Tuesday, May 08, 2012

Tear Down The Wall

I alluded yesterday to the elections in Greece, in which the EU plan to bailout the nation in exchange for austerity measures to be put in place was symbolically rejected and a new government elected.

A Greek political party leader who has vowed to rip up the terms of Greece’s international bailout was handed the mandate to try and form a government after Antonis Samaras of New Democracy failed to forge an agreement.

“This is a great moment for the Left, a great responsibility for me,” Alexis Tsipras, whose Syriza party placed second in May 6 elections, told President Karolos Papoulias in Athens today. Tsipras aims to forge a coalition of “leftist” parties that would overturn current bailout policy.

Greece’s Parliament is split down the middle on whether to renege on the terms of the two bailout agreements negotiated since May 2010. With the risk increasing of instability in Greece, the epicenter of the debt crisis, policy makers in Europe urged Greek leaders to quickly agree on a new government.

Austerity measures work only when you can't increase income. If you have a job and owe a lot of money, it's easier to cut your expenses temporarily than it is to go in and ask for a raise. Austerity measures stop making sense when you can take the money you have (or borrow) and get a better economic return on it than you would by holding the line on expenditures.

That might, and I stress, might, make sense for Greece, whose income has been stagnant for years and who hasn't shown a capacity for growing its way out of debt. A balance of careful investment targets coupled with some moderate shifts in spending might buy that nation enough time to get itself out of trouble.

But take a nation like Spain, which is already lurching towards default: here's an economy that was vibrant and growing before the worldwide housing bubble. Indeed, up to 2005, Spain created over one-half of the net jobs created in all of Europe, and was poised to overtake Germany in leadaing the EU in per capita income.

You know the rest: it's the same story as here in the States. Cheap lending rates, people bought and flipped houses they couldn't afford as they were goaded on by the same nefarious criminals as our Wall Street firms employed.

Shouldn't Spain be spared the austerity whipping? Apparently not, although to be fair the EU has put out signals that it may be more lenient on terms with Spain.

But then that begs the question, why is Greece being picked on? After all, if it's good for the gander, it's good for the goose. And it's not like Greece isn't too big to fail: estimates are the EU would lose one trillion euros if Greece collapses and is ushered out of the Union.
There seems to have been blunders made on all sides of this confrontation: the EU underestimating the size of Greece's impact, Greece underestimating the anger of its people to an austerity package as well as underestimating the strength of its bargaining position.
I think its time for cooler heads to prevail.