The Greeks are voting today because the old government coalition that was led by the New Democracy party had failed to provide much in the way of leadership and problem solving. The basic problem for Greece is that it should never have joined the European Monetary Union. In fact one might argue that they should never have joined the European Union, which is a trade union but also a super regulatory group that makes not only trade policy but policies that regulate manufacturing design and production, quality controls, and a host of other onerous rules and regulations. It is a super bureaucracy that more to distort the economies it controls than it does to grow them. An analogy would be that of Health and Child Services that made it their business to come into your home every day and tell you how to raise your children, what foods you may eat and how to prepare them, what health precautions you need to take, and….well, you get the idea, a super nanny government.
The Syriza party, one that was formed back about 2006, has been steadily gaining strength through more members and through a willingness of the general population to vote for the policies it represents. Oddly enough it is a far left fascist political party, one that the majority of the Greek people would never consider joining but it is willing to do what should be done to get that country back to some sort of normalcy. The ECB, the IMF, and past Greek governments have destroyed the Greek economy. When wages before joining the EU were paid in Drachmas, the old Greek currency, the products produced for export had the advantage of being cheaper even with added import duties. Imports were far more expensive because one had to buy not in Drachmas but in Euros and the conversion meant that most of the goods that would be imported were too costly. So either one did without or one made such goods for local consumption. But once in the monetary union, wages were paid on a one for one basis. The result was instant inflation. Now the goods manufactured or produced cost more and were no longer competitive with goods made by the other members of the EU. The problem with inflation is that it tends to produce more debt in the public sector, the private sector, and in the consumer sector. And the nannycrat policies started to corrupt the government and the people. Imagine retiring at the age of 45 as a hair dresser because the government felt that the chemicals you used on a daily basis shortened your life span. Almost all pensions were paid by the government and those pensions were very generous. The socialism that invaded Greece was literally that of Robin Hood wealth transfers.
So how to meet the costs of all these new policies. Do what the U.S. and most of Europe have been doing for decades, borrow like crazy. Of course we use our tax collections to pay some of that debt but mostly we just keep rolling it over as it will never go away until we default on it. So the Greek government borrowed and borrowed very heavily against tax collections that would never pay the interest en toto. Starting about 2008 we started having the Greek crisis of government bonds coming due and little money to buy them back. At that time Europe was having having its recession crisis and the bond holders were getting nervous. You may recall the PIIGS, those five countries who should never have joined the EU; Portugal, Ireland, Italy, Greece, and Spain. Eventually all five will leave the EU if they wish to survive well into the 21st century. And that is fact, not fiction. Debt to GDP is not an illusion and repayment will be extracted if they stay as members. Iceland was the only smart one of the bunch. They had their bank crisis in which the private banks were so overloaded with bad loans and their own public central bank was suppose to guarantee the losses by having the government through higher or special taxes on the people pay those losses. And if you remember, the public gave the finger to the bankers and all the EU nations and the IMF and the ECB and the EU ruling commission, and said no! They threw out the sitting head of government in a special election, told the banks to file bankruptcy and even sent some of those bank presidents to jail for fiduciary mismanagement. Supposedly the IMF and the rest of the world predicted doom and gloom for the rest of Iceland’s days in this century. That never happened. Their economy has rebounded to at least a slight growth in GDP and their is not great load of government and private bank debt overload to hold them back in the future.
Will the sky collapse if the new Greek government defaults on its bonds? No, only that the IMF and the ECB will not bail them out. And if that is the case and I do believe the current leadership of Syriza is aware of the options, they will withdraw from the EMU and go back to the Drachma. But who will trade with them if they do? Russia, for one. It will be a very long road back to stability in their economy but Greece will get there. Of course there will be plenty of casualties but there are enough charitable organizations that will help lessen the general pain. It is another cautionary tale. Socialism does not pay as a political solution. Socialism destroys the future for the simple reason it is a philosophy that there is a free lunch. the reality is that there is only a free lunch as long as someone else can pay. When the money runs out so does the lunch. and often times that lunch is bought on credit, making the consequences worse. So tune in tonight and hear the news. Syriza will take the elections and Monday the Euro will drop closer to parity with the dollar.