Sunday, July 29, 2012

Between the Proverbial Political Rock and a Hard Place

"A society grows great when old men plant trees whose shade they know they shall never sit in." A (how ironic) Greek Proverb

How about:

A society collapses when power-grabbing old men in government over-harvest private sector fruit and distribute it amongst masses who, having grown accustomed to government subsidy, lack the knowledge and motivation to plant trees of their own.


A society grows weak when power-grabbing old men in government grant political favor (monopolies, tax loopholes, tariffs, subsidies, etc.) to their chief sponsors at the expense of unsuspecting taxpayers.


A society grows weak when power-grabbing old men in government appropriate taxpayer funds to prop up failed institutions, leaving them free to make the same mistakes over and over again.

Enough with the cynicism reality.

Of course we all enjoyed last week's rally in stocks. Clearly the powers that be have no interest in seeing the end of the Euro their political careers under the weight of legitimately high borrowing costs. European Central Bank President Mario Draghi pledged last Thursday to do whatever it takes to defend the Euro. Germany's Merkel and France's Holland promised the same on Friday. Their commitments met with warm receptions on equity markets the world wide. And the interest rate on 2 year Spanish debt promptly dropped from 7% to 5%. Perhaps signaling that the bond market believes (for the moment) measures are forthcoming that might indeed put the present crisis to rest.

Oh but the challenge facing the politician who aspires to future terms in office. As it stands, the Eurozone, as a body, sports a lower debt to GDP ratio than the United States. Do the Eurobond and you have your modern-day fix. The thing is, the Eurozone is not a fiscal body. It is an utter mess of clashing cultures. It sports the likes of Greece, whose under-producing people have been over-fed by an over-leveraged government for far too long. If you're the Greek prime minister you're between the proverbial rock and a hard place. Reject the austerity tied to your prospective bailout, and you say goodbye to the Euro, hello to hyper-inflation and goodbye to your job. Implement the austerity and your ex-public sector workers will vow to take you down with them.

There's a reason interest rates in Spain and Italy have (save for last Friday) spiked to unsustainable levels; it's because the likelihood that they'll be able to pay back their debts grows less certain by the day. And while clearly there's new resolve to print the present crisis away, the multi-trillion Euro question remains; will there be the political will to stick with the tough economic reforms that would make for something other than yet another very (very!) expensive lesson in moral hazard some years down the line?

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