Democracy Slowly Dies in PIIGS

Euro Flag Map

Pose Counterweight to Voters’ Wishes –

People are prone to cognitive dissonance. Americans want to cut the budget deficits but simultaneously reject reductions in popular programs or tax increases.  Europeans demand a stronger economy but also wish to maintain their euro memberships, which is what is causing the trouble in the first place.

In a recent post, Indignados: Rebels Without a Cause | DARECONOMICS, I wrote that the problem is Spain is that protesters have failed to present an alternative course of action.  The Spanish situation applies to the rest of the crisis-hit countries.  There is no Plan B.  Either side, left of right, has not changed course in its crisis-fighting efforts.

Voters have ceded a great deal of sovereignty to European institutions over the years, and now they are dealing with the consequences.  The eurozone necessitates one monetary policy for 17 very different economies.  While each eurozone country has the same regulatory burdens, the lack of transfer payments does not mitigate their costs in the poorer countries unlike in a true currency zone like the United States.

However, if these countries so chose, they could leave the eurozone whenever they like, but really they can’t.  The only thing keeping them afloat is German money or the promise of German money.  Greece, Portugal, Ireland and soon to be Cyprus would be bankrupt without bailouts.  Spain and Italy could not sell debt at such low rates without the ECB put.

This largesse is not free.  Northern tier voters resent bailing out the periphery, so political cover must be given.  This takes the form of austerity.

Until now everyone has played along.  Switches from left to right or right to left have made no difference in a country’s crisis fighting efforts despite campaign promises to the contrary.

Italy has broken the mold.  The Democratic Left wishes to continue the austerity program, but cannot form a government without the support of either the Grillo or Berlusconi bloc.  Grillo will not support austerity, and who the hell knows what Bunga will do.

Italy could change course, and its election results may prove prescient.  Fringe parties are growing in strength throughout the periphery upsetting the delicate political balance that has ensured adherence to the austerity model.

The cost of a euro breakup is prohibitively high for all 17 countries, but that factor is changing.  Once it becomes cheaper to exit and a political party supports this choice, the eurozone could dissolve in days.

A eurozone exit is drastic, but I do not understand why these peripheral countries seem to be such poor negotiators.  The euro’s greatest beneficiary is Germany.  It has the most to lose from a breakup. Why don’t the crisis countries use this leverage to get a better deal?

For now, continued adherence to European directives seems to be the only game in town, and this ensures stability no matter who is in power in these countries.


3 thoughts on “Democracy Slowly Dies in PIIGS

  1. thanks I appreciate the post.

    It should be interesting, the thing is with many if not all of these countries
    Greece and Italy and even US included, you have opposing forces, so there is
    no surprise in opposing representatives.

    On one hand you have the youth, with high unemployment, perhaps high debt,
    but with computer skills and they can’t be too far off seeing what is happening at home and abroad and know the future looks grim. Our youth are growing up quickly; from naive they will become a political force, they are awakening though I am surprised how long it has taken them.

    On the other hand you have the elders, who exist on social security or retirement,
    and they can’t have that cut off, and you also have good part of families living
    together on the same government benefits (shared housing).

    You are not getting money from either of these groups; blood from a stone.

    So they (eg: France) stick it to the wealthy, it may not be fair, but thats whose got the $.
    But there is only so far you can go (before they go).

    So if they have not already, they will get the earners too; those actually lucky enough
    to have a job, no where else to turn.

    So at least four groups with opposing positions, then add in all the corruption (eg: see Rajoy Spain) and no one trusts anyone. Small wonder they will cede authority to the EU.

    One big mess; as funds get smaller and smaller
    (eg: Greece ) things are bound to get more messy.

    The Only good news for the US is, they will witness Spain, Italy, Greece, France go first
    so at least there will be a bit of notice as to what happens ? The bad news is, even witnessing this, is there anything that can be done ?

    Seems unlikely ( see sequestration in US, cant even reduce 2 % without calling it a “crisis”).

  2. The mistake, taking on the debt of the banks.
    This shocked me. I never, ever, guessed, that they would do such a thing.
    Candidly I foresaw the collapse in 08 but perhaps not for all the right reasons.

    My reasoning had been, I saw the slew of no doc Adjustable Mortgages
    and No Interest mortgages going out
    and knew that within 3 or 5 years (depending on product) that when they reset
    (usually they were 3 or 5 year ARMS) or jnterest had to be paid
    they could never be paid. The people were getting mortgages based on false
    statements of income, with no documentation, knowing they would reset. They
    simply presumed real property that had gone up 20 – 30 % a year would simply
    continue. To add to the misery, they would refi and take equity and use it as a credit card.
    So now they had nothing, especially when often there was no equity in the home to
    begin with (no or low downpayment).

    I said this to anyone that would listen; I even asked how I could invest
    to incorporate this belief, unfortunately I did not have product available to permit
    that investment. But I did sell all bank stocks and told everyone I knew to do the same.
    Did not short the bank stocks because never knew exactly when the chips would fall
    and the risk of irrational exhuberance was too much.

    It wasn’t brains, it was simple common sense. A house bought for $ 150,000 10 years later was worth 600,000 for the rate to continue it would be worth 3 mil in another 10 years. Where on earth did they think the buyers would come from. To put it another way, it took your parents 5x yearly gross income to buy their first home, it was then taking 10 years gross to buy a home, and then would be 20 or 30 years gross to buy a home. With property tax doubling on “false” valuation every 10 years. Could not possibly be afforded.

    Had the banks one by one been placed in bankruptcy and the debts worked out
    we would not be here today. Saddling the public with the private debt of course
    is not only disgusting, but has now caused the downfall. They chose the easy
    quick way out and now reap the loss. Had they chosen bankruptcy it may have
    taken 3 or 5 years or more to clear, having chosen bailout it may take 10 – 20 years
    (Japan) and that is if it works at all.

    Some day, perhaps in a year or few, some candidate in Spain or Greece will say
    elect me and I will tear up the EU austerity agreements and walk on the debts; that these
    are not the debts of the people. Spain or France or other will then too get a candidate to echo that sentiment. When two or three are all saying the same thing and get elected, it should happen. It is the US that may be stuck with it. A Greece or Spain can probably get away with it, it will be much more difficult for the US to tell China to get lost we ain’t payin ya.

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