Or A TALE OF TWO PROVERBS
The first proverb I wish to quote with relation to the European debt crisis is that ?the road to hell is paved with good intentions?. For reasons which have been explained far better and in depth by serious analysts, the sovereign debt crisis engulfing the whole of Europe, and not just insignificant little Greece, resulted from the 2008 crash of the banking sector and the general destabilization caused by all those enormous bubbles bursting one after another.
Now the remedy prescribed by Europe with Germany as its steam engine and Great Decider, has been a policy of austerity and cut backs in order to reduce deficits and debt. Perhaps not an unreasonable policy, you may think, especially if you do not happen to be aware of the economic history of the world over the past century. But be that as it may, it is certainly a good intention.
The second prong of this crisis is that all European banks are grossly undercapitalized and far too exposed to the sovereign debts of the badly behaved countries, or PIGS. So another part of the object of this exercise has been to try and help these smelly inferior pigs remain solvent so that they can repay their exorbitant debts and keep the banks afloat. Again an excellent intention.
However, when put into practice with an iron fist, things don?t seem to be working out so nicely, and certainly no way as originally envisioned.
Now, take Greece with its bulging debt and yawning deficit. Plans were drawn up (one is told at least) whereby this whole situation would be put to rights through increased taxation and salary and pension cuts, within three years. We were originally told that we would be back in the markets by 2011. Whoops!
One could write whole treatises on the whys and the wherefores, but one can look at it quite simply. The idea was to recycle funds through Greece to keep the banks safe and solvent. Ok. But what about the Greek economy? Oh! Well, they do need to reduce their deficit. Of course they do. And they do need to reduce their debt. Well, yes? of course? But how? By going further and further into debt only in order to pay their loans?
The more you owe, the more you borrow, and often at shark rates, and? well, what on earth is that going to solve? And then the deficit reduction. Well, unfortunately nothing acts in a void. The more you increase taxation, and indirect taxation (VAT) in particular, the more you throw the whole economy into greater and greater recession, hence generating greater and greater need for even more financing.
So what we have now achieved in Greece is the destruction of the revenue generating private sector and hence deeper and deeper recession, requiring more and more taxation to be generated from?? The Economy? What economy? It has already imploded.
Furthermore, we have been promised at least another two years of enormous recession (I do believe the correct term for this is outright depression), with absolutely no commitment to growth. And after ten years of this catastrophic policy we are told we shall have achieved the debt to GDP ratio we had in 2009 when the crisis exploded.
Is it my fault I prefer nonsense rhymes to explain this? Anyway, who says that in 10 years we will have that ratio at all? If this policy of extortionist taxation feeding the vicious circle of growing recession carries on, our debt to GDP ratio will not be 120% as predicted optimistically, but something nearer 1,000 to 1,000,000% of GDP, quite simply because we shall have hardly any GDP left to speak of.
So this brings us to my second proverb. A Greek one here, as is fitting. There was a farmer whose finances were getting worse and worse so he realized he had to cut costs if he was to remain afloat. But what costs could he cut? He decided the best thing would be to train his donkey (that is his means of transportation) not to eat, so in that way he could save money on the straw he had to buy him every day to feed him. Well, his experiment was quite successful in that his initial savings on expenses bore this out. Only, well. The donkey died.
Afterword. The same thing happens when you train your pigs not to eat too, you know. After a while they die.