The Welfare State Model is Unsustainable

[Corlyss_D]

February 22, 2010
Greece and the Welfare State in Ruins
By Robert Samuelson

WASHINGTON -- It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues affecting hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency -- the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, disabled and aged. All welfare states face similar problems: burgeoning costs as populations age; an overreliance on debt financing; and pressures to reduce borrowing that create pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece is the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt -- basically, the sum of past annual deficits -- was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two-thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost 17 billion euros in bonds (about $23 billion) maturing this April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are now debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others. These expectations constituted an implicit guarantee of the debt of Greece and other euro countries. If Greece defaulted, the guarantee would vanish and, possibly, trigger a flight from other countries' debt.

But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand -- or require -- rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut its government work force and raise taxes on alcohol, tobacco and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble.

To some economists, Greece's situation is so dire that default is inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen existing unemployment, already about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and revert to its own currency (the old currency: the "drachma").

Conceived as a way to unite Europe, the euro increasingly divides. No one wants Greece to default, but no one wants to pay the price of prevention. With its own currency, Lachman thinks, Greece will pursue depreciation to spur exports and economic revival. If other countries dump the euro, currency wars could ensue. The threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birth rate and rapidly graying population automatically increase old-age assistance even as the government tries to cut its spending. At issue is the viability of its present welfare state.

Almost every advanced country -- the United States, Britain, Germany, Italy, France, Japan, Belgium and others -- faces some combination of huge budget deficits, high debts, aging populations and political paralysis. It's an unstable mix. Present deficits may aid economic recovery, but the persistence of those deficits threatens long-term prosperity. The same unpleasant choices now confronting Greece await most wealthy nations, even if they pretend otherwise.

Copyright 2010, Washington Post Writers Group

Page Printed from: http://www.realclearpolitics.com/articl ... ruins.html at February 22, 2010 - 11:05:42 PM CST

[jbuck919]

Well, now I understand Corlyss' concerns. If the US goes down that road, we won't be in a position to provide the next Marshall Plan when Europe collapses.

[Corlyss_D]

Financial Times
Greece threatens more than the euro
By Gideon Rachman

Published: February 22 2010 20:02 | Last updated: February 22 2010 20:02

As Greece’s financial crisis rumbles onwards, it has become commonplace to argue that the roots of the problem stretch all the way back to the design of Europe’s single currency. Actually, it is worse than that. The Greek crisis is about the very basis on which European unity has been built for the last 60 years. It threatens not just the euro but the entire edifice of the European Union.

The risk for Europe now is that if the EU does not move forward politically in response to the Greek crisis, it will move backwards – and the long process of European integration could start to unravel.

The EU has always proceeded by creating economic “facts on the ground”, which were intended to trigger political effects. Ever since the 1950s this has worked admirably, as a modest coal and steel community turned into a common market and finally into a Union of 27 nations, with its own parliament, supreme court and foreign policy.

Jacques Delors, the European Commission president who presided over the creation of a single market in the 1980s, said frankly: “We’re not here just to make a single market – that doesn’t interest me – but to make a political union.” The creation of the single market involved a huge expansion of European law and therefore deep erosions of national sovereignty.

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The same political thinking lay behind the design of the single European currency in the 1990s. As Tommaso Padoa-Schioppa, a former member of the board of the European Central Bank, recently wrote in these pages: “The founding fathers wanted the euro primarily as a step towards political union.”

This drive for political union was intensified by the end of the cold war. France feared that a reunited Germany might once again dominate Europe. The French answer was to bind Germany into the European construction through the creation of a single currency. The German government willingly accepted this in return for the promise of a major advance towards political union in Europe, which was a longstanding national goal. (As for the German people, they were never consulted directly – an oversight that may come back to haunt the euro now.)

Gerhard Schröder, the German chancellor at the time that euro notes first emerged from Europe’s cash machines, believed that monetary union required “decisive advances towards political union”. Some, like Romano Prodi, Mr Delors’ successor as Commission president, even looked forward to an eventual crisis in the eurozone as the event that would trigger these “decisive advances”.

Now the crisis has happened – and it clearly invites the big political steps that the founding fathers anticipated. A logical political response to Greek insolvency – and the threat of similar crises in Spain, Portugal and eventually Italy – might be to create common European taxes and a mechanism for big fiscal transfers between EU states. These are features that help smooth a currency union in the US, but that do not yet exist in Europe.

