails Greece is found in increasing government spending and expecting that someone else should pay for it.

With negotiations dead, Mr. Tspiras has called for a public referendum on the demands of its creditors and has promised to campaign against those demands. So one of three things is about to happen.

First, and most likely, the Greek people will vote down the referendum and the EU will walk away from negotiations allowing the Greek economy to collapse. In doing so it will remove Greece from use of the euro and will probably expel Greece from the EU.

Second, the EU with prodding from the administration of President Barack Obama will relent and extend additional credit to Greece on the assurances that Greece will “seriously” review it situation and undertake the necessary steps to improve their economic well being.  Somewhere in the mix will be assurances that the Obama administration will “backstop” the financial commitments from the EU.  Greece will not honor the reforms necessary and the Obama administration will turn its back on the EU when it comes to exercising its “assurances.”

Already, on several occasions, President Barack Obama and Treasury Secretary Jack Low have criticized the EU leadership for not being more flexible – meaning extending more credit – to Greece. They have been especially critical of the austerity measures (meaning reductions in welfare, public employment and pension benefits) demanded by Greece’s lenders.

This should come as no surprise. First, Mr. Obama rarely misses and opportunity to scold our allies – particularly when he believes that it puts him in a position of moral superiority. By doing precisely what are allies in the EU are refusing to do, Mr. Obama can not only insert the knife but twist it a couple of times for good measure.

And second, don’t forget that when Mr. Obama when confronted with his own economic crises at the beginning of his presidency reacted precisely the way that Mr. Tsparis and his Syriza government did – spend more. And not just spend more but spent it to prop up the number of public employees, enhance their benefits and ensure that there excessive retirement benefits continued unabated. Unemployment benefits were extended which discouraged workers from actually seeking jobs and welfare benefits nearly doubled in the form of food stamp use.

But continuing to support Greece while Greece refuses to realistically address its economic woes simply means postponing the inevitable – albeit at a greater cost.

And third and least likely, the Greek people will accept the referendum and Mr. Tspiras’ government will be forced to call new elections where the Greek people will be asked to find a government that will negotiate in good faith and impose the economic measures necessary to rescue the Greek economy. The essence of human nature is to avoid hardship and the Greek people have become so accustomed to the welfare that even if they accept the referendum, they will be unlikely to form a government empowered to negotiate.

Mr. Obama has been wrong on virtually every foreign and domestic issue. He is wrong again in soft pedaling the need for economic reforms in Greece. Greece should fail. Its elected officials and citizens should feel the consequences of decades of abuse of the welfare state. The EU will not escape damage either. The recognition and write off of Greece’s unpaid debts by both public and private lenders will cause ripples in the economies of the remaining EU members. That pain was inevitable given their tolerance of Greece’s excesses.

In the end, Greece’s failure should send a signal to the other marginal players in the EU – particularly Portugal and Ireland. And perhaps even America’s politicians might learn that no economy can continue to spend in excess of its revenues and increase its debt without eventual dire consequences.

But don’t hold your breath. Under Mr. Obama, America has become a welfare state just like Europe.