Saturday, 23 July 2011

Superstate ahoy

Phillip Bagus, author of The Tragedy of the Euro, has written a couple of great articles recently on the European government debt crisis.

On the 28th of June, in an article for the IEA, he asked:
Why doesn’t Greece simply default and leave the euro as so many Greek protestors demand on the streets of Athens?
His answer:
The monetary setup of the Euro leads to redistribution in favour of more profligate governments residing mainly in the south of Europe.
The Greek economy with wage rates that are too high is no competition to innovative German industry enjoying moderate wage increases.

The result of these artificially high Greek wages would be poverty and unemployment. These effects, however, are partly counteracted by the profligate spending of the Greek government. To finance the spending, the Greek government simply prints bonds. Transferring new funds to the Greek government, the banking system buys these bonds and uses them as collateral for new loans from the European Central Bank (ECB), which thereby monetises the government deficit. The Greek government uses the new money to pay for early retirement schemes, an army of public servants and generous social benefits. The Greek economy’s lack of competitiveness is thereby sustained and increased.

For instance, the Greek government could issue a bond, receive new money and pay a minister. The minister buys a BMW with the new money. As a result prices in the eurozone rise and Greece enjoys a trade deficit with Germany. Greeks live beyond their means financed by the issuing of government bonds and the production of new money. Cars flow into Greece in exchange for new euros and debt promises. Europeans from fiscally more responsible states pay the bill in form of higher price inflation and since 2010 in form of direct guarantees for subsidised loans to the over-indebted Greek government. As the Greek government benefits from the euro, it does not want to default and leave the eurozone despite the riots in the streets.
I recommend the whole article.

In an article this morning for The Cobden Centre, Bagus considers the latest bailout package agreed by the Eurocrats:
The transfer union implies a transfer of power to the European Commission. We get ever closer to a European superstate. Incentives to reduce deficits will be reduced both in the periphery and in the core. Germans will start to resist cuts in public spending. Why save if the savings flow to the periphery? Instead of reducing German pensions to guarantee Greek pensions, German voters will push for more public spending. To pay for welfare states and transfers, more taxes (maybe a European tax) and money production will become necessary. The centralization of power allows for harmonization of regulations and taxes. Once tax competition ends, there will be a tendency towards ever higher taxes. With the transfers, the power of Brussels will continue to rise. There seems to be only one bold, albeit costly way, to stop the process towards a EUSSR: withdrawal from the transfer union. With an exit from the Euro, Germany could bring down the whole Euro project and save Europe.
Again, the whole article is well worth reading.

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