Tuesday, 12 July 2011


Fiscal Union is muted as the silver bullet.

If only EU citizens will unite behind the idea of a Finance Ministry of Europe, all will be ok.

WHY? essentially because then NAG (Netherlands, Austria and Germany) will be able to permanently subsidize Greece et al, and then there will be no defaults.

Greece has two problems, (1) an unsustainable fiscal position and (2) an uncompetitive and contracting economy.

FU would solve (1), but shows why FU is impossible unless the FME has total control over tax and spending. German taxpayers can't and shouldn't vote just to hand over money to Greece, when they pay more tax, and work longer and don't have rampant tax evasion. German taxpayers should not be funding swimming pool tax dodging Greeks.

Greece has to solve its own fiscal hole, and to do that it must actually collect the taxes it tries to levy and to cut its spending. Public sector workers will moan that its not their fault, they should count themselves lucky that they got that unsustainable spending in the first place, rather than feel entitled to more.

Now (2) is harder. Many will argue that a fiscal contraction can only make matters worse, BUT, are having interest rates of 20% better for the economy?? NO WAY.

What has to be recognized is that the standard of living in Athens was unsustainable. It has to fall if Greece is to become competitive.

There are some that would now try to argue that if the EUR was much lower, then Greece would be competitive, however if that was the case, their purchasing power would be significantly lower, and so would their standard of living, the two are different sides of the same coin. Greece's economy is not sluggish because of Germany productivity, believing Germany should pay Greece for some of the benefit of having a slightly weaker euro is absurd nonsense. Germany could demand payment as recompense for having lower purchasing power.

Greece can devalue, but then it must accept a lower standard of living, or they can demand the same standard of living and become incrementally less competitive and watch the rest of their economy sink.

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