Stop talking about Austerity as you have no idea what that means

It is disgusting to hear the British and French bleat on about the horrors of Austerity, as if they actually had any idea of what they are talking about.

My friend Andrew Brice in Wellington, New Zealand has produced some simple but effective graphs that showing GDP growth across the world from 1994 to 2014. Looking at the graphs for somewhere like Greece, and you quickly see what Austerity really means.He is graphing World Bank data since 1994 on a range of economic data points for all countries. While not setting out to show "Austerity", the graphical presentation does provide some interesting information. His site can be found here.

I've selected four countries for the chart below: France, Greece, Spain and the United Kingdom.

Notice how the GDP points expand fairly uniformly for France and the UK. Each point on the spider diagram, for the three reference years, shows growth, indicating and reasonably balanced growing of the various key elements of GDP.

Not Greece, in which that growth virtually implodes for 4 of the five factors between 2004 and 2014. Only 'X' - Exports, continues to grow, and that at a slower rate than the previous decade. Household consumption, General government, Gross capital formation and Imports all collapsed. Gross Capital Formation is less than it was in 1994.

Spain looks only marginally better.

Yet for the UK and France, all five indicators continue to expand through the crisis and into the second decade of this century.

GDP growth graphs for http://zyaneconomics.appspot.com/#/finmodel/

In the UK and France, governments have attempted to bring spending under control, and in large measure have failed miserably.

Oxfam's report on Austerity in the UK is a wonderful example of not understanding reality. "Since 2010, austerity – primarily in the form of deep spending cuts with comparatively small increases in tax – has been the UK government’s dominant fiscal policy, with far fewer measures to stimulate the economy. The stated aim of austerity was to reduce the deficit in the UK to give confidence to the markets and therefore deliver growth to the economy. While austerity measures have had some impact on reducing the deficit, they have delivered little growth, and public debt has risen from 56.6 per cent of GDP in July 2009 to 90 per cent of GDP (£1.39 trillion) in 2013."

It is almost as if "Austerity" actually only means "we cannot have everything that we want". Economies just balance what is required to keep the lights on, tax rates that do not disincentive investment, balanced against social programmes that effectively avoid rioting and revolution. In which case Austerity has become the a rejection of a "give me mine" mentality.

Yet contrast that with 10 things the Greeks cannot do (from July 2015 at the height of the crisis). If you want to see real austerity, look at Greece. Could the UK or French governments survive cutting pensions by greater than 50%. Or unemployment higher than 25% (and 50% for under 26 year olds)? What would Oxfam say to 45% of pensioners living below the poverty level, and food consumption dropping by almost 30%?

United Kingdom

Looking at the GPD growth chart for the UK it is almost easy to see the source of discontent. Yet it needs to be remembered that the economy has continued to grow (once over the Global Financial Crisis - GFC - induced great recession) and is now larger then it was in 2008.

UK GDP Growth, 1994 - 2014
Note the continued expansion of all five elements

 
Personal income has (as of 2015) grown to exceed personal income, inflation adjusted, pre-GFC. It took a long to time recover, and certainly the average POME (Prisoner of Mother England, or is that short for Pomme de Terre?) has had a rough ride. But pensions have continued to be paid, the health service has continued to treat patients, and to expand the range of coverage and care provided. The economic effectiveness of that service may be up to question, but that is a factor of quality of provision, not total expenditure in GDP terms.

France

France is not significantly different, with growth across all five data points through the years. Yet France (and the French) are mired in a psychological paradigm that says that they are suffering, oh so horribly, from massive austerity. Each new president is elected on a promise of change, or in the case of Sarkozy, "rupture" with the past. Yet for twenty years, each new president has been met by strikes at the mere hint of market reform legislation, strikes lasting weeks and covering the entire country sometimes. Each president has caved. Even the French military has a better (much) record of refusing to surrender.

France GDP Growth, 1994 - 2014
Not bad for coming through the GFC

Yet looking at the image above, you would think that France has had fairly steady growth, especially when you consider that between 2004 and 2014 there was the GFC knocking their economy into deep recession, and their being in a Europe that has seen lackluster growth at best over the past half decade.

Greece

Turning to Greece, we see a very different graph, in which the only growth has been in exports. The years between 1994 and 2004 showed good growth, in line with the UK and France. Yet with the GFC and their debt crisis, loss of sovereignty and destruction of the social welfare system, the years 2004 and 2014 we can see what austerity really means.

Greek GDP Growth, 1994 - 2014

The collapse in Greek GDP growth has been across the board, with only exports growing past 2004 levels, and that only marginally. The other four indicators have all collapsed, with Gross capital formation falling to below 1994 levels.

Compare that to the GDP performance of Greece's four land-border neighbours; Albania, Bulgaria, Macedonia (well, okay, the Former Yugoslav Republic of Macedoia to give it the official name) and Turkey. All four have experienced consistent and continual GDP growth.

