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Thread: ECB President Draghi Declares War on Europe’s Social Safety Nets

  1. #1

    ECB President Draghi Declares War on Europe’s Social Safety Nets

    I’m late to the remarkable interview given by ECB president Mario Draghi to the Wall Street Journal. I find the choice of venue curious, since the Financial Times has become the venue for top European politicians and technocrats to communicate with English speaking finance professionals.
    But Draghi’s drunk-on-austerity-Kool-Aid message was a perfect fit for the Wall Street Journal. While he wasn’t as colorful as Andrew Mellon’s famous “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Draghi is still a true heir in believing that his prescription, per Melllon, will result in “High costs of living and high living will come down.” The “high living” that Draghi is particularly opposed to is Europe’s social safety nets.
    The bizarre part about that is it is those very programs that kept Europe from being in even worse shape than it is now. I recall in early 2009 that American economic officials were hectoring Europeans, particularly Germans, for not doing enough in the way of economic stimulus. European readers argued that that reflected abject ignorance. Germany provides generous support to idled workers, and that spending was automatic. Germany performed far better than its US critics anticipated.
    Not surprisingly, the Journal did not question the notion that democratic governments should take orders from an unelected finance official. But Draghi tried to make his views sound a tad more legitimate by blaming the planned ritual sacrifice as a demand of the market gods.
    From the Wall Street Journal:
    European Central Bank President Mario Draghi warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent’s traditional social contract is obsolete…
    He said Europe’s vaunted social model—which places a premium on job security and generous safety nets—is “already gone,” citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people…
    He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity…
    “There is no feasible trade-off” between economic overhauls and fiscal belt-tightening, Mr. Draghi said…
    Can he really not see what happened in Ireland and Latvia, and what is taking place in Greece? Did he somehow not notice that Greece falls short of its growth targets every time the screws are turned tighter? This is like watching a medieval doctor apply more leeches to a patient that has already passed out from blood loss. There is no prosperity happy ending in this story, save for a very few at the top. And the process is not “belt tightening” but open warfare on basic social structures.
    And we have the predictable threat:
    “Backtracking on fiscal targets would elicit an immediate reaction by the market,” pushing interest-rate spreads higher, he said.
    Um, what has led bond yields to fall is the LTRO, which has taken the concern of bank failures off the table and allows (actually, encourages) banks to take their “trash” collateral and use it to secure LTRO financing. That means banks can engage in a carry trade: buy periphery debt and use it to obtain cheaper LTRO lending. For Draghi to insinuate that the tightening of spreads has anything to do with fiscal targets is dishonest. It has everything to do with the ECB (for the moment, anyhow) supporting the banks and the markets. Investors believe they can rely on the Draghi put.
    If the market reaction really were about fiscal sustainability, we’d still here nervous talk about Italy. Its bond yields are still in excess of 5%, and since its growth rate is nowhere near that level, so its debt to GDP ratio will continue to rise. But as long as the ECB stands ready to throw liquidity at any emergency, the markets will remain complacent.
    The Journal did include some sane remarks, albeit well into long article:
    “He’s just sugar coating the message,” said Simon Johnson, former chief economist at the International Monetary Fund.
    “A lot of this structural reform talk is illusory at best in the short run…but it’s a better story than saying you’re going to have a terrible 10 years,” he said.
    10? Remember, it’s been more than 20 in Japan. 10 could turn out to be a very good result indeed.
    ECB President Draghi Declares War on Europe's Social Safety Nets | naked capitalism

    I hope the European people will make the right vote next month...
    Those who can make you believe absurdities can make you commit atrocities.

    Voltaire


  2. #2
    The bottom line is that someone always has to pay for social safety nets. While they are necessary for people who really need them, the biggest flaw in the USA system is that it never takes human nature into account. Rather than providing temporary assistance, they have become a way of life for too many people who really do not need them. That is an incredible waste and an inefficient use of resources.

    The other factor is the way that people get serously pissed when anyone tries to take away their freebies. Look at what happened in Greece. I suspect the EU will overwhelmingly vote for the people who promise to give them the most freebies or who promise to protect the generous freebies that the governments can no longer afford.
    "Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote." -- Benjamin Franklin


  3. #3
    Quote Originally Posted by TopDogger View Post
    The bottom line is that someone always has to pay for social safety nets. While they are necessary for people who really need them, the biggest flaw in the USA system is that it never takes human nature into account. Rather than providing temporary assistance, they have become a way of life for too many people who really do not need them. That is an incredible waste and an inefficient use of resources.
    Like anything else, reasonable safety net is a plus for people in need temporary, too much safety net is unsustainable.

