[Vision2020] Bank Deregulation, not Social Democrats, Cause of Greek Crisis

[nickgier at roadrunner.com]

Greetings:

While it took only several hours to write "Riding the Rails," this one took several days.  The full version is attached as a PDF file. I've gathered all my columns on Europe at www.home.roadrunner.com/~nickgier/Europe.htm

The situation in Thailand is getting really nasty, so I guess that will be next week's topic.

Nick Gier

BANK DEREGULATION, NOT SOCIAL DEMOCRATS, CAUSE OF GREEK CRISIS

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. If one looks at the facts, it has been center-right governments in Greece, Iceland, Ireland, and the Baltic States that have nearly destroyed the economies of their respective countries.
 
Let's take a look at 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.

But in 2009 the big Irish party turned into a wake as the economy declined 7.5 percent, but not nearly as bad as 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 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.  

Swift and firm action by the Irish government has worked. A TARP-like fund was set up to save the profligate banks. The government has combined tax increases and spending cuts to reduce the budget deficit, and Ireland appears to be on the road to recovery with 3 percent growth predicted for next year.

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. 

>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. 

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. 

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. 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.

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.  

Economists are now saying that if intervention had come earlier in the year, the bail-out would have cost several hundred billion euros rather than the $750 billion fund that has now been established.  World markets are now responding positively and it appears that the worst is over.

Because of a slow EU response, the value of the euro, reaching a high of $1.60, has now dropped precipitously to $1.22. 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. 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 stronger and more resilient societies.  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.

Nick Gier taught philosophy at the University of Idaho for 31 years.