Exclusive: Greece and the Curse of the Free Lunch – Lessons for America?

by ALEX ALEXIEV March 10, 2010
As the Greek government presents its austerity plan to cut down its 12.7 percent budget deficit by a few points through a combination of salary cuts and tax increases to loud EU applause, the question of the ultimate resolution of Athens’ financial implosion is far from resolved. The Greeks speak bravely of solving their problems by themselves, even as they continue to ask their EU partners to show “solidarity,” which is Eurospeak for a financial guarantee of their unmanageable debt. The more solvent Western Europeans, led by Germany, on the other hand, are anything but keen on bailing out Greece, yet remain aware that a Greek default could easily drag down other highly indebted EU members and perhaps the euro itself, to say nothing of their own banks which are heavily invested in the bonds of the floundering PIGS (Portugal, Italy, Greece and Spain). Instead of offering concrete solutions, they have now taken to discussing the putative merits of a European Monetary Fund as a potential last resort for EU financial delinquents, knowing well that any such construct is irrelevant to the current crisis.  
 
Characteristically, few seem to be interested in exploring the real causes of the Greek implosion. Those on the left, the Greek government included, mutter darkly of market speculators, unsavory rating agencies and devious if unnamed outside forces conspiring to do in the Hellenic Republic. More realistically, pundits on the right have bemoaned out of control spending, bogus statistics and government corruption as the root causes of a preventable disaster. Very few, left or right, have bothered to take a close look at the systemic nature of the perfect storm buffeting Greece and threatening the EU and its currency beyond.
 
To do that, a short excursion in the history of Athens’s involvement in the European integration project is in order. European unity as an idea was born in the aftermath of the old continent’s traumatic WWII experience and the universal determination never to allow such carnage on European soil again. The founders of the European project, political giants like Konrad Adenauer of Germany, Robert Schuman of France and Alcide de Gasperi of Italy, understood that political unity would take a very long time to achieve and focused instead on economic integration and open markets in an effort to nurture economic interdependence as a way of preventing bellicose nationalism from raising its ugly head ever again. Noble as this objective was, it was soon corrupted by parochial interests as, for instance, when the French demanded and received German acquiescence to huge and seemingly open-ended subsidies for inefficient French farmers under a welfare scheme called the Common Agricultural Policy (CAP). By the late 1970s, an early iteration of the European Union, known as the European Community and consisting of nine nations, became a reality. Yet, by then, most of Western Europe had gradually succumbed to a collectivist ideology complete with militant labor unions, massive income redistribution schemes and an ardent if oxymoronic belief in something called the “social market” economy. This worked to some extent for a while because the original Western European members were at comparable levels of economic development and the few underdeveloped regions that required subsidies, like southern Italy, did not burden the system excessively.
 
This began to change for the worse in 1981, when Greece, and a bit later Spain and Portugal, were accepted as members even though economically they were far behind Western European levels. All three had emerged just a few years before that from oppressive dictatorships and their admission was essentially a kind of affirmative action for economic underachievers that guaranteed them the status of EU welfare recipients for decades to come. Others have speculated that admitting these non-competitive countries simply guaranteed the more productive German and northern European industries new protected markets at the cost of providing them with a relatively inexpensive free lunch. This mistake was compounded ten years later when Greece was admitted to the Euro-zone although, as many suspected at the time and we now know, it was able to meet the Euro criteria only by falsifying its statistics.
 
In the three decades since its entry in the EU, Greece has become the recipient of huge (for the size of its economy) handouts in every imaginable sector. Its agricultural subsidies are the largest in the EU on a per capita basis, as are the even larger “structural,” “cohesion” (etc.) giveaways. And there is no end in sight. Ranked today as the 26th richest country in the world in international rankings, Greece continues to receive $24 billion every six years for infrastructure projects alone. The free lunch mentality these handouts predictably cultivated in Athens was further exacerbated by the easy money ushered in by the euro.
 
Assumed to be a member in good standing of the exclusive stable currency club, Greece all of a sudden became the beneficiary of cheap and plentiful credit it could not have dreamed of on the basis of its own economic merits. It did not hesitate to engage in an orgy of borrowing and spending while fudging its statistics to give it the appearance of fiscal rectitude the EU charter vaguely demanded.
 
From the outside it looked like the Greeks had managed to turn a poor Balkan country into a socialist utopia virtually overnight. Since its entry in the Euro-zone, the leftwing socialist governments that dominated most of this period increased social spending every year by 3.6 percent over GDP growth, which, in the past decade, was reported rather fancifully to be twice that of the EU average (4 percent vs. 2 percent). Public sector employees, the political backbone of the socialist PASOK party, made up 25% of the labor force yet their wages and pensions claimed over 50 percent of the budget by 2008, with bonuses that often reached 90 percent of salary. Greeks received two extra monthly salaries per year, among other goodies, and retired at 58 years of age with 80 percent of their final salaries, making them seemingly better off than the hapless Germans who paid for much of this to begin with.
 
Alas, it was all smoke and mirrors, and the fool’s paradise the Greeks built for themselves has now been exposed for being exactly that. And a grim reality it is. Greeks’ incomes are at least 30 percent higher than their productivity would warrant and have been maintained at that level at the cost of an unsustainable budget deficit and national debt of 120 percent of GDP. Nor have the three decades of huge EU handouts or the two decades of easy money really helped make the Greek economy more competitive or produced a sustainable standard of living. On the contrary, they may have made things worse. Today, neither Greek industry nor agriculture are truly competitive, resulting in imports three times the size of the country’s exports, a public sector that is dead last among 23 developed states in efficiency and an economic freedom ranking of 81st among the world’s nations, which is below that of many third world countries.  Not surprisingly, the country’s entitlement mentality has kept it mired in a swamp of corruption that has no equal in Europe this side of Russia. Transparency International recently reported that the average Greek family spends $2500 yearly in bribes for getting free government services such as a driver’s license or admission to a hospital.
 
None of this should come as a big surprise for those who have studied the curse of the free lunch in modern welfare societies, even if it’s never mentioned in any EU discussion of the Greek crisis.
 
So where do we go from here? The optimism expressed by EU mandarins following the introduction of Prime Minister Papandreu’s austerity package and the ability of the Greeks since than to sell €4.8 million worth of bonds at 6.64 percent interest is wishful thinking. Borrowing money at that rate in a country already encumbered with €300 billion debt is not a solution even if they can continue doing it. Bringing wages in line with productivity would be, but that will mean a decline of living standards by a third, which the militant unions would not permit.
 
Unfortunately for Europe, Greece is not the only one in this predicament. Italy, Spain and Portugal followed the same spending and wage inflation model, lost their competitiveness and are now close to the brink themselves. Bailing them all out, even if it could be done, would fundamentally undermine the stability of the Euro and the European Union itself.
 
A decade ago, Milton Friedman argued that a monetary union with fiat money that does not have a central government is likely to collapse in a serious economic crisis because the different countries would be subject to “asymmetric shocks.” It would no longer be a huge surprise if his prediction were to come true.  
 
FamilySecurityMatters.org Contributing Editor Alex Alexiev is a visiting fellow at the Hudson Institute in Washington D.C. The views expressed here are his own.
 

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