19 May 2012
The last time Greece faced a crisis of this magnitude was in 490 BC when the armies and fleets of the Persian Empire were converging on Athens.

The great Athenian leader Themistocles rallied his countrymen and defeated the Persians.

Alas, this time Greece has no Themistocles to save the embattled nation. Unlike the incompetent Persian Emperor Darius, the Greeks now face Germany’s very tough, stern and able Frau Doktor Angela Merkel who has vowed to impose “zucht und ordnung” (order and discipline) on the unruly Greeks.

A potentially fatal run on Greeks banks is underway, with over 800 million euros withdrawn last week. The sky is indeed falling.

Who can blame Greek depositors? Default and an exit from the euro zone appear likely, meaning their money in Greece’s wobbly banks could end up being converted into re-born drachma, worthy only 50-30% of the euro.

Greece’s recent political turmoil and inability to form a government shows its voters want the benefits of staying in the euro zone, but don’t want to pay their dues through taxes and slashing deficits.

New elections scheduled for 17 June are unlikely to resolve this Greek drama. Leftist parties that stoutly reject the austerity program agreed upon by the last government in Athens are leading the polls.

Angela Merkel insists Greece will stay in the euro. But that’s more hope than fact. German voters are in no mood to bail out the happy-go-lucky Greeks or swallow more austerity, judging from last week’s important regional vote in North Rhine-Westphalia. French voters said the same thing last week when they elected moderate Socialist Francois Hollande.

What would happen to Greece if it quit the euro? Financial chaos, capital flight, riots, and bank failures. But after the apocalypse, Greece would eventually revert to its 1960’s status: a poor but proud nation living off tourism, shipping, agriculture and fishing.

Devaluing a new drachma won’t do much for a nation whose main export is olives and feta cheese. Besides, the Greeks have severely damaged their tourist industry by endless strikes and surly service.

Angela Merkel is rightly concerned that Greece’s exit from the euro would be a blow to Europe’s political unity. This aspect of the crisis is as important as the economic/financial dimension.

But Merkel should also recall the timeless dictum of Prussia’s king and renowned general, Frederick the Great: “he who defends everything, defends nothing.”

Greece should never have been admitted to the euro. It snuck into the currency union by hiring those miscreants at Goldman Sachs to falsify its financial books.

Admitting Greece to the euro zone was a bridge too far. Euro membership should be limited to those nations that have solid finances and honest reporting. In short, a club of northern European nations that follow Germanic good government. Unprepared nations, like Greece, Romania, Bulgaria, Serbia, Moldova or Ukraine do not belong in the euro zone. Most have no business in the EU either.

The European Union and euro zone expanded too far, too fast. Retrenchment is now in order. As the French say, “fall back to better leap forward.”

Amidst this crisis, what many forget is that it was caused by politicians borrowing too much to buy votes and shady bankers lending recklessly to boost their own bonuses.

If there is one thing we learn from the Euromess it is the Golden Rule: governments must raise any and all funds they spend.

Borrowing from the money lenders is poison. More empires and nations have been ruined by unsustainable borrowing than by wars. Politicians should not be allowed to borrow except for well-defined, long-term projects, likes roads or bridges, in which revenue streams and repayment schedules are clearly defined.

There’s not much the western leaders can do right now to save Greece in spite of the G8 summit meeting at Camp David, Maryland, this past weekend.

President Barack Obama keeps urging more debt creation in a vain effort to resolve the crisis brought on by too much debt in the first place. The real answer is that nations that erected a house of financial cards must go through a long, painful period of rehabilitation and fiscal dieting to break debt addiction.
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copyright Eric S. Margolis 2012

This post is in: Debt Crisis, Europe

13 Responses to “MORE DEBT WON’T SOLVE EUROPE’S PROBLEMS”

  1. Seems to me that Bankia should be told “No!” Since when do banks lose money? 🙁

  2. Mike Smith says:

    I found this interview interesting

    http://www.spiegel.de/international/business/interview-with-economist-paul-krugman-on-euro-zone-rescue-efforts-a-834566.html

    In a SPIEGEL interview, Nobel Prize-winning economist Paul Krugman argues that this is not the time to worry about debt and inflation. To save the euro zone, he argues that the European Central Bank should loosen monetary policy and the German government should abandon austerity.