    The other factor is the way that people get serously pissed when anyone tries to take away their freebies.
    If we take the Walmart case, in one side the policy of this multi national corporation want to pay minimum wage as much as they can and on the other side they complaint when people don't spend money in their stores, "You can't eat your cake, and have it too".

    The politicians, the industrialists and the financiers have unbalanced the world societies and it is going to shake the whole world as we know it and I am afraid that the worst is to come.

    Look at what happened in Greece. I suspect the EU will overwhelmingly vote for the people who promise to give them the most freebies or who promise to protect the generous freebies that the governments can no longer afford.
    Well, The Guardian described it pretty well in this article: Greek debt crisis: how did the Greek economy get into such a mess?

    The people of Greece could ask first to get out of the Euro zone, and then ask the international community to remove the Odious debt.

    As far as the actual EU policy, like Nigel Farage said: "Enough is enough"





    A superb speech!
    Rise of Eurosceptism is an Assertion of Identity

    Those who can make you believe absurdities can make you commit atrocities.

    Voltaire


  4. #4
    Quote Originally Posted by Franc Tireur View Post
    Well, The Guardian described it pretty well in this article: Greek debt crisis: how did the Greek economy get into such a mess?

    The people of Greece could ask first to get out of the Euro zone, and then ask the international community to remove the Odious debt.
    Both of these actions would mean they would have to jump off of the gravy train that has been financing their wild spending sprees and corruption. Removing debt is not without consequences. it doesn't just disappear. When debt is removed, whoever financed it takes the loss. In the case of Greece, that could be mostly Germany, who has been financing much of Greek debt. The Germans will not agree to this because it hurts the German economy.

    A lot of the money that was going into Greece was stolen by politicians. The EU should be aggressively investigating and prosecuting the thieves.

    Greece should be forced to pay off their debt--or at least a major portion of it--and should then be thrown out of the EU to fend for themselves.
    "Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote." -- Benjamin Franklin


  5. #5
    Quote Originally Posted by TopDogger View Post
    A lot of the money that was going into Greece was stolen by politicians. The EU should be aggressively investigating and prosecuting the thieves.The EU should be aggressively investigating and prosecuting the thieves.
    Well, it is complicated, but we can say that Greece was stolen by politicians, and the politicians money was stolen by other states from spending wildly and without thinking. The real thieves are the founders of EU, so I don't see how they are going to prosecute them.

    Greece should be forced to pay off their debt--or at least a major portion of it--and should then be thrown out of the EU to fend for themselves.
    I guess the question is: Is the people responsible for this debt, as I mentioned earlier, odious debt could be used and like any investment, sometime banks make bad investments and other states shouldn't guarantee the bank actions.
    Those who can make you believe absurdities can make you commit atrocities.

    Voltaire


  6. #6
    Ultimately the people where the money was sent are responsible for repaying a loan to the government.

    Banks and investors are unlikely to forgive the loans if there is any possibility that Greece can keep paying off the debt. It is in Greece's best interest to keep paying. It will be a long, long time before they see any further loans from anyone if they default on the current loans.

    Gemans are tired of loaning money to Greece. The German people clearly see that it is ludicrous for them to work until they are 65 to give money to Greeks so they can retire with full benefits at age 50. Greeks can spend more years in retirement than they spend working and paying taxes.
    "Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote." -- Benjamin Franklin


  7. #7
    Of course that is the international law, as far as the enforcement of this law, it is another story.

    In international law, odious debt, also known as illegitimate debt, is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.

    I think many people don't realize exactly what kind of hit the Greek are under.

