Small talk

With the euro as its currency, Greece is facing a booming deficit and a looming crackdown. These are Europe’s problems almost as much as they are Greece’s.

Before countries signed up to the Euro there were many skeptics. A currency without a political union to back it simply would not work, or so the claim went. And no, the European Union is not, in practice, something you can call a union. Diverging national interests and voting preferences have made that goal unachievable for the time being. Even so, in due course most became pretty sure the skeptics have been proven wrong. The Euro has become a stronghold, a trusted monetary unit.

Then the all too familiar crisis hit the banks. The banks were bailed out, the economy got stimulus injections like never before, and all was well. Or almost. All was not entirely well. Governments were stuck with huge debts and soaring deficits, and much doubts remains what will happen when governments put a halt on their flow of money to keep the market’s engine running smoothly.  Western nations, even those with high debts – are there still any with low debts?-, would do wise to keep spending level up in 2010, postponing cuts until 2011. The reason is simple: Cut spending or raise taxes too soon, and your economy might slump back into recession (Japan in the 90’s is the classical example here, but America did something similar in the 30’s). Fiscal austerity might be a good thing, though not if this means killing valuable growth, which greatly exceeds an extra year of debt in value.

There is one particular example where the former lines just do not hold, and it is called Greece. Glorified as its past of the ‘Poleis’ might be, it now has little left to boost about. They hoodwinked the European Union into believing it was suitable not just to join the EU, but to share in its currency too. Even after shifting some blame towards Brussels for its naïve idealism, it is still bad, as damage has been done to Greece’s trustworthiness and the EU’s credibility.

In the past weeks ministers from all EU members states gathered to discuss what should happen next. Proposals made by the plagued nation to cut its deficit have been scrutinized and were good enough only for a lukewarm welcome. Do not underestimate the sheer size of the task: Bringing back double digit deficit numbers to below 3%, which is the maximum allowed by official EU guidelines, is no small feat. When eyeing Greece’s Prime Minister Papandreou and other MP’s I would almost start thinking they don’t even want to take harsh measures. And that is probably correct: Protests -albeit unconvincing ones- pop up regularly, and steps that have a negative impact on the lives of citizens’ are rarely popular.

The only thing that makes matters a lot easier is that they just don’t have any choice. Greece must cut, or it will eventually have to default, which is not an option within the Euro zone. A first step must be raising taxes. Not just by increasing percentages tied to the level of income, also by improving the tax system itself. As it now stands it is as transparent as a barrel of oil; and a duck and cover game makes many able to evade paying their taxes. Another sound step would be to increase pension age. Current retirement-age average lies around 58 years. The new aim will probably be set at 63 years. Compared to a country like the Netherlands -where a fixed 65-year pension age will probably become 67 by 2020- even that could be considered as too generous.

As outlined earlier, it won’t be all up to Greece what happens next. A shared currency also means shared responsibilities and risks. So the question this week was: Will Brussels (i.e. Germany) subsidize Greece? The answer seems to be negative, which is very positive. We should be very unwilling to do that, indeed. Not just will it be unfair to those who have played the game by the rules, it might also set an example that relaxes stances towards a healthy financial balance. An argument that runs along the lines that ‘banks were bailed out, why not a nation’ is not very persuasive. The stakes are too high, all have known for a long time that mismanagement was fashionable and no politician will let Greece get away autonomously after it had happened.

The slippery slope argument of ‘not setting an example’ is hard to pin down as legitimate or not. After all, why should nations ruin their financial system just because they can get away with it? High burdens in the future and preventing to have to take unpopular decisions, maybe, but failure would be devastating. Perhaps -with Portugal, Spain, Italy and Ireland in tight spots- it is not so much making sure countries aren’t sickening their own economies any further with a subconscious feeling of getting away with it, but makings them aware that fiscal prudence must be strived for immediately, and in the long term as well.

The name IMF (International Monetary Fund) is already echoing in the hallways. This Washington based institute has much experience when it comes to rigorous handling of financial problems and an image bolstered by the recent crisis. For a European country it would be seen as humiliation to ask the IMF for help, though what other choices are there? The alternative would be for the EU to set up its own equivalent of the IMF, but that would cost time and money, plus create bureaucracy, while the IMF is already set to go.  Besides, would it be any less humiliating?