But there is no sign of any such move. Europe is stuck. So what has gone wrong? The problem is that the “economics first, politics later” method is almost Marxist in its assumption that economics will inevitably dictate a particular political response. But democratic politics involves choice.

The traditional EU method could only work when the political changes prompted by earlier economic decisions did not seem deeply controversial or unfair to ordinary voters. But the kind of political integration required by the euro affects ordinary citizens at a very basic level – since it involves big choices about taxation and spending.

As a result, it exposes a truth that ardent pro-Europeans are very reluctant to acknowledge. Most citizens of the EU still feel far more attached to their own nation than to the Union. “Europeans” are much less willing to bail each other out than they are to bail out their own fellow countrymen. West Germany spent billions to turn around East Germany. But there is little sign that the Germans are willing to spend further billions to turn around Greece – with the spectre of similar crises to come in Spain and Italy. The Germans may feel very “European” in principle. But when they are asked to start writing large cheques to support a bankrupt Greek state, they start to feel strangely German again.

As for the Greeks, they too have counted among the most ardently pro-European people in the Union. But the price of any EU bail-out of Greece is likely to be savage austerity measures, overseen by officials sent in from Brussels. That is likely to feel more like colonisation than a voluntary “political union”.

So what happens now? It is possible that Greece may yet muddle through this crisis. But, in a world of rapidly rising sovereign debt, the next euro-crisis might only be months away. At that point, the members of the European single currency will once again be asked how much they are willing to do (and to pay) to help each other out. If the answer is still, “not very much”, the euro-area might begin to shed some of its weaker members.

But the consequences could go well beyond the single currency. The EU would have a crisis of confidence and the likely result would be that other powers it has acquired, on everything from immigration to social policy, would come into question. There is more than money at stake in the Greek crisis.

gideon.rachman@ft.com

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Couldn't happen to a more deserving bunch of misguided fusspots. Economic union was a wonderful idea. The minute it tranmogrified into cross-border statism without serious or meaningful democratic support, it wandered off into that "we'll trade anything, everything, for security" mindset that has dogged the continent for 2000 years. For Europe, security never resided in union, but in mere cooperation. Rule of Europe from Brussels was a non-starter to many except the most deluded of Kumbaya dreamers, who thru neglect and indifference, came to control the process. When masters of process set the goals, look out!

[jbuck919]

From the same source, on the same day:

Financial Times

The euro will face bigger tests than Greece

By George Soros

Published: February 22 2010 02:00 | Last updated: February 22 2010 02:00

Otmar Issing, one of the fathers of the euro, correctly states the principle on which the single currency was founded. As he wrote in the FT last week, the euro was meant to be a monetary union but not a political one. Participating states established a common central bank but refused to surrender the right to tax their citizens to a common authority. This principle was enshrined in the Maastricht treaty and has since been rigorously interpreted by the German constitutional court. The euro was a unique and unusual construction whose viability is now being tested.

The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the euro. Mr Issing admits that he was among those who believed that "starting monetary union without having established a political union was putting the cart before the horse".

The European Union was brought into existence by putting the cart before the horse: setting limited but politically attainable targets and timetables, knowing full well that they would not be sufficient and require further steps in due course. But for various reasons the process gradually ground to a halt. The EU is now largely frozen in its present shape.

The same applies to the euro. The crash of 2008 revealed the flaw in its construction when members had to rescue their banking systems independently. The Greek debt crisis brought matters to a climax. If member countries cannot take the next steps forward, the euro may fall apart.

The original construction of the euro postulated that members would abide by the limits set by Maastricht. But previous Greek governments egregiously violated those limits. The government of George Papandreou, elected last October with a mandate to clean house, revealed that the budget deficit reached 12.7 per cent in 2009, shocking both the European authorities and the markets.

The European authorities accepted a plan that would reduce the deficit gradually with a first instalment of 4 per cent, but markets were not reassured. The risk premium on Greek government bonds continues to hover around 3 per cent, depriving Greece of much of the benefit of euro membership. If this continues, there is a real danger that Greece may not be able to extricate itself from its predicament whatever it does. Further budget cuts would further depress economic activity, reducing tax revenues and worsening the debt-to-GNP ratio. Given that danger, the risk premium will not revert to its previous level in the absence of outside assistance.

