Tuesday, November 1, 2011

A Greek Tragedy of Their Own Making

Greek Prime Minister’s decision to call for a binding referendum on the EU bailout package sends shock waves across Europe…Global markets slide significantly.

The end of last week, the financial world celebrated the agreement within the EU for a bailout package for Greece.  Greece, on the cusp of bankruptcy and default yet again, is perhaps the poster child for the failed socialist state.  Its entitlement programs are unsustainable, corruption and tax avoidance rampant, and the people remain as unwilling to remove themselves from the teat of the government as they ever have been.

This deal, which would pay current Greek bondholders 50 cents on the dollar for their investments, also has EU banks adding substantially to the bailout fund (increasing to about $1.4 trillion) as well as requiring (but not stipulating how) EU banks to significantly increase their capital which would better allow them to weather possible future defaults from Italy or Spain.  Finally, the Greeks would need to enact still more major changes to their internal fiscal policies and programs.  This would require the weaning of millions from the government dole as well as government jobs.  Many who retired on large pensions at the age of 50 would see these pensions reduced – perhaps requiring them to return to a workforce where there are few if any jobs.

The obligation to the Greek government and Greek people for change is one that is far from popular.  Combined with corruption and massive levels of tax avoidance, Greeks who are recipients of the government dole / jobs are loath to step away from that life.  They embrace the sense of entitlement to continue to take from the government benefits which the government and nation cannot, and never could, afford to pay.

In a surprise move late Monday, the Greek Prime Minister announced that the final decision as to if Greece will undertake the additional fiscal reforms that they need in order to qualify for the bailout will go to the Greek people in a referendum.  This surprise decision now throws the entire bailout agreement into turmoil.  Already, financial markets around the world are reacting to the decision to bring the decision to the Greek people.

This referendum, which is thought to be held in January, 2012, is going to provide some interesting aspects for study.  If the referendum fails, the impact to the Greeks and Europe will reverberate far more than just the collapse of the current Greek government.  This bailout very nearly never happened.  The wealthier, more responsible nations of the EU are becoming more and more loath to send their wealth to bail out irresponsible southern European nations.  Other EU members who have enacted their own austerity programs to address their fiscal challenges are loath to support EU members which refuse to enact responsible austerity programs.

The main question in my mind revolves around whether or not the Greek people, 1 in 4 of whom are dependent upon the largesse of the government, will embrace the significant and needed course correction to get the country onto a fiscally responsible path.  Because of the depth and duration of the entitlement state in Greece, the ingrained corruption / tax avoidance mindset, and the perception that the role of government is to provide for so many of the people, can this same group of people wean themselves from their addiction to the dole and entitlements?  Can they see that they have, in the words of Margaret Thatcher, ‘run out of other people’s money’?

Human nature being what it is, I have my doubts that a majority of Greeks will vote to painfully wean themselves.  Addicts always believe that there will be someone or something around to deliver the next fix.  It’s not dissimilar to the ‘to big to fail’ mantra that too many talked about in the financial crisis of 2008.  Is a nation like Greece too big to be allowed to fail – despite their own continued efforts to hurtle down the path of failure?  Will their desire and greed for easy money from the government cloud them from understanding the repercussions of their vote on other nations in the EU as well as in the US?

Then ask yourself about California – the Greece of the United States…except that California has an economy significantly larger than that of Greece.  Would a popular vote majority inside California vote to reduce the size and scope of government? To reduce or eliminate government entitlements, payouts, and services because the state is unable to fiscally afford the irresponsible promises made?  Like Greece, and unlike the US, California doesn’t have the ability to print its own currency to mask its financial problems.

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