The Scriptures do not give human-kind very much room to move. Either we will willingly accept the gentle and light bond-yoke of Jesus Christ, which sets us free from ourselves, or we will be enslaved to idols, which condemns us to enslavement to human passions and wilful rulers.
When the Apostle Paul brought the Gospel of the Christ Jesus to Athens, he was astounded and provoked by the superstitious idolatry of that city. The very place which prided itself in its reasonableness and rationality, was dark in superstition and vice. Things have not changed much over the centuries.
Even to this day we see Athens and all Greece lost in self-absorbed indulgence. But it is no longer just Athens--it is now the same throughout the West. An excellent article in Spiegel Online explains the symptoms and causes, and reviews the possible but exceedingly painful cures.
The Mother of All Bubbles
Huge National Debts Could Push Euro Zone into Bankruptcy
Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.
Savvas Robolis is one of Greece's most distinguished economics professors. He advises cabinet ministers and union bosses. He is also a successful author and a frequent guest on the country's highest-rated talk shows. But for several days now, it has been clear to Robolis, 64, the elder statesman of Greece's left-wing academia, that he no longer has any influence.
His opposite number, Poul Thomsen, the Danish chief negotiator for the International Monetary Fund (IMF), is currently something of a chief debt inspector in the virtually bankrupt Mediterranean country. He recently took three-quarters of an hour to meet with Robolis and Giannis Panagopoulos, the president of the powerful trade union confederation GSEE. At 9 a.m. on Tuesday of last week, the men met behind closed doors in a conference room in the basement of the Grande Bretagne, a luxury hotel in Athens. The mood, says Robolis, was "icy."
Robolis told the IMF negotiator that radical wage cuts would be toxic for Greece's already comatose economy. He said that the Greeks, given their weak competitive position, primarily needed innovation and investment, and that a one-sided fixation on cleaning up the national budget would destroy the last vestiges of economic strength in Greece. The IMF, according to Robolis, could not make the same mistake as it did in Argentina in the early 1990s. "Don't put Greece on ice!" the professor warned.
But the tall Dane was not very impressed. He has negotiated aid packages with Iceland, Ukraine and Romania in the past, and when he and his 20-member delegation landed in Athens on April 18, they had come to impose a rigorous austerity program on the Greeks, not to devise long-term growth programs.
Thomsen's mandate is to save the euro zone. And any Greek resistance is futile.
Time to Foot the Bill
For the moment, this is the last skirmish between the old ideas and ideals of prosperity paid for on credit and a generous state, against the new realization that the time has come to foot the bill. The only question is: Who's paying?
The euro zone is pinning its hopes on Thomsen and his team. His goal is to achieve what Europe's politicians are not confident they can do on their own, namely to bring discipline to a country that, through manipulation and financial inefficiency, has plunged the European single currency into its worst-ever crisis.
If the emergency surgery isn't successful, there will be much more at stake than the fate of the euro. Indeed, Europe could begin to erode politically as a result. The historic project of a united continent, promoted by an entire generation of politicians, could suffer irreparable damage, and European integration would suffer a serious setback -- perhaps even permanently.
And the global financial world would be faced with a new Lehman Brothers, the American investment bank that collapsed in September 2008, taking the global economy to the brink of the abyss. It was only through massive government bailout packages that a collapse of the entire financial system was averted at the time.
A similar scenario could unfold once again, except that this time it would be happening at a higher level, on the meta-level of exorbitant government debt. This fear has had Europe's politicians worried for weeks, but their crisis management efforts have failed. For months, they have been unable to contain the Greek crisis.
Attacked by Speculators
European governments agree that saving Greece is imperative. They are worried about the euro, and the Germans are concerned about their banks, which, lured by the prospect of high returns, have become saturated with government bonds from Greece and other southern European countries. They are also terrified that after a Greek bankruptcy, other weak euro countries could be attacked by speculators and forced to their knees.
There are, in fact, striking similarities to the Lehman bankruptcy. This isn't exactly surprising. The financial crisis isn't over by a long shot, but has only entered a new phase. Today, the world is no longer threatened by the debts of banks but by the debts of governments, including debts which were run up rescuing banks just a year ago.
The banking crisis has turned into a crisis of entire nations, and the subprime mortgage bubble into a government debt bubble. This is why precisely the same questions are being asked today, now that entire countries are at risk of collapse, as were being asked in the fall of 2008 when the banks were on the brink: How can the calamity be prevented without laying the ground for an even bigger disaster? Can a crisis based on debt be solved with even more debt? And who will actually rescue the rescuers in the end, the ones who overreached?
