A spend-and-borrow debt mess
The ink was barely dry on the $150 billion EU/IMF bailout of Greece when world stock markets tanked on two major fears. First, financial analysts are concerned that the bailout money won’t be enough to cover Greece’s borrowing needs from its out-of-control budget deficit. Second, there are fears that the EU/IMF deal will not be approved by the German parliament in a vote scheduled for Friday.
Additionally, there are new worries that the Greek debt contagion will spread to Spain and elsewhere in Europe. The looming specter of debt default and deflation is heavy in the air for investors worldwide.
Making market matters even riskier, German chancellor Angela Merkel faces key regional elections this Sunday in populous North Rhine-Westphalia, including the conservative areas of Cologne, Bonn, and Stuttgart. These cities hate government debt and overspending as much as the rest of Germany, if not more so.
The great postwar German leader Konrad Adenauer came from Cologne. He was a conservative Catholic who despised Nazism and Soviet communism. He also was an inflation fighter. To stop hyperinflation in the postwar period, Adenauer sponsored the new German mark and linked it to the dollar, which in those days was as good as gold.
Today, all of Germany still hates inflation. And the Germans are afraid that the currency printing presses used to buy bad bailout bonds will return the country to a haunted past. So it’s tricky business for Merkel to sell the Greek bailout on the eve of local elections that could disrupt her already thin governing coalition.
Merkel is playing a double game here. She’s telling the Financial Times and the Wall Street Journal that the bailout must pass in order to save the euro currency. At the same time, she’s telling folks at home that Greece’s extravagant social-welfare entitlement system of bankrupt promises is a disgrace that Germans would never tolerate.
Apparently, credit markets won’t stand for it either. Both around the world and here in the U.S., credit markets are boycotting massive government debt creation. The result is that gold is fast becoming a currency substitute, with strong markets for the yellow metal saying a pox on all your houses.
Merkel and other European leaders would like the IMF to be the fiscal-discipline policeman for Greece and the rest of southern Europe. But as Nobelist Robert Mundell has argued, while the unified and fixed exchange rate of the euro currency system, along with liberalized trade, has been good for economic growth, things have broken down with the failure of the so-called fiscal-stability pact that was never enforced.
With tens of thousands of Greek government union workers marching in the streets of Athens calling for more general strikes in protest of IMF austerity measures to cut back on bloated pensions, voters in Germany and perhaps other EU countries do not believe the bailout conditionality will ever work. Voters see solvent nations being saddled with more debt that the European Central Bank may well monetize into higher inflation.
Perhaps the Greeks should consider a privatization asset sale of the Parthenon, or some of the beautiful Greek islands, as a means of raising desperately needed cash. Think of it: Greek Thatcherization. Of course, in addition to privatization, Margaret Thatcher used her budget ax. That’s something neither Greece nor Spain appears capable of implementing in a sustained way. Mrs. Thatcher also reminded us that the problem with socialist governments is that they finally run out of other people’s cash.
What’s more, while Greece and Spain have moderate 30 percent business tax rates, lower than rates in the U.S., their combined personal and VAT tax rates come to about 60 percent. Team Obama take note: These are anti-growth tax policies.
Indeed, the debt follies of Europe and the bankruptcy of the European entitlement state should be a lesson for Obama’s Washington, where overspending and borrowing have reached absurdly grand heights. As a share of GDP, U.S. debt is projected to move toward 100 percent in the wake of the new Obamacare entitlements. That’s near the 125 percent debt ratio of Greece.
And just like Greece, U.S. government union-worker benefits, which run 50 percent above private-sector equivalents, are bankrupting federal, state, and local budgets. They’re also spawning a massive voter revolt against big-government debt that will bear fruit this November in the tea-party midterm elections.
In a vague sort of way, British Tory leader David Cameron is opposing the spend-and-borrow mess of Gordon Brown’s Labour party that so resembles Obama’s policies. Consequently, Cameron looks set to win the U.K. election on Thursday. That’s good news for England. But it could embolden German legislators to vote against the EU-IMF bailout for Greece on Friday. And that could create an even bigger stock market mess, at least in the short run.
Call it a spend-and-borrow debt mess. A pox on all your houses, at least until financial-market and voter discipline force the dim-witted politicians to radically change course.
Larry Kudlow is host of CNBC’s “The Kudlow Report.”