SOCIAL DEMOCRATS NOT RESPONSIBLE FOR GREEK CRISIS
By Nick Gier
Read other columns on Europe here.
Justice will not come
to Athens until those who are not injured
are as indignant as those who are injured.
--Thucydides
The Celtic Tiger cubs
learned to spend ostentatiously because "they were worth it,"
but the cubs must rediscover old-fashioned values.
--Brian O'Kelly, Dublin City University
The U.S. has a clear path to economic recovery, while Greece does not.
--Paul Krugman
We're driving bumper
to bumper with every other major economy today,
so misbehavior or mistakes anywhere can cause a global pileup.
--Thomas Friedman
Conservatives are claiming that the Greek financial crisis is the fault of Europe's Social Democrats. Only nine of the 27 countries of the European Union (EU) are governed by Labor, Socialist, or Social Democratic parties, so this is a rather unfair accusation. In fact, it has been center-right governments in Greece, Iceland, Ireland, and the Baltic States that have nearly destroyed the economies of their respective countries. Reckless behavior on the part of Wall Street and the failure of the Bush administration to reform the financial system nearly brought down the world economy.
The Celtic Tiger Loses His Roar
Let me start with Ireland, where the Labor Party has always run a distant third in the polls. For years conservatives have praised the economic miracle of the "Celtic Tiger." Economic growth was indeed impressive: an average 6.4 percent from 1990-2007 with a peak of 9.5 percent in the late 1990s. Workers, especially those from Eastern Europe, poured into Ireland for good paying jobs.
America's Heritage Foundation and Cato Institute boasted that it was low corporate taxes that fueled the boom, but others argued that it was also large transfer payments from the European Union (EU) that made the Celtic Tiger roar. As new EU members, Portugal, Spain, the Baltic States, and Greece also received massive aid from "Old Europe," prosperous economies built by Social Democrats over 60-80 years.
But in 2009 the big Irish party turned into a wake as the economy declined 7.5 percent, exceeded only by the Baltic States' Depression of 20 percent. The Irish budget deficit is now 14.3 percent of GDP, the EU's highest, and the unemployment rate has climbed from 4 percent to 13.7 percent.
Ireland's national debt--8.2 percent of Gross Domestic Product (GDP)--is the higher than Greece's at 6 percent. As calculated by New York's Citibank, the debt for the Euro Zone is 1.1 percent of GDP. Ireland's debt translates into $194,000 per person, compared to Portugal at $26, 700, Spain at $24,000, and Greece at $21,000 per person. Each American owes $42,000 on a debt of $13 trillion, $8 trillion of which was run up by Presidents Ronald Reagan and George W. Bush. Instead of raising the necessary revenue, Bush charged two wars and senior prescription drugs to our grandchildren.
Rich Blake of ABC News offered this diagnosis of the Irish crisis: "The banks overindulged during the past decade, lending hand over fist in a bubbly real estate market and leveraging balance sheets to the hilt." Housing prices have fallen 30 percent and many Irish home owners are behind in their mortgages. Does this sound familiar?
Swift and firm action by the Irish government has put the country back on the road to recovery. Anglo Irish, the largest bank, was nationalized after it was found to have cooked its books and made billions of euros in bad loans. An Irish TARP-like fund was set up to save the other banks. The government has combined tax increases and spending cuts to reduce the budget deficit. Greece is still in a deep recession, but Ireland's economy is set for a rebound, predicted to grow at a 3 percent in 2011.
The Baltic Tigers Are Now Meowing
A casual observer might say that the European financial crisis is a simply "latitude" problem. Lazy and disorganized Portuguese, Spaniards, Italians, and Greeks simply cannot compete with hard-working Protestants in the North. The failures of Iceland, the Baltic States, and Catholic Ireland falsify this bigoted theory.
Since their liberation from the Soviet Union people of Estonia, Latvia, and Lithuania have voted overwhelmingly for right-wing, nationalist parties, and they have eagerly adopted what is known as the "Washington Consensus" of unregulated free markets. After growing at an average rate of 9 percent from 2003 to 2007, the economies of the Baltic States are now in a severe depression. As Rainer Kattel: "The small open economies were flushed with foreign capital, became overleveraged, and are now paying the price."
The governments of the Baltic States made the same mistake as Iceland, whose center-right government privatized the banks and allowed them to go crazy, making loans in amounts ten greater than the nation's GDP. Unregulated banks encouraged eager consumers in Iceland and Baltic States to sign up for home and car loans denominated in Euros or Swiss Francs. When their own currencies crashed, they were unable to make the payments. The "accidental" burning of SUVs in Iceland was a common sight. At least Iceland and the Baltic States, which have not gone to the euro, can let their currencies depreciate and adjust to harsh economic realities. Ireland, Portugal, and Greece do not have that option.