'Great Sacrifices'
Take, for example, the countries that will pay for the Greek bailout. The country could need as much as €120 billion or €130 billion -- or even more -- over the next three years.
At the weekend, euro-zone members and the IMF agreed on a €110 billion bailout package over three years. The EU will provide €80 billion in loans, with Germany's share over three years amounting to €22 billion, including €8.4 billion in the first year alone. Greece will have to impose further austerity measures in return. Greek Prime Minister George Papandreou said they would involve "great sacrifices," saying: "It is an unprecedented support package for an unprecedented effort by the Greek people."
Euro-zone leaders will formally launch the package, which still needs to be approved by the German Bundestag and a number of other euro-zone parliaments, at a summit on Friday. The aid will be released ahead of May 19, when Greece next needs to make debt repayments.
Caught in the Maelstrom
The money would be well invested if Athens succeeds in getting its state finances under control within the three-year time period, through rigid austerity measures and successful economic management.
But if it doesn't? Then the money, or at least some of it, will be gone. Then all the things that the rescue measures were intended to prevent could in fact transpire: Lenders would have to write off their claims, banks would have to be rescued once again, speculators would force the rest of the weak PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) to their knees -- and the euro would fall apart.
If that happened, the rescuers themselves would be at risk. Even Germany, in international terms a country with relatively sound finances, has amassed enormous debts. If it became caught up in the maelstrom of a euro crisis, the consequences would be unforeseeable. The credit rating of Europe's strongest economy would be downgraded and Germany would have to pay higher and higher interest rates for more and more loans. Future generations would shoulder an even greater burden as a result.
But what is the alternative? Should Europe simply allow Greece to go bankrupt instead? In that case, the possible future scenario would happen right away instead.
One might argue that it is better to get things over quickly, even if that is painful, rather than prolonging the agony. But one can also hope that everything will turn out for the best in the end. The euro-zone countries prefer to hope, which is why they have agree to a rescue program that will provide Greece with the funds it can no longer borrow on the open market, now that it is being forced to pay such high interest rates.
Living Beyond Their Means
The whole world lives on the principle of hope: hope that it will be possible to repay the debt that has accumulated in past years, that governments will manage to clean up their ailing budgets, thereby averting the worst, and that life will go on, just as life has always gone on, somehow, after earlier crises.
All of the major industrialized countries have lived beyond their means for decades. Even in good times, government budget deficits continued to expand. The United States, in particular, paid for its prosperity on credit. The poor example set by the state was contagious -- US citizens began buying cars and houses they couldn't really afford, and banks speculated with borrowed money.
Things couldn't possibly go well forever and, indeed, the financial crisis put an end to the days of unfettered spending. To avert a collapse, governments came to the rescue with vast sums of money, guaranteed their citizens' savings and jump-started the economy with massive stimulus programs -- all with borrowed money, of course.
A Huge Bubble
The world was saved, temporarily at least, but since then it has accumulated more debt than ever before in peacetime. The national deficits of the 30 members of the Organization for Economic Cooperation and Development (OECD) have grown almost sevenfold since 2007, to about $3.4 trillion today. Their total debt burden has also grown dramatically, to a record-setting $43 trillion. In the euro zone, national deficits have even grown 12-fold in the same time period, with the euro-zone countries accumulating $7.7 trillion in debt.
The current government debt bubble is the last of all possible bubbles. Either governments manage to slowly let out the air, or the bubble will burst. If that happens, the world will truly be on the brink of disaster.
When Greece faces a possible bankruptcy, the euro-zone countries and the IMF come to its aid. But what happens if the entire euro group bites off more than it can chew? What if the United States can no longer service its debt because, say, China is no longer willing to buy American treasury bonds? And what if Japan, which is running into more and more problems, falters in its attempts to pay for its now-chronic deficits?
The conditions that prevail in Greece exist in many countries, which is why governments around the world are paying such close attention to how -- and if -- the Europeans gain control over the crisis. . . .
Growing National Debt
The United States is still capable of fulfilling all of its obligations, the document states, but it also points out the worrisome rate at which the national debt is growing.
Germany is given high marks, and without qualification. According to the IMF report, Germany has come through the crisis relatively well, and its debt has not grown by nearly as much in other developed countries. In the case of Greece, however, the IMF sees a bright red warning light, and its conclusions for Portugal and Spain are also alarming. In both countries, state finances have deteriorated ominously recently, the IMF experts conclude.