 These countries have come through revolutions, civil wars and military dictatorships, but have then spent 20 years growing. And growing. Meanwhile their Eurozone neighbour has suffered at the hands of creditors and "friendly" governments. "But it's all the Greeks fault, they are perfidious and profligate, and they borrowed the money". All true (well, except the perfidious). Yet looking at the rouges gallery of neighbours, can we really say that the Greeks are any worse?

Greek is in austerity. And this is real austerity; the kind that results from the markets losing faith, and the bankers engaging in as much Moral Hazard as the Greek government itself. Yet when the bill came due, the banks (as effectively representatives of other governments or the ECB and IMF) decided that only one side of the perfidious (and here I mean it) cabal would pay.

Summary

The United Kingdom and France should, to use the English colloquialism, "shut their pie-holes". They are not in austerity, and do not actually know that it means. They are living *slightly* above above their means, but continuing to borrow like drunken sailors.

True Austerity is Greece, and this is in their futures when the markets say "enough". Then we will see real austerity in those two countries, as government debt becomes unavoidable and unsustainable. Greece saw:

– 25%: Fall of gross domestic product
– 28%: Reduction in public sector employees
– 28.5%: Drop in food consumption
– 61%: Drop in average pension (833 euro)
– 45%: Number of pensioners living below the poverty line
– 26%: unemployment (50% at ages under 25)

This is the real face of austerity, and something the UK and France should really fear. Today's weak attempts to controls spending are only a start, and a poor one at that.

Greek Bankers and former MPs are going to jail

This might just be Syriza's "way out" of the Grexit, and the way they can stay in the Euro, while destroying PASOK and Nea Democratea's (ND) ability to regain power. Earlier this week, on 17th of June 2015, a special committee of the Greek Parliament released their report, and in so doing, have put Greek bank executives, Finance Ministry heads and MPs from the former ruling parties on notice: you have iron bars in your future.

Rewind to earlier this year, when Syriza established a Parliamentary Committee, the “Debt Truth Committee” to determine how much of the €320 billion debt is legal, and recommend how much of that debt to unilaterally cancel as illegal. On the 17th the committee reported their findings. In perhaps the biggest non-surprise of the saga, the committee has reported that the "Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious."

This provides the Greek Parliament with a legal opinion to allow them to abrogate the loans. Wipe the slate clean. Clear the ledger. Stop the payments. Thank you, it's been fun.

This also gives the Greece government the authority to arrest Greece Finance Ministry officials and politicians. And under EU law, the Greek government could issue an arrest warrant for IMF and ECB officials. Would an EU arrest warrant for IMF chief Christine Lagarde be honored next time she gets off an airplane in Europe?

The Troika's objective

As I posted a couple of days ago, the "end of history" crowd needs the elected government of Greece to fall, to ensure the myth of the eternal victory of liberal western capitalist democracy as the sole survivor of Cold War One (CW1).

"If we want to date the moment when the Atlantic liberal order lost its authority – and when the European Project ceased to be a motivating historic force – this may well be it. In a sense, the Greek crisis is the financial equivalent of the Iraq War, totemic for the Left, and for Souverainistes on the Right, and replete with its own “sexed up” dossiers." (from Ambrose Evans-Pritchard at the Telegraph of 19 June 2015) 

It is easy to listen to the Troika's rhetoric of Greece the Failed State and to assume that more and deeper cuts and systemic changes are required. It is also easy to assume that Greece has not changed, and is the laggard in Europe. Yet looking at the numbers and we see a country that has implemented systemic changes that would destroy any ruling party in any Western country, from France or the UK, to the United States.

Could France, Germany, the UK or the USA cut its government payroll by 28%? Could any of them cut their average pension by 61%?

As Evans-Prichard goes on to say "We all know the argument. The EU is worried about political “moral hazard”, about what Podemos might achieve in Spain, or the eurosceptics in Italy, or the Front National in France, if Syriza is seen to buck the system and get away with it." All the while forgiving and forgetting the Moral Hazard that is incumbent in the IMF, ECB enforcement of the original loans and lending (investing) in Greece.

The price

With the loans being declared illegal, Syriza now goes into negotiations early next week looking to see what the Troika is willing to bring to the table. If the only things on offer are more years of hardship and continuing a program that "directly affected living conditions of the people and violated human rights, which Greece and its partners are obliged to respect, protect and promote under domestic, regional and international law" (Exec summary, Chapter 6) , then Syriza walks away, declares the loans void, and says "see you in court".

Greece would not even need to leave the Euro, as it will still be the legal currency of the country. There will be no need for a New Drachma with an instant 50% devaluation. Euros would continue to flow through the economy, and Greece's primary budget surplus would make it, theoretically, one of the better performing governments in the Eurozone, if not the world.

Suddenly, while Greece will be locked out of international capital markets, the immediate need to access those markets to service the debt will disappear. Not that simple of course, but a much stronger negotiating position.

Syriza's "get out of jail" card

For Syriza to stay in power, they will need an "out" to demonstrate to two constituencies that they represent the break from the past.  

