Greece Is The Word

(For Friday money mania, that is…)

I had to laugh when reading this L.A. Times “Top of the Ticket” post which, shockingly, didn’t involve former Laura Bush employee Andrew Malcolm…

In Athens, government workers are rioting in the streets, protesting cuts in their salaries, benefits and pensions. Three bankers burned to death after protesters set their building on fire while they were at work. Police are using tear gas. Officials in France and Germany, which is underwriting much of Greece’s debt of $141 billion, are watching with alarm.

With U.S. debt also mounting — much of it owed to the Chinese — pundits are beginning to wonder if those street protests in Greece are a window on America’s future. These are not riots from the Right — the “tea party” is angry about deficit spending, but hardly the kind of movement that would target businesses or government cutbacks. These are attacks on capitalism from the Left.

And of course, this segues ever-so-nicely into a Michelle Malkin post about SEIU workers supposedly “march(ing) in the streets of San Francisco last fall over budget cuts and layoffs” (and how is that illegal?) and the Times also notes acts of vandalism in the same paragraph to smear the SEIU with some old-fashioned “guilt by association.”

All of this is meant to imply that the rioting in Greece could happen here also, which I find to be extremely unlikely.

And the Murdoch Street Journal, in a shockingly lucid moment, tells us why here…

Ruled by neo-Marxists at the time, Greece scraped into the EU in 1981 and has since lagged behind the rest of the club. Before the advent of the euro, inflation was four times the bloc average. The political-economic default in that era was for the Athens government to devalue its currency, instantly reducing the standard of living of its citizens but avoiding pro-growth reforms.

Athens got an exemption from the EU’s debt rules in order to join the single currency bloc in 2001, a year before euro notes and coins went into circulation. The country rode the wave of the stable currency, low inflation and low interest rates throughout the good times of the euro’s first decade. Membership in the euro was an incentive for Greek politicians to institute fiscal discipline and carry through reforms to improve their competitiveness. They did neither, preferring the easy path of low-cost borrowing, which is how they got into their current mess.

As a euro member, Greece no longer has the option of debasing its currency, which was one of the main arguments for creating and joining the euro bloc. This means the burden of adjustment for years of borrowing is now falling on the Greek government, which is where it rightly belongs. The realization of this adjustment is what has Greek civil servants marching in the streets. The government could help ease the pain if it pushed such pro-growth reforms as a flat tax and moved Greece up in the Doing Business categories.

Of course, since we’re talking about the Journal, they make sure to sneak in a dig at “the welfare state model of development, dominated by public unions, onerous regulations, high taxes and the political allocation of capital” also.

Also, as told here by U.S. House Repug Cathy McMorris-Rodgers…

The Obama administration should protect U.S. taxpayers and publicly oppose a European bailout (through the IMF). At the very least, the president should be upfront and forthright about the potential costs of such a bailout. And he should take ownership of his decision by acknowledging he has tools at his disposal to stop a bailout, if he chooses to use them.

In response, I give you Paul Krugman today in the New York Times (here)…

So how does this end? Logically, I see three ways Greece could stay on the euro.

First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation; this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento — that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

The trouble, of course, is that none of these alternatives seem politically plausible.

What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

If it happens, it will play something like Argentina in 2001, which had a supposedly permanent, unbreakable peg to the dollar. Ending that peg was considered unthinkable for the same reasons leaving the euro seems impossible: even suggesting the possibility would risk crippling bank runs. But the bank runs happened anyway, and the Argentine government imposed emergency restrictions on withdrawals. This left the door open for devaluation, and Argentina eventually walked through that door.

If something like that happens in Greece, it will send shock waves through Europe, possibly triggering crises in other countries. But unless European leaders are able and willing to act far more boldly than anything we’ve seen so far, that’s where this is heading.

So basically, we pay now or pay later, people (another miracle of our global economy).

Oh, and given the utter unlikelihood of violence transpiring in this country over our own budget shortfalls (as the Journal tells us, the U.S. is still in much better shape), I have some advice for U.S. House Majority Leader Steny Hoyer, who said in the L.A. Times story that “Never in my decades in Congress have I seen a public so outraged by deficits and debt…It is enough to look across the Atlantic at Greece’s extreme economic crisis and understand it can happen here. If we don’t change course, it will happen here.”

God Steny, grow a pair, willya?

Update 5/14/10: What Paul Krugman sez here…