Nordic Countries Excel in Every Category
Under Social Democratic leadership for decades, the Nordic countries (Finland, Sweden, Denmark, Norway, and Iceland) developed the most progressive societies in human history. Combining thriving businesses with the world's best social services, these countries still have high progressive income taxes and large public sectors even under center right governments in Sweden and Denmark. Finland's school children consistently earn the highest grades on international exams.
From 1997-2007 the Nordic economies grew on average 3.2 percent and their unemployment rates averaged 5.7 percent. Excluding Norway's huge surplus because of North Sea oil and Iceland's fall under conservative mismanagement, the current budget deficit for Sweden, Denmark, and Finland together is 3.5 percent of GDP, contrasted to Greece's 9.1 and U.S.'s 11.1 percent. Most of my data is taken from the free market Economist magazine.
The Nordic countries rank high in every category: (1) Sweden, Denmark, and Finland rank 4th, 5th, and 6th in terms of economic competitiveness; (2) Denmark and Finland are first and second for their friendly business environments; (3) in terms of innovation Finland ranks third while Sweden is fifth and Denmark is tenth; (4) all five are in the top 14 in terms of GDP per person.
Sweden Nearly Destroyed by Unregulated Banks
After leading their fellow Swedes to unprecedented prosperity and social security for 40 years, the Social Democrats lost to a center-right coalition in 1976. Following the example of UK's Margaret Thatcher and the U.S.'s Ronald Reagan, Swedish conservatives liberalized the banking system. In the U.S. this produced the savings and loan crisis, which cost the federal government $125 billion, which is $230 billion in today's dollars. The taxpayer bill for the Bush-Obama bail-out is now down to about $100 billion, primarily because the banks have repaid most of their loans.
Carter Dougherty describes the origins of the Swedish banking crisis: "The financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden's banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times. Property prices imploded. The bubble deflated fast in 1991 and 1992."
Reading up on the American bank failures and FDR's response in the early 1930s, a chastened Swedish conservative government spent about the same proportion of GDP as the U.S. recently did to save its banks. One bank was nationalized and four others were given substantial support, and after following strict rules for solvency, they were sold back to private interests. Some economists say that in the end Swedish taxpayers owed nothing. Firm action on the part of a conservative government saved the Swedish economy from total collapse.
There are at least two ironies in the Swedish banking crisis. Much like Bill Clinton being forced to the right by GOP victories of 1994, the Social Democrats, back in power by 1982 and protecting razor thin majorities, liberalized the banks even more in 1985. The second irony is that Swedish banks own an average 63 percent share in Baltic State banks, and they are not showing much compassion as they call for repayment of huge loans to Latvians, Estonians, and Lithuanians.
Danish Conservatives Preserve Social Democratic Achievements
Except for seven years, Denmark has been ruled by center-right governments since 1985, and in the 2007 election the Social Democrats received the lowest percentage of votes in their history. When they were in power from 1994-2001, however, they brought down the budget deficit, reduced the unemployment rate, and eliminated oil imports with government subsidized wind power. Denmark spends 20 times more than the U.S. per capita for worker training and recruitment, and the result has been an unemployment rate of 3-4 percent even during the Great Recession.
Comparing the incomes of fathers and sons, the egalitarian Nordic countries have the highest social mobility rates in the world. While only 25 percent of Americans born in the lowest economic 20 percent move out of the bottom, a full 40 percent of Danes do. There are fewer and fewer Andrew Carnegies: only 7 percent of Americans now make it from the bottom to the top 20 percent. Social mobility correlates strongly with general income inequality, and U.S. social mobility has decreased dramatically since the Reagan Revolution made Americans much more unequal.
Germany: Europe's Economic Power House
Germany's Social Democrats have traded places with the conservative Christian Democrats since 1949, with the latter ruling 31 years and the former 21 years. For the past five years the two parties have formed a grand coalition under the leadership of Chancellor Angela Merkel, who offers the "social market" as an antidote to Wall Street capitalism. A German Banking Federation survey showed strong support for her theory: 61 percent Germans polled wanted more "social protection," while only 23 percent desired more "market."
With world's third largest economy and the second largest number of exports (recently overtaken by China), Germany has been hit hard by the Great Recession. With universal health care, generous unemployment benefits, and cooperation between strong unions and corporations, Germans have survived the storm very well. With a job program that was initiated by the Social Democrats during their last term in office (1996-2005), The Economist reports that "unemployment dropped from 5 million in 2005 to 3 million in 2008; in the last two years of the upswing long-term unemployment fell by 40 percent." The contrast with a huge jobs loss in non-social democratic U.S. is striking.
