Tuesday, May 8, 2012

Slow Motion Greek Tragedy

The slow and painful exit of Greece from the euro continued. I would actually applaud the move, because there was never any way they could remain in the currency union, except for the manner of his exit. Syriza (a left wing party that had a surprisingly strong second place finish) has failed to form a coalition of left wing parties. This probably means a new round of elections in June. Syriza's leader, Alexis Tsipras, has called for abrogation of austerity measures that were pledged as part of the bailout package from the Germans and ECB. This will effectively lead to the Greek exit from the euro, although he denies it. Tsipras has called for nationalizing the banks, restoring pay and pensions that were cut and all the usual leftist clap trap. If they leave the euro and inflate the currency, they can have their cake and eat it too, because they will in effect cut wages and pensions. From the Irish Times:

“The bailout parties no longer have a majority in parliament to vote for measures that plunder the country. There will be no €11 billion of additional austerity measures; 150,000 jobs will not be cut,” he said, adding he was only prepared to work with New Democracy and Pasok in government if their leaders sent a letter to Brussels reneging on their written support for the bailout programme.

Syriza came a surprise second in Sunday’s election, garnering 16.8 per cent of the vote and landing 52 seats in the 300-member parliament. New Democracy took an 18.5 per cent share but 108 seats, thanks to a 50-seat bonus awarded to the first party. In third place was Pasok, on 13.2 per cent, which took 41 seats.

Under the Greek system, the party with the most votes gets a bonus of 50 seats in parliament. This has probably denied the left wing parties a chance to form a coalition, because the more right wing party New Democracy, was the leading vote getter.

I doubt that the Greeks could ever comply with the "austerity" measures. It's not well understood that the Greeks have increased their taxes massively as part of the bid to reduce deficits. Nothing has really helped them out of their difficulties.

H/T National Review's Veronique DeRugy, from Matt Mitchell:
Lots and lots of papers* have now studied this question and the evidence is rather clear: the types of austerity that are most-likely to a) cut the debt and b) not kill the economy are those that are heavily weighted toward spending reductions and not tax increases. I am aware of not one study that found the opposite.
DeRugy points out that the asterisk refers to 21 peer reviewed papers. So it matters that the left is seeking to reverse the spending cuts but not the tax increases in Greece. In my view, the Greeks would be best off leaving the euro zone, reforming their tax code, through massive simplification, getting the government out of important industries, and imposing the spending cuts by inflating the currency. Their current situation is hopeless and even more socialism will just be the death knell for their society. It will be interesting to see how this plays out, because the right of center party remains committed to the euro and the left remains committed to fantasy football.

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