For these reasons, an international rescue effort was unavoidable, leading IMF Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet to launch an unprecedented public relations campaign. Appearing in Berlin last Wednesday, the two top representatives of global finance told the reluctant members of Germany's parliament, the Bundestag, how serious the situation is. Strauss-Kahn's Washington experts estimate the Greeks' financial requirement at €50 billion a year, in a worst-case scenario. That scenario will occur when private lenders refuse to lend the Greeks any more money. The IMF bailout program would total €150 billion over a three-year period. During this time, the IMF would contribute €27 billion, including €15 billion in the first year alone.
The IMF is bracing itself to remain in the country for 10 years, until the economic reforms are complete and have come to fruition. For the Greek government, the IMF's presence in Athens will deprive it of a significant amount of its power. . . .
'Panic Is Slowly Taking Hold'
The rescue package is now a done deal, and the Greeks have a clearer idea of what is in store for them. A European nation has hardly ever been expected to make comparable sacrifices in peacetime. In return for the bailout deal announced Sunday, the Greek government will implement further cost-cutting measures, including drastic reductions in salaries and pensions, further tax hikes and a stricter austerity program for all of the country's public budgets.
It won't be long before new unrest and protests erupt among the Greeks, with their penchant for strikes. Metalworkers and candidates for civil service positions took to the streets of Athens last week, and there were further protests over the weekend. "Panic is slowly taking hold in the minds of people," says economics professor Savvas Robolis.
Because the Greeks, despite the massive capital injections from Brussels and Washington, face an extremely uncertain future and the country can expect to see "explosive unemployment," Robolis isn't certain that social protests will remain peaceful in the future.
If not, speculators will quickly pounce on the euro again. They have made enormous profits in recent weeks and months, after betting on Greece's growing difficulties and a constantly weakening euro. Now they are just waiting for the next opportunity. . . .
But the euro zone isn't the only place with a debt problem.
The US budget deficit has now reached $1.6 trillion, or 10 percent of GDP. The national debt is now over $12 trillion and is forecast to expand to more than $20 trillion by the end of the decade. At that point, Americans will be paying $900 billion a year in interest alone.
Paying with New Debt
Today, only four areas consume almost all government revenues: defense, social programs, health care and interest on debt. Americans must pay for everything else with new debt.
Fred Bergsten, director of the Peterson Institute, one of the leading economic think tanks in the United States, warns: "If we don't correct the situation in the next five years, our worldwide position will be in jeopardy."
The disastrous financial situation is in large part due, not to the economic stimulus packages and programs to fight the global economic crisis, but to behavior during the years under former President George W. Bush. At the time, Americans became accustomed to consuming far more than they produced.
They consume inexpensive goods from Southeast Asia, and the Chinese and the Japanese are only too willing to accept US Treasury bonds in return. In other words, Asia is giving the United States an almost unlimited credit line. This is the only reason the Americans were able to keep interest rates low for so many years -- the cost of borrowing was being kept artificially low. Many people believed that they could afford to buy real estate. And in the belief that the value of their houses was constantly increasing, Americans consumed even more and got into more and more debt. This illusionary system fell apart when the real estate markets collapsed.
But current President Barack Obama has also contributed substantially to the biggest American budget deficit since World War II. His healthcare reforms alone will cost the government about $900 billion in the coming years. And the military presence in Iraq and Afghanistan will swallow up $160 billion in the coming budget year. . . .
Three Possible Scenarios
So what's next? The world's economies, who were addicted to constant new injections of debt, can expect a tough course of cold turkey. And if they don't undergo the treatment, they will face what amounts to a lingering illness, and some could even collapse.
There are three conceivable scenarios, distinguishable mainly by who will ultimately bear the greatest burden: taxpayers, savers or creditors.
In the first strategy, the national economies embark on a strict course of austerity measures. To do so, they will have to demand higher taxes from citizens.
Or they could limit government spending, which is the approach Ireland, for example, has taken. The government there has cut pay for civil servants by 7.5 percent on average, and recipients of social welfare have also seen their benefits reduced. ECB President Jean-Claude Trichet praises the efforts in Dublin as exemplary.
Throughout history, governments have often faced massive pressure to consolidate. It was the approach the United States took after World War II to eliminate its debt. But after years of deprivation, the Americans also had a lot of catching up to do, which translated into strong economic growth.
Uncomfortable Adjustments
Later on, European countries were repeatedly forced to balance their budgets. To do so, southern countries like Italy and Portugal generally increased their revenues, while northern nations like Denmark and Sweden preferred to reduce their expenditures, according to a new study by the Brussels-based Center for European Policy Studies.
