More Euros in the Greek Black Hole

Two of the modern world’s eternal questions are:

  • When is government big enough for a statist? and
  • How big is a welfare-state black hole?

The first question should be on the top of the agenda every time you talk to a statist, be it an American liberal, a European social democrat or any other breed of Homo Collectivus. As for the second question, we have an interesting little case study called Greece. Its welfare state has gobbled up two so called bailouts already, better known as rescue cash supplied by primarily German taxpayers. Each one of those bailouts, managed by the European Union, the European Central Bank and the International Monetary Fund, came with stern warnings to the Greeks to get their fiscal house in good order, and equally stern promises to German taxpayers that this was the last time they’d have to rescue another welfare state in the EU.

The Greek government, of course, did what it was told to do in order to get the bailout cash. It cut spending, raised taxes and laid off thousands of government workers. But because of the higher taxes private-sector economic activity contracted; because of reduced government spending consumers dependent on entitlements had less to spend; because of reduced government subsidies to select product, such as pharmaceutical products private companies on those markets lost sales. Last but not least, the laid-off government workers could not find private-sector jobs, for all the reasons just given.

This does not mean that the welfare state itself is worth keeping. Quite the contrary, the best way forward is to do away with the welfare state entirely. The Greeks have not yet decided to do so, but are instead trying their best to preserve it. They are trying to keep the very entitlement systems that have discouraged work and entrepreneurship for decades; as a result they also have to keep the taxes that, for decades, have added yet another layer of discouragement toward work and entrepreneurship. However, since the current crisis their GDP has been reduced by a staggering 25 percent, which means that they have to squeeze their welfare state into a much tighter tax base. That does not work, of course, especially with unemployment closing in on 30 percent for the entire workforce – and 60 percent for young workers – so the Greek government really only has one choice: to run perpetual deficits.

This is where the German taxpayer enters the scene again. They have already borne a big chunk of the burden of throwing more than 200 billion euros in two bailout packages down the hole of the Greek welfare state. But these packages, which together are about equal to the Greek GDP when it was at its top before the crisis, have proven to be totally inadequate. The Greek welfare state still runs a deficit, its debt is still piling up – and GDP is still contracting.

While this should not surprise anyone who has working knowledge of macroeconomics, it should really not be more difficult than common sense to put the pieces together: if you take money away from people and businesses, they are going to want to spend less and hire fewer people; if you continue, year in and year out, to do the same thing to the private sector, it will continue to respond in the exact same way.

As a result, government will get less tax revenues and have to spend more on entitlements such as unemployment benefits and poverty relief. The bailout cash only helped bankroll these entitlements, but when each of the one-time infusions ran dry the Greeks were back to the same situation again.

Long story short: austerity does not change the structure of the welfare state, but preserves instead the very programs that drive the deficit. Therefore, no one should be surprised that the German taxpayer is now once again called upon to bail out the Greek welfare-state consumer. The EU Observer reports:

A month before general elections in Germany, finance minister Wolfgang Schaeuble has broken the taboo of admitting that Greece will need a third bailout when the current one runs out, in 2014. “There will have to be another programme in Greece,” Schaeuble said on Tuesday (20 August) during a campaign rally in the northern-German town of Ahrensburg. As part of a third programme, he mentioned another lowering of the interest rates on the loans the eurozone has given to Greece. “They are not out of the woods yet,” he said.

Of course, when the first bailout was announced everyone promised that “there will be at least two more bailouts down the road”… Oh, that’s right. They promised quite the opposite.

EU Observer again:

Earlier this year, Germany’s insistence not to deal with a funding gap of almost €10 billion for 2015-2016 delayed the negotiations on the second bailout for Greece, as the International Monetary Fund (IMF) was reluctant to sign off on a programme that does not get the country out of its financial mess once and for all.

You have to sympathize with the IMF, whose management has to go to its main funders, primarily the United States, and ask for more and more bailout money. That can’t be an easy job. But at least they are not dealing directly with taxpayers (and as far as the U.S. government goes, they’ll just sell another stack of IOUs to China…) which is exactly what Germany’s Chancellor Angela Merkel has to do.

But on the more serious front, it is good that the IMF is asking for workable solutions to bring the Greek crisis to an end. Unfortunately, short of dismantling the welfare state there are no such solutions at hand. Since no one in either the IMF, the EU or the ECB is willing to try to sell the phase-out of the welfare state to the Greek government – let alone Greek voters – there will be no end to the Greek crisis until the country effectively collapses. Nobody can accurately predict when that will happen, but when it does, things will get ugly.

The problem for Germany’s taxpayers is that they cannot afford yet another Greek bailout. Since the majority of Germany’s political parties have lined up behind another Greek bailout in one form or another, voters in next year’s German election could switch in large numbers to EU-skeptical parties, such as Alternative fur Deutschland. That would be a change for the better and a signal to all troubled European welfare states to start re-thinking what they cannot afford. Because one thing is certain: if there is a third Greek bailout, it won’t be the last.