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TMFPostOfTheDay (< 20)

Why Greece is Greece

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February 17, 2012 – Comments (7)

Board: Macro Economics

Author: saunafool

We keep hearing that Greece is the first in a long line of dominoes to fall in Europe. It is a compelling and frightening prospect--particularly for someone like me who lives in Europe with a business depending on Europe not collapsing. (I don't need Europe to thrive, just survive.)

I was watching the French news last night, and as the crisis has dragged on, EU monitors have found out just how dysfunctional Greece is.

* 98% of new construction--even today 2 years after the crisis began--takes place without a construction permit, without registering the property with authorities. Thus, no property tax.

* Wide swaths of business work in an all-cash economy, paying no VAT.

* High income and connected people simply pay bribes to friends instead of paying their income tax.

The list goes on, but what it implies is something more than a lack of budget balance. It implies a non-functioning state, unable to collect taxes on the books.

And this is what sets Greece apart from everyone else in Europe. Their problems are an order of magnitude greater than any other country. Italy might be a screwed up, corrupt, chaotic wonderland, but they are as efficient as Scandinavians compared to the Greeks. France might have budget problems, but they are professional and effective bureaucrats. Spain, Portugal, and Ireland are suffering from the collapse of the property markets, but at least they are somewhat able to function.

Greece is in a class by itself.

What is the path forward? Unless Greece can form reliable institutions, it doesn't really matter. If they leave the Euro, they will just have hyperinflation until their populace is reduced to a 2nd-world standard of living. At that point, maybe the country goes back to what it was in the 70's--a cheap holiday destination--and things start to recover. The protests and violence on the way down might preclude that outcome, however, because people generally want to be safe when they are on vacation.

If they stay in the Euro, they will eventually have to take their marching orders from Brussels in return for repeated bailouts. The cost of the bailouts will likely result in a government imposed from Brussels with hopefully functioning institutions. In a culture where the dominant mode of operation is to dodge taxation, that will be a long, difficult, and likely unsuccessful endeavor.

My vote would be to create a mechanism for them to drop out of the Euro and let them deal with the resulting chaos themselves.

As for the bankers who will lose hundreds of billions on Greek bonds. Let them eat cake.

7 Comments – Post Your Own

#1) On February 17, 2012 at 2:20 PM, PeteysTired (< 20) wrote:

Knowing all this dysfunctionlity exists in Greece why would anyone lend them money?

This seems similar to the US subprime crisis....there has to some form of risk/reward for lending money.  Banks have done a tremendous job of getting the rewards while spreading the risk to people all around the world.

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#2) On February 17, 2012 at 2:29 PM, PSU69 (89.71) wrote:

SaunaFool, 

Thanks for this post. I haave been to Europe over 50 times, yet never hit Greece. Sad to see your comments about the widespread failure of the citizens to embrace fiduciary responsibility. Hope the Euro zone improves. I have friends in Spain who tell me unemployment there is still terrible. I plan to fetch Porsche # 4 from Zuffenhausen in September. I willl NOT drive to Greece!

 

Rob 

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#3) On February 17, 2012 at 3:03 PM, DJDynamicNC (36.45) wrote:

Thanks for this. Good information here, and good points raised.

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#4) On February 18, 2012 at 12:26 AM, awallejr (85.43) wrote:

I have said this many times.  Greece is a corrupt, lazy country.  In fact its GDP is about the size of Boston. I think the fear is over blown and they should be cut off.  Jamie Dimon said a default of Greece would have zero impact and who am I to disagree with him.

Greece defaulting is not tantamount to when Lehman defaulted.  Let them already.  I really am tired of listening to pundits talking about them every single day.

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#5) On February 18, 2012 at 9:57 PM, rofgile (99.30) wrote:

Greece should have defaulted in 2010.  Europe would be much farther along now if it had.  And a lot more Greeks would have jobs.  Heck, they might even have had a credit upgrade by now (See Iceland's recent upgrade in credit rating).

 

 -Rof 

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#6) On February 19, 2012 at 2:43 AM, awallejr (85.43) wrote:

Actually they already defaulted if they are already talking about bondholders taking haircuts.  Get them off the headlines already.

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#7) On February 20, 2012 at 4:41 PM, Dzierga (< 20) wrote:

Greece has 1 million fewer people than the State of Pennsylvania, not to mention a relatively low GDP per capita.   Problems in Greece are not going to bring down Europe and certainly not the world economy.   The wild gyrations of our stock market in relation to this relatively small problem are irrational. 

Italy, on the other hand, is California and New York combined in terms of population. (Fortunately, Italy seems to be OK.)  France is a little larger than Italy.  For Germany, add New York, Texas, and California -- the 3 largest US states. These are large countries with robust economies.  They wanted a union and they got it; now they need to live with the consequences.

 

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