In light of these examples, the task that now lies ahead for Greece is absolutely achievable, the authors conclude. Their only qualification is that "adjustments of this magnitude take time, typically at least five years."
For politicians, an austerity program is undoubtedly the most uncomfortable approach. "It's possible that we won't survive this," Irish Finance Minister Brian Lenihan concedes. Voters rarely reward efforts to save money, usually voting the politicians deemed responsible out of office instead.
This is why the second, supposedly pain-free strategy is so attractive to politicians: Confronting the mountain of debt with the help of inflation. In other words, governments simply print money.
Firing Up the Printing Presses
US President Barack Obama, in particular, is likely to be very tempted to fire up the money printing presses and, by devaluing the currency, to reduce the real burden of liabilities the United States has accumulated. Because foreign investors in China and Japan hold a large share of America's debts, they would be more adversely affected by depreciation than the Americans themselves.
Inflation has other advantages from the government's perspective. When prices rise, the government collects more revenue. This improves its ability to repay its debt, because the value of the debt also declines daily. For this reason, Paul Krugman, winner of the Nobel Prize in Economics, advised the president to try using the tool of inflation before raising taxes or cutting spending. His recipe for the crisis consists of "vigorous growth and moderate inflation."
In recent months, the American central bank, the Federal Reserve, has already availed itself of a modern version of printing money: It simply spent hundreds of billions of dollars to buy up government debt in the form of treasury bonds. The approach, known as quantitative easing, keeps returns and interest rates low.
The only question is when the Fed will flick the switch -- in other words, when and to what extent it will start re-collecting the money with which it has flooded the markets. If it doesn't do so, or does so only with hesitation, all the capital in the markets could stimulate demand to such a degree during the next recovery that prices would rise dramatically. If that happens, the debt would quietly be reduced through inflation. Savers and foreign investors, who would be partly expropriated, would be at the losing end of such an approach.
Spinning Out of Control
Besides, there are many hidden risks to this approach. Inflation is hard to manage and can easily spin out of control. Germany has had bitter experiences with out-of-control inflation in its history. In 1922 and 1923, an explosion in consumer prices ended in hyperinflation.
At the time, investors sought refuge in tangible assets: real estate, farmland and, most of all, precious metals. A similar trend is already taking shape today, as prices for gold and silver reach record highs.
The third strategy countries can employ to reduce their national debt also has unpleasant consequences: They stop making payments, either in full or in part. Such cases have happened hundreds of times throughout history, and yet no guidelines exist on how debtors and creditors are to proceed. "There is no legal framework for national bankruptcies," says Klaus Abberger, an economics with the Munich-based Ifo Institute for Economic Research.
As far back as 1776, Adam Smith, the father of modern economists, pointed out the need for a legal system to deal with national bankruptcies. "A fair, open and avowed bankruptcy," the moral philosopher wrote, "is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor."
Restructuring Debts
More than two centuries later, Greece would undoubtedly be a candidate for such a bankruptcy proceeding -- that is, if the politicians in the euro zone weren't so terrified of the consequences. If that were to happen, the government in Athens would have to sit down with its creditors and negotiate how much of its debt it could repay.
It is high time to think about how this would work, says Clemens Fuest, an economist at the University of Oxford. "We have to prepare a debt restructuring, so that the creditors are at least involved in the costs," Fuest insists. On the other hand, he says, if the Greek bonds were serviced in full, "taxpayers would be short-changed once again, just as they were in the banking crisis."
In the end, some governments will probably put all three strategic levers into motion to overcome the debt crisis. Even if they don't actively fuel inflation, at least they won't be fighting it rigorously. They will restructure the debts of hardship cases like Greece. Most of all, however, they will seek to balance their budgets by raising revenues and reducing expenditures. When that happens, at least everyone will suffer: not just taxpayers, but also savers and lenders.
Only then could states be able to get their affairs back in order. However, one key element is still missing: The economy has to grow, so that the government can collect enough tax revenue and thus reduce its debt. The trick, in other words, will be to save money while at the same time expanding aggregate output. This is the dilemma that governments face: debt and cutbacks curb growth, but debt reduction cannot succeed without growth.
Whether there is in fact a way out of this quandary will soon become apparent -- in the case of Greece.
BY ALEXANDER JUNG, ARMIN MAHLER, ALEXANDER NEUBACHER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, WOLFGANG REUTER, HANS-JÜRGEN SCHLAMP, THOMAS SCHULZ, DANIEL STEINVORTH AND HELENE ZUBER
Translated from the German by Christopher Sultan
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