    I think it sort of highlights the difference between economists and accountants lol

  3. I guess Greece is in a no win situation…most want out of the Euro currency and those who want to stay will be forced to accept austerity that they don’t want either….it’s going to be a rough ride in the next few months.After two months Greece will have no money if they decide to abandon the Euro.World markets…look out.

    http://ca.news.yahoo.com/eu-urges-greece-stay-euro-plans-possible-exit-001539639.html

    • Steve_M. says:

      I don’t think that those Greek people who now want to default on the country’s external debt and leave the euro have a clue as to what will (notice I’m not saying “would”) happen. To get some clue, see what happened to Argentina years ago. Also see what happened in Sweden in 1992 or 1993, when there was no default, but the government had trouble selling a particular bond issue to its own insurance companies. Interest rates there briefly soared to around 500 per cent before things settled down. In Greece’s case, almost no one outside of Greece would buy a drachma denominated bond and interest rates in that country would hit the stratosphere and stay there for a long time. Then watch as Greece falls into real chaos!

  4. Mike Smith says:

    http://www.freakingnews.com/Obama-Head-in-the-Sand-Pics-56372.asp

    Why would the Europeans care what Obama has to say about anything ?

    Europe should do what is best for Europe, cutting spending will be a big part of that, maybe banning Goldman Sachs and ilk from the continent another. Perhaps closer economic ties with Russia would also be of benefit…

    Already Germany in particular and others in Europe are importing Russian raw resources in larger quantitys

    http://www.spiegel.de/international/business/gazprom-eyeing-second-pipeline-as-nabucco-faces-failure-a-833501.html

    Russia in return needs the jobs and the consumer goods that European companys could provide… and the Europeans also need the jobs… a win – win – win.

    Perhaps defense agreements should also be looked at, after all countrys who don’t wish to be dragged into ill conceived American wars aren’t ” real allies ” Let the Americans eat their ” Freedom Fries ” and Germany shouldn’t be belittled for having their own foreign policy either
    http://www.spiegel.de/international/world/criticism-of-germany-s-military-role-in-the-nato-alliance-a-833503.html

    As for the EU and central Europe…

    China will soon control that anyway

    http://www.spiegel.de/international/europe/with-10-billion-dollar-credit-line-china-deepens-presence-in-central-europe-a-833811.html

  5. I applaud you Mr. Margolis for being one the very few journalist to report how Goldman Sachs was complicit in the blatant fraudulent undertakings that lead Greece to join the EU. What we have across the world today, but particularly in the Western World, is a debt bubble that is being fed by more debt. No matter how one views it, money tied to nothing more than fiat and fractional reserve banking practices, is a value system that will be continuously deflated until there is very little value left. Ergo quantitative easing, central banks buying up treasuries and the like. Couple this with a Quadrillion dollar derivatives market, and it does not take an MBA in finance to see that this current system is not sustainable. How many more bailouts, how much money printing, how many more defaults before the “Market “ is allowed to purge itself of this financial waste? God forbid that market capitalism actually is allowed to do what it is supposed to. But then again I guess all of those tax payer funded bonuses and patronage appointments would not be as free flowing as they are now

    • Steve_M. says:

      Mr. Lee: A clarification is needed here. Greece joined the former EEC – Common Market – in 1981 and was a member of the EU upon its creation in 1993. It was the euro (common currency in most EU contries) that Greece joined in 2004, a few years after it was brought into being in 1999, thanks to some help from Goldman Sachs.