At this moment, taken on the whole, it is not a bad thing that the Euro went down a bit. Its value hovers just below $1,40, which is not worrisome. As the value drops, export becomes more rewarding and attractive, stimulating the economy. This must be prevented on a longer time scale, as a cheap Euro will make importing products more expensive and that could lead to more inflation.  Brussels will no doubt therefore closely monitor the PIIGS (Portugal, Ireland, Italy, Greece, Spain). Greece already got a new deadline of one more month to come up with a decent (read: better) plan. I have no idea how they intend to use their precious time. I would urge them not to label anything as taboo, while seriously considering letting in an outsider such as the IMF, which can bring along a more objective viewpoint, leading to long-term stability rather than short-term wishful thinking. After all, a debt of more than 100% of GDP does not exactly radiate a bright light.

If Greece embraces neither IMF nor comes up with a satisfactory plan, then we might, for the very first time, need continental interference in national politics. The Eurocrats will love it.

Over the past year there have been many attempts and proposals aimed at policy making that in some sense or another have mocked the strong beliefs so many countries proudly held up high. Now, after the hardest blows seem to have passed, traces of national protectionism have popped up everywhere. The most infamous known is probably Barack Obama’s import tariffs on Chinese tires, though the uproar this caused in China hasn’t lead to serious counter strikes yet.

But there are other ways than tariffs to regulate the market or, in a less ambitious sense, try to influence its direction. Here the big car companies might come to mind.  And rightly so: The money involved with the bail-out of General Motors (GM) was high. Recently, with the involvement of the German government in order to speed up and secure the sale of car-manufacturer Opel, the tale has got a new twist.

Herein GM at least showed us last week that they still know what it is to do business. The company has since 1929 been the owner of Opel, a German car-brand. But the crisis hasn’t loosened its grip completely, wherefore the sale of Opel was thought to be a necessary or wise step to cure the company of its many illnesses. But American GM had not so much a change of heart, as a change of opportunities. And opportunities are taken, not handed out is what they seem to think. Germans in any case didn’t see this coming, judging by their calls of outrage. Because now we know GM will not be selling the brand Opel to Magna. The reasons are clear.

It started because Germany was reluctant to turn a blind eye to the laying off of too large a share of its workforce, since they think it is important to keep as many people working as possible. So to prevent GM from drowning they offered 1,5 billion Euros in order to close the financial gap, which was aimed at securing possibilities for an Opel-sale. And they took it to be as such. But another offer by German politicians of 4,5 billion Euros, eventually changed the whole scene. At first this provisional loan was aimed at Magna (a Canadian company) and Sherbank (a Russian company), to make sure that after the take-over German Opel factories would remain operational. Before we go over the whole issue why GM is not selling, several points should be noted.

The first is the fact that European institutions do not seem to put free market reign on an untouchable pedestal anymore. Help provided in this manner is something which cannot be compared to bank bail-outs, which were necessary from a more general point of view. Second is that the Germans might feel betrayed by their American car-colleagues, but they have absolutely no reason to. A more tentative note might be stated as a question: What would have happened when neither GM nor Opel would have made it? It’s clear; survival without help can be summarized as ‘unlikely’. But Germany’s help towards both GM and Opel came on top of everything the White house had already done. It is hard to get rid of the impression that the two companies would have walked straight into death’s outreaching arms without it. But maybe we should be glad that they have not. Many people depend on their jobs, and so do quite a lot of businesses that can only work because they are so intimately tied to the car-makers. A rich history and an excellent body of knowledge can hopefully only be helpful in the future as a driving force for innovation.

The story continues with Neelie Kroes, the European Commissioner for Competition. She demanded that the money reserved for securing Opel’s future would have to be available for any (potential) owner, not just for a set of two buyers who were willing to meet German demands. The strongest argument to support her claim runs on government partiality, which shouldn’t put competitors at a disadvantage by their free-market meddling. And indeed, with an aid-kit of money it seems likely that even General Motors would have acted swiftly in deciding not to sell the company.

In any case the process greatly slowed down the process of an Opel-sale, and eventually killed it. The economy, though far from total recovery, can at least leave the intensive care. And GM states more or less to be thinking along those lines when they explained why Opel will not be sold:

[because of] “an improving business environment for GM over the past few months, and the importance of Opel/Vauxhall to GM’s global strategy.”

Businesses are not founded in order to please politicians, and that is something well understood by GM. They took the 1,5 billion euro stimulus gladly. Bu if Opel were in sound health it wouldn’t have to be sold in the first place. So it’s reasonable to think that GM was or is unwilling to sell such a company if it has no financial reasons to do so. Some billion Euros of aid would do the trick for potential buyers, but its actual owner thought so too.

What counts is the result, clear as it may be that Germany did not like being outwitted by the American company. But why wouldn’t GM be entitled to the same help as all of the others? Whether the stimulus package is a good thing remains in the open, but Kroes is right in insisting that if the money is available to one buyer, than likewise to its competitors. And now with the market making a slight bend towards more promising grounds, GM is hardly to blame for this clever move.