Let the IMF Into the Eurozone!

According to the Treaty of Maastricht, there is to be no bailing out of Eurozone members by any exterior agencies, if those members become insolvent or in deep financial difficulty. In the past month or so, of course, we’ve learned that Greece has been flushed into a precarious financial predicament by having bond traders take out lots of nasty, naked credit default swaps – betting on Greece to fail in its financial obligations, mainly to other EU members.

The whole thing has now aroused a hullaballo. The Germans, as well they should be, are strongly against a bailout. To use an analogy recently applied by Financial Times columnist Wolfgang Munchau, the Germans rightly regard themselves in the top slot in a soccer league with the other competitors way below. The others are way below because their balance of payments deficits are large and growing – while Germany’s finances are firmly in the black. This is the same Germany that was roundly excoriated back in 2007-08 by The Wall Street Journal for still being overly much a “welfare state” – especially a place where German workers received too much in pay and benefits relative to others (say in the U.S.)

The WSJ piece, as I recall, compared the fortunes of an unemployed German worker to an American. While the latter had to “pound the pavement” looking for a new job – by which to jump back onto the capitalist merry go-round, the German unemployed worker was able to take his family on a month-long holiday to Sardinia and chill out. Then, on returning, he read and edified himself intellectually - while intermittently looking for work, receiving about 65% of his normal pay (while the unemployed American barely survived on a pittance of unemployment insurance). More to the point, the German worker received his benefits for nearly two years, while the American’s only lasted 6 months. NO wonder so many ‘Muricans have to turn to God and prayer – they won’t get much from their corporate-oriented government!

Now, this was before the financial meltdown in the fall of 2008. What happened subsequently is that German workers were funneled gradually back into Germany’s revamped production system under new labor rules (that were still generous) while Americans were cut by the millions, eventually leading to an unemployment rate in excess of 10% (actually more like 17%).

Those German workers now are receiving an average of 34 euros a week in pay and benefits (according to a piece in yesterday’s WSJ) and are at the top of their game in terms of productivity – a primary reason why Germany is second to none in productivity and its financies are flush as opposed to other members. Yes, Greece (as well as Spain, Portugal) have lower labor costs – a fraction of the Germans- but their payoff is not so high because their productivity is nowhere near the German ball park. Add in spending beyond their means, and you have one explanation for their financial mess and being targeted by the international bond traders.

So, what do Germany’s fellow Eurozone members demand? Why, that the tight fisted Germans spend more and buy more of their fellow members’ products – whether cars, dolls, pancakes, furniture or whatnot. The claim is that the Germans “owe” this much to the others, to help them get their economies back on their feet – as opposed to being hounded by the sharks….errrrr…. bond traders. Even such financial mavens as Martin Wolf of The Financial Times has fallen for this blather, writing in a recent column that the Germans really need to loosen their purse strings!

I understand this sentiment, but don’t accept the Germans are now obliged to be the noble consumer just to help Greece, or any other EU member. Any more than I accept the American capitalist spin that already finance-stretched American consumers need to be "patriotic" and spend more on crappola - get in more debt- because 70% of the nation's GDP is based on consumption. The Germans got to where they are by watching their marks….errr.. euros, and not spending frivolously, which includes not spending more than they actually earn. This is a lesson that the Germans have tried to impart to their fellow Eurozone members, but with mixed results. The usual rejoinder is that "someone has to spend" or no one thrives.

What’s the solution? To me, it’s to allow the International Monetary Fund (IMF) to enter Greece and formulate a package for their economic health. The entry of the IMF does not violate Maastricht, since we are not really talking of a federation here. (As today’s Financial Times editorial points out). Nor would this be a bail out, since believe me – the IMF will carve out its pound of flesh to enable Greece to be loan worthy again.

As a point of reference, in 1991 Barbados had to go to the IMF after unwise government policies (namely large tax cuts) were implemented five years earlier and brought the island nation to the brink of insolvency. The IMF entered and issued a host of prescriptions, including an 8% salary cut for all civil servants across the board. It was this cut that triggered the departures of my wife and myself for the U.S. – since small though it might appear, it meant the difference between saving and not saving. It was as well we did leave, because in the next year a VAT (value added tax) was also applied to thousands of products including foods.

The irony of it all was that we were forced to leave not because of implicit socialist policies, but because of attempted CAPITALIST ones (tax cuts)- designed to emulate Reagan’s in the U.S. (Which proves that grafting capitalist finance tricks on a basically democratic socialist nation is like trying to graft a monkey's head onto a lion - that critter won't survive)

Anyway, Barbados has recovered nicely and I believe Greece will too, once the IMF administers its dose of financial castor oil – and the Greeks presumably take it (though they may not like it!). Sad for them, it may mean cutting back many of their public services, public support systems – but that may well be the price to avoid insolvency and a bond credit rating of zero.