The US is in much better Shape than Greece
In contrast to the rest of Europe, Spain, Portugal, and Greece came late to democracy and the European Union and its currency the euro. Military dictatorships controlled these countries until the middle 1970s. The generals survived as long as they did primarily because the U.S. found them convenient allies in preventing the spread of Communism in Southern Europe. Fear mongers painted the Social Democrats just as red as the Soviets, and ignorance and unfounded accusations worked just as well then as it now does in American politics.
Since 1974 Greece's two major parties--the Socialists and the center-right New Democracy--have had an equal share in the maladministration of their country. Corruption has been the rule on both sides, and the Greek people have been the losers. Although Greece's public sector is actually smaller than many other European countries, it is bloated and inefficient. Both parties are notorious for hiring their friends for "do-nothing" jobs. Rich Greeks have moved $436 billion off shore into Swiss bank accounts and they are among the world's worst tax evaders. The Minister of Tourism was forced to resign when it was discovered that her husband owed $6 million in back taxes.
In 2000 Greece was allowed to take on the euro as its currency without "due diligence," and a year later Goldman Sachs sold the government financial instruments that concealed the true nature of its mounting debt. The current government is pursuing the idea of suing Goldman Sachs for its deceptive practices. EU officials are now putting new policies in place that will control speculators who have been betting on Greece's failure, and they are insisting that credit default swaps be fully transparent.
Recently National Public Radio featured an interview with a Greek banker who recalled a meeting in the early 2000s. There it was announced that Greek banking would now be "supermarket style" and that everyone was going to make a lot of money. While the government ran up its own debt, Greek consumers, joining nearly everyone else in Euro-America, took out loans to buy electronic goods, cars, and homes far in excess of their means to do so.
The European Union has been slow to respond to the Greek crisis. Many Germans, for example, believe that the prosperity they have gained by old-fashioned thrift should not be sacrificed for Southern Europeans whom they perceive as not being very disciplined or diligent. (Greeks, however, work on average 250 hours per longer than the Germans.) Economists are now saying that if intervention had come earlier in the year, the bail-out would have cost several hundred million dollars rather than the $1 trillion fund that has now been established. World markets are now responding positively and it appears that the worst is over. Although the Greek economy is only 2.8 percent of the EU's, the largest in the world, Europe cannot risk a Greek bankruptcy, just as Bush and Obama could not let GM, Chrysler, and major banks go down the tubes.
The Greek government is trying to do its part, even while protests (marred by murders by a few anarchists) are a daily occurrence. Editors of The Nation summarize government action as "restructuring of the tax system, a crackdown on tax evasion, pay cuts for public sector workers including government ministers, pension reform, and a public hiring freeze." Early this year a Greek bond offering of $6 billion had more buyers than expected, but the interest rates range from 5-6.5 percent because of Greece's poor credit rating. Those rates are going down now with the huge EU fund in place.
Because of a slow EU response, the value of the euro, reaching a high of $1.60, has now dropped precipitously to $1.21. Traders are buying U.S. treasury bonds at a greater rate than ever. Just like Ireland, the U.S. economy, thanks to Obama's stimulus package, is expected to grow by 3 percent next year. A weaker euro will impact American exports to Europe, so that projection may have to be revised down. Nevertheless, Nobel Prize winning economist Paul Krugman sums up issue succinctly: "The U.S. has a clear path to economic recovery, while Greece does not."
In Europe parties on both sides of the center do not perceive government as the enemy, but it is a constructive partner in building a stronger and more resilient society. The principal mistake that Social Democrats made, just as Clinton and his advisors made in deregulating the financial sector too much, was that they tolerated too much risk and free-wheeling in the banking industry.
One final word about economic tigers. Except for Japan, the Asian species are doing far better than the nearly extinct European varieties. Except for a temporary crash caused by currency speculators in Singapore, the Asian Tigers are once again on the move, with economic growth in the 7-11 percent range. Here the buzz word is "Confucian capitalism," an Asian version of the "social market." The significant fact, most challenging to libertarians, is that there is far more state intervention in these economies, and they are roaring even louder these days.
One last observation: Those Tea Partiers who say that we should bring back "Austrian" (=libertarian) economics have a real problem. I answer them with a creationist jab: "It's just a theory with no facts to back it up!"
Nick Gier taught philosophy at the University of Idaho for 31 years. See his other columns on Europe at www.home.roadrunner.com/~nickgier/Europe.htm