Tuesday, December 20, 2011

Fall-out from the crisis of Greece (and the Southern Periphery)

A very dangerous process is under way: with the European debt problem assuming ever increasing dimensions, a mindset seems to gain foothold that all the problems are in the "sick" South and all the answers have to come from the "healthy" North.

After 3 months in Greece, I have now been back to Austria for 2 weeks. Austrian tax payers subsidize their national railways to the tune of 7 BN EUR a year, I just read, so that the national railways can send their employees into retirement at an average age of less than 55. Sounds familiar? I remember the comment of a Greek politician that it would be less costly to have all train riders be transported by taxi rather than by the national railways and, if I recall correctly, Greek tax payers subsidize their national railways with less than 7 billion EUR annually.

The same goes for tax payers' subsidies of pension payments, social and health security payments, etc. etc. Except that it is not today's tax payers who are doing the subsidizing but, instead, today's tax payers transfer the burden to future tax payers (in fact: future generations).

Can Austria afford that? Of course not! The famous ratio of sovereign debt to GDP already stands at around 80%. But Austrians are more clever than Greeks, it appears. Some of the sovereign debt is not even included in this calculation because it is transferred to special purpose companies (do you remember Enron?). All told, the sovereign debt of Austria might be in excess of 100% of GDP.

Is the Austrian government concerned about this? Yes, they were --- until other countries (like Greece) came along with even worse ratios of sovereign debt... And here is the great problem!

Does anyone in the South of Europe realize that Central Europe (with the notable exception of Switzerland) has built up welfare states which by no possible imagination can be financed in the long term? Particularly not with the demographic development is most Central European states?

Are the one-eyed leading the blind here? It appears that way but the one eye is not going to be open for so much longer!

One of the Austrian governing parties just published their own 24-point "savings plan" for the cure of the enormous budget deficit (mind you: an enormous budget deficit at a time of economic boom!). A savings plan? It consisted of 24 points of how to raise taxes. And that in a country where government expenditures already represent 53% of GDP ("only" 50% in Greece). Good luck!

Austria has the advantage over Greece of having a well-functioning private sector which, so it seems, will forever finance all the government's follies. Or will it not forever? And Austria's private sector has the advantage of having other countries buying its exports. Or will they not forever?

By the way, Germany is not all that different!

The present crisis is only superficially a crisis of the South. Sure, in the South the crisis blew all imaginable proportions but that is not to say that the North is "out of the water". It isn't. Instead, it is heading for the same waters which the South is already in!

Europeans altogether (with the possible exceptions of Switzerland and Scandinavia) have become accustomed to the fact that there may be such a thing as a free lunch. And with globalization, there now comes the surprise that "there ain't such a thing!"

Here is a 10-point paper written over 15 years ago. It was awarded a prize from the former Nobel Prize Winner Gary S. Becker. It's simple thesis is that there is no such thing as a free lunch.

The rest of the world outside Europe knows that, anyway. We Europeans are just about to find out.

1 comment:

  1. Being a Greek, a realist & a pragmatist, I congratulate you on your educated analysis. I am sorry for not possessing the German language, to be able to read your German posts.
    I liked your recent comment on Prof. Varoufakis, a clever economist with an agenda.
    I feel that I should suggest to you the recent paper by Profs. Bitros & Karagiannis (2011) "The socialist origins of x-liberalism in Greece".
    Thanks again & the best Season's Greetings!