The situation is aggravated by the market in credit default swaps, which is biased in favour of those who speculate on failure. Being long CDS, the risk automatically declines if they are wrong. This is the opposite of selling short stocks, where being wrong the risk automatically increases. Speculation in CDS may drive the risk premium higher.

Recognising the need, the last Ecofin meeting of EU finance ministers for the first time committed itself "to safeguard financial stability in the euro area as a whole". But they have not yet found a mechanism for doing it because the present institutional arrangements do not provide one - although Article 123 of the Lisbon treaty establishes a legal basis for it. The most effective solution would be to issue jointly and severally guaranteed eurobonds to refinance, say, 75 per cent of the maturing debt as long as Greece meets its targets, leaving Athens to finance the rest of its needs as best it can. This would significantly reduce the cost of financing and it would be the equivalent of the International Monetary Fund disbursing conditional loans in tranches.

But this is politically impossible at present because Germany is adamantly opposed to serving as the deep pocket for its profligate partners. Therefore makeshift arrangements will have to be found.

The Papandreou government is determined to correct the abuses of the past and it enjoys remarkable public support. There have been mass protests and resistance from the old guard of the governing party, but the public seems ready to accept austerity as long as it sees progress in correcting budgetary abuses - and there are plenty of abuses to allow progress.

So makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large a portion of euroland to be helped in this way. The survival of Greece would still leave the future of the euro in question. Even if it handles the current crisis, what about the next one? It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance. A well-organised eurobond market would be desirable. The question is whether the political will for these steps can be generated. The writer is chairman of Soros Fund Management and author of the Soros Lectures, published by PublicAffairs this month

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[ravel30]

Corlyss_D,

I have a question for you. My sole purpose in asking you that is to get to know you better . It seems to me that you do not believe or like anything close to the welfare state.

I quote the first few lines of the first article that you posted:

"Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, disabled and aged."

My question is, how do you suggest to help the unemployed, poor, disable and aged persons if not from the welfare state ? I may make big assumptions here (that you don't like the welfare state) but still, I would really like to know your ideas about that.

Anyone else could join in too

Matt.

[Corlyss_D]

^^^ I'm not blowing you off, Matt. I need a little time to construct my answer so as not to sound glib, which seems to be a side-effect of patronizing the Pub. We regulars here have been talking among ourself for so long, we kinda know what to expect from each other, mostly in a friendly-adverarial sort of way that can puzzle infrequent visitors. I'll try to get back to you tomorrow since Canada isnt' curling. Go Canada! Didn't you love the crowd bursting into O Canada in the 9th end of the Canada-Britain men's match on Saturday? Almost brought me to tears! May be the best match I ever saw! It certainly was the best of only two or three really good matches I've seen in the last week.

[living_stradivarius]

A telling question for everyone to answer is: How high of a corporate tax and income tax rate are you willing to tolerate?

[slofstra]

A telling question for everyone to answer is: How high of a corporate tax and income tax rate are you willing to tolerate?

As long as it's higher on the bracket above the one I'm in, sky's the limit. In other words, the question as worded is fairly pointless. The question of tax rates versus not providing for the poor is a trade-off scenario (given that it's also not a zero-sum game); one's personal feelings about how much tax they can tolerate should barely enter it. Notwithstanding there are sound reasons outside of this for keeping tax rates low.

[Corlyss_D]

one's personal feelings about how much tax they can tolerate should barely enter it.

How do you figure that? The libs/Dems/Socialists in all welfare states seem to think no tax on business is too great, and almost the same for personal income. Businesses are the ones that provide jobs. Even the Russians finally had to concede they couldn't put everyone on the public payroll. I was thrilled when the Canadian personal income tax level fell below 57% in the 21st century. I mean, I know you guys are nice, and that's really sweet and everything to have that reputation, but there are limits. I remember in 1997-9 time frame when doctors and nurses were fleeing to the US because they couldn't make enough money to justify staying in Canada working for the state system. Where would they have gone if they hadn't had the US to flee to? The answer was to lower the tax rate and liberate them to earn what the market will bear, not to wage control them so that their only option for a decent living was to move to the US, although we are grateful for the influx: it helped relieve our doctor and nurse shortage because we breed video gamers, not math and science types.

[Daisy]

Welcome to the USSA!