    Greece's revised austerity plan


    Greece and its international lenders agreed late on Thursday to revise the country's five-year austerity plan to include more tax increases and less spending cuts. The revised 2011-2015 fiscal plan, the key to unlock further EU-IMF loans for the debt-laden country, was submitted to parliament on Friday.
    It includes a total 28.4 billion euros of fiscal measures, 155 million euros more than in an initial version of the plan unveiled earlier this month.
    The revised plan foresees a total 14.32 billion euros of spending cuts, about 490 million euros less than in the previous version. It also calls for 14.09 billion euros of tax measures, 649 million euros more than in the initial version.
    Here are the main measures and targets, as presented by the Greek Finance Ministry in a document obtained by Reuters. The privatization targets were set out in an EU/IMF document obtained by Reuters earlier this month.
    FISCAL PLAN
    * TAX INCREASES: taxes will increase by 2.32 billion this year, with additional taxes of 3.38 billion euros in 2012, 152 million euros in 2013 and 699 million in 2014.
    This includes an 1.38 billion euro "solidarity levy" charged this year on households, ranging between 1 and 5 percent of income. Other measures include the lowering of the tax-free threshold to 8,000 euros from 12,000 euros, higher property taxes, legalization of unauthorized buildings, a VAT rate hike on restaurants and bars to 23 from 13 percent, and luxury levies on yachts, pools and cars. The government also wants to scrap a string of tax exemptions.
    * CUTTING THE PUBLIC SECTOR WAGE BILL: 770 million euros in 2011, and 600 million in 2012, 448 million in 2013, 300 million in 2014 and 71 million in 2015.
    The reduction will come from a curb on hirings and allowance cuts, as well as by shedding all public sector workers employed under temporary contracts. The government will replace only 1-in-10 civil servants who retire this year and 1-in-5 in coming years.
    * CUTS IN SOCIAL BENEFITS: 1.09 billion euros this year, 1.28 billion in 2012, 1.03 billion in 2013, 1.01 billion in 2014 and 700 million in 2015.
    Reduction will mainly come by means-testing beneficiaries and cutting a string of benefits.
    * INCREASE SOCIAL CONTRIBUTION RECEIPTS: 629 million euros this year, 259 million in 2012, 714 million in 2013, 1.14 billion in 2014 and 504 million in 2015.
    To be achieved through an increase in social security contributions and by cracking down on contribution evasion and undeclared labor.
    * CLOSE/MERGE PUBLIC ENTITIES AND SUBSIDIES: 490 million in 2011, with further 700 million euros in savings in 2012-2015.
    * FIGHTING TAX EVASION: 878 million euros in 2013, 975 million in 2014 and 1.15 billion in 2015.
    * CUTS IN PUBLIC INVESTMENT SPENDING: 850 million euros this year (150 million euros more than in previous version of the plan)
    * Defense CUTS: 200 million euros in 2012, and 333 million euros each year in 2013-2015.
    * CUTS IN HEALTHCARE SPENDING: 310 million euros this year and a further 1.81 billion euros in 2012-2015, mainly by lowering regulated prices for drugs and widening the use of e-prescriptions.
    * OTHER MEASURES include savings in state-owned enterprises and cuts in subsidies to local government. Warning: Unrecognized block 'Divider'
    PRIVATISATIONS
    The government aims to raise a total of 50 billion euros from privatizations by 2015.
    Here are some key sales:
    2011
    * Greece aims to get 5 billion euros by selling stakes in betting monopoly OPAP, lender Hellenic Postbank, port operators Piraeus Port and Thessaloniki Port as well as Thessaloniki Water among others.
    Greece earlier this month agreed to sell a 10 percent stake in Hellenic Telecom (OTE) to Germany's Deutsche Telekom. The government exercised its "put" option to sell the stake for around 400 million euros.
    2012
    * The government plans to raise 10 billion euros by selling stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATEbank as well as ports, airports, motorway concessions, state land and mining rights.
    2013-2015
    * Plans are to raise 7 billion euros in 2103, 13 billion in 2014 and 15 billion in 2015 with property sell-offs, and yet more stakes in ports, airports and highways.
    Factbox: Greece's revised austerity plan | Reuters
    Those who can make you believe absurdities can make you commit atrocities.

    Voltaire


  8. #8
    I cannot feel sorry for the Greeks. They took advantage of the rest of the countries in the EU and went on a wild spending spree at the expense of other countries in the EU. They were the equivalent of the millions of welfare scammers we have in the USA.

    If you want to play, you have to pay.
    "Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote." -- Benjamin Franklin


  9. #9
    Quote Originally Posted by TopDogger View Post
    I cannot feel sorry for the Greeks. They took advantage of the rest of the countries in the EU and went on a wild spending spree at the expense of other countries in the EU. They were the equivalent of the millions of welfare scammers we have in the USA.

    If you want to play, you have to pay.
    I guess people want to see only from their perspective and often rush to conclusion.


    If the Greek politicians went on a wild spending spree at the expense of other countries in EU, why the creditors have accepted to lend continuously in the first place?

    Why the US business bank Goldman Sachs helped Greece to have a shadow secret banking book?

    Goldman Secret Greece Loan Shows Two Sinners as Client Unravels

    Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start. On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.
    Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.
    “The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.
    Goldman Secret Greece Loan Shows Two Sinners as Client Unravels - Bloomberg
    Those who can make you believe absurdities can make you commit atrocities.

    Voltaire


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