  6. Steve_M. says:

    Good summary of the problem, but I think Eric underestimates the damage that Greece will incur when (not if) it leaves the eurozone. It will default on its outstanding debt, thereby causing interest rates in Greece to hit the stratosphere. Almost no one outside of Greece would consider buying drachma-denominated bonds and almost no money would be available to support its social programs or pay the public sector employees.

    These days, few North American tourists are considering taking up bus tours in Greece, so that source of income has largely evaporated and will probably not return to help the Greeks even under a re-established drachma.

    On a side issue, of the countries mentioned by Eric late in the article, only Greece, Romania, and Bulgaria are members of the European Union. The other countries – Serbia, Moldova, Ukraine – are not even in negotiations to join it and won’t be able to become part of it anytime in the foreseeable future. Romania and Bulgaria are not yet on the euro, but under the terms of the Treaty of Maastrict, they are supposed to join the eurozone once they have met all of the detailed criteria for doing so. At the moment, only Romania is expressing clear interest in joining the eurozone, but it is not even close to meeting all of its conditions.
    (Croatia, which Eric did not mention, is due to join the EU next year, but will probably not be going on the euro for several years at least.)

    • Steve_M. says:

      Mea culpa about Serbia. It is an official candidate to join the EU, but I’m not sure where the negotiations now stand, as I haven’t heard any news about them. Also on the official candidates list are Turkey, Montenegro and Macedonia, although Greece is determined to block the latter from joining the EU.

  7. The following text purports to be from Marcus Tullius Cicero. “The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” — Cicero , 55 B.C.

  8. Some Canadian says:

    > Unlike the incompetent Persian Emperor *Darius*

    Correct me if I am wrong, but the only Persian emperor with the name “Darius” in this time frame is Darius I “The Great” of Persia. So why exactly is he incompetent?

    He did a poor job in the Greek Wars. Eric

  9. Sadly for the general Greek population,tough and highly unpopular decisions have to be made…even though this financial mess is not a direct fault of their own.The Greeks know this and now the planned exodus has bugun,especially those who have family in North America.They know there is no quick fix and the younger generation have little future to look forward to.Sadly,the suicide rate amongst Greeks has risen by as much as 50%.This alone should tell a story.Mr.Margolis is correct that you CANNOT solve debt problems by acquiring MORE debt.It just doesn’t work this way.

    I have mentioned this several times here on this forum,that this whole mess began decades ago after WWII…Europe was in ruins and had to be rebuilt…mass emigration had taken place primarily to North America,to find a better life.Politicians in Europe realized this and the only way to stop the exodus was to “buy” a better life…and future,by borrowing insane amounts of money to finance this.It worked very well for years…people were happy with their newly acquired expensive to maintain social programs that made Hugh Hefner look like a pauper in comparison.

    Now the problems have started in the 90’s already, when the “borrowed” money had snowballed into massive unsustainable debt with compounded interest.The resulting stress was already beginning to show.Reckless and spend thrift politicians (are there any other kind?) who had created this mess were now retired and living high on the hog…or dead,were out of the picture and there was no one to be held accountable…no one.Now we have this gigantic mess that cannot be fixed overnight…let alone in the next generation.

    Until that unlikely day comes where politicians,by law,need to be held accountable for their actions when it comes to spending taxpayer’s money (not their own),not much will change and many,many people will be forced to live a poor life unable to afford anything.Much like in North America as well.The only way to succeed in politics,one needs only NOT to have a conscience,then they will survive the dirty world of politics.Greece,Spain,Italy…among other nations are now paying the price for this.Sad…very sad.

    • Just from the BBC, “Spain’s fourth-largest bank, Bankia, has asked the government for a bailout worth 19bns euros ($24bn; £15bn).

      Bankia also restated its results – now saying it made a 2.98bn-euro loss for 2011 rather than the 309m euros in profit it announced in February.”

      Now we’re talkin’ real money!

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