They also need to deepen their roots throughout the Greek bureaucracy. After all, after 40 years of sharing power between PASOK and ND, all ministries, especially Finance, are stocked with bureaucrats who know how to please moderate socialists and moderate conservatives, but most of all know how to outlast whatever political party is in power. Just like almost every Western capital city.

Syriza needs to clear out the functionaires more closely aligned with the two (formerly) major political parties, and replace them with economists and functionaires aligned with a leftist socialist economic agenda. 


Syriza's "go directly to jail" card

What better way, then to frog-march to jail the ministry functionaires who wrote the papers that supported the politicians who negotiated the deals that the functionaires in Athens and Brussels (and Washington) then agreed. As long as those functionaires remain in place, more papers will be written demonstrating why the previous papers represented the only way forward. For syriza to make any progress, they must ensure those papers are never written. How better than to fire the functionaires (on the grounds of course, of #1 the functionaires committed illegal acts and #2 Greece still needs to streamline the bureaucracy and therefore must cut heads).

Of course, this is not exactly in the individual best interests of the functionaires - thus the importance of the “Debt Truth Committee”.

If the Committee states that the loans were illegal, as they have, then Syriza has all it needs to remove the functionaires pending trial. And to arrest and smear any sitting MP from PASOK or ND who was in any way involved in negotiating, speaking in favour of, or voting for the bailouts. 

So Syriza, the legitimately elected representatives of the Greece people, will negotiate for reductions in the debt burden, while at the same time shoring up their longer term position in Greece itself by surgically removing the functionaires who work to undermine them from within the ministries. They will try the politicians and former MPs who voted for the bailouts. As with Iceland, we will see what democracy really means, the democratically expressed will of a people translated into real pain for those who screwed the people.

Wolf! Wolf! Wolf, and Moral Hazard

Wolf

Having been wrong about the Grexit date of 9th May 2015, and having written again about why it is actually in the best interests of Greece based on other countries' experiences, it is time to call "Wolf!" again. Boring, I know, but "Wolf! Wolf! Wolf!".

Or, "Grexit! Grexit! Grexit, and Moral Hazard!"

There, I've said it. Now why do I keep saying it?

Syriza was elected, and they are a political party, and they will implement to the extent that they can, their agenda. From the Syrisa perspective, the ongoing Greece-Troika-EU dance that has become oh so tedious has two purposed; ensure that the Germans will reject or refuse to put any viable plan on the table, and ensure that EU's  (and Toika's) willingness to inflict massive and almost perpetual pain on the Greek people finally reduces the percentage of Greeks who say they want to stay in the Euro.

From the Troika perspective, it is clear that, like good loan-shark enforcers, the Troika will be happy to see every last penny extracted, every last asset liquidated, before in the end suggesting that there is one way-out left; suicide. According to the New York Times reported on 25 May 2015, "As for the hospitals, even though they are taking in twice as many patients now, their budgets have been cut to the bone. In the first four months of this year, health officials say that the 140 or so public hospitals in Greece received just €43 million from the state — down from €650 million during the same period last year."

The suicide that the Troika would like to see is the suicide of Syriza, those nasty, far-left socialist / communists who also happen to be Greek nationalists. So we are now in a battle of wills between the "End of History" with it's ultimate victory of liberal capitalist democracy and a miserable rearguard of that failed socialist philosophy that has no future.

The problem with this narrative, like all simplistic narratives, is that the situation is of course far more complex, and is one that strikes at the heart of the presumptive winner in the game of history. Capitalism is failing. Liberal democracy is failing. Sure, it remains the now-dominant political-economic narrative, and will remain so probably though the coming crisis (no, not the Greek one, the real one).

Moral Hazard

Greece is a reflection of the Moral Hazard that has engulfed the capitalist system, with Too Big To Fail (TBTF) banks, but Not Big Enough To Save countries. When the final choice must be make, the Troika and virtually all Central Banks will  impoverish and force a country to fail, rather than allow the poor lending decisions of the banks and IMF to reap the reward of poor investing decisions.

Moral Hazard is the concept that if an entity (or an individual for that matter) knows that they will be able to "get away with it", be it murder, theft, or simply poor lending and investment decisions, then there are not impediments to that unacceptable behaviour. In central banking and regulatory context it means the importance of demonstrating that no business is TBTF, because to admit that the business will not be allowed to fail will simply encourage "Moral Hazard" or behaviours that are ultimately counterproductive to the business (or the counter-party) to the point of damaging the business.

In the case of Greece, one side of the Moral Hazard has been the implicit expectation that no matter what happens, the money "loaned" to Greece will be repaid. The other side of Moral Hazard is that Greece sought and took loans when it knew that it was taking out loans that were well beyond the ability of the Greek economy to repay.

Until the IMF, ECB, national Central Banks and national governments print money, buy bonds, and run their countries at significant budget deficits, there will be Moral Hazard. With Greece, all can see the future, they just aren't willing to look.