PIIGS

[lukin]

I want to understand what caused the hardships for these European countries. I don't want this to turn into a partisan debate of socialism vs. capitalism; just facts. I'm curious because my daughter came home from school today and told me that her teacher claimed these countries failed because they aren't paying enough taxes which caused these countries to default on their loans. Any insight is greatly appreciated.

[Michael Hardner]

Sorry, lukin, what is PIIGS ?

[Guest American Woman]

What Does PIIGS Mean?

An acronym used to refer to the five Eurozone nations, which were considered weaker economically following the financial crisis: Portugal, Italy, Ireland, Greece and Spain. Since the nations use the euro as their currency, they were unable to employ independent monetary policy in order to help battle the economic downturn.

Read more: http://www.investopedia.com/terms/p/piigs.asp#ixzz1ZC6xVTle

[Michael Hardner]

Ok... well I suppose they could increase the already high tax rates more to support the large civil service, bureaucracy etc. etc... and maybe investors and high earners there will be glad to pay even more to support these things.

It's possible... but not plausible...

Interesting too, that the left uses the same arguments in countries that have high taxes and rich social programs as in countries that have lower taxes and fewer social programs.

Maybe there's something generally wrong across the board here ?

[lukin]

Ok... well I suppose they could increase the already high tax rates more to support the large civil service, bureaucracy etc. etc... and maybe investors and high earners there will be glad to pay even more to support these things.

It's possible... but not plausible...

Interesting too, that the left uses the same arguments in countries that have high taxes and rich social programs as in countries that have lower taxes and fewer social programs.

Maybe there's something generally wrong across the board here ?

So basically, the problems for these countries is a result of Big Government? People want to retire at 50 with full benefits, but the money to cover their pensions has to come from somewhere.

[Michael Hardner]

Those countries aren't competitive.

[lukin]

Those countries aren't competitive.

So what is the reason why they are in so much trouble? Especially Greece?

[Michael Hardner]

So what is the reason why they are in so much trouble? Especially Greece?

Those countries aren't competitive.

[lukin]

Those countries aren't competitive.

Got you the first time , Mike. Many countries in the world are not competitive. why is Greece in dire straits? is it because of the EU?

[Michael Hardner]

Not competitive, meaning taxes and labour costs are too high.

[lukin]

Not competitive, meaning taxes and labour costs are too high.

So the lesson is to cut taxes and cut spending. It's hard to get off the gov't nipple when you rely on them for a livelihood, so any little cut to a social program produces chaos. Is this what the USA is facing in the near future?

[Michael Hardner]

That's what I said - Greece & US are so different yet we hear the same argument.

[bud]

the greek economy was one of the fastest growing economies in the eurozone between 2000-2007. then the financial crisis happened and greece's two biggest industries, tourism and shipping, plummeted and revenues fell by 15%. the greek government didn't address this problem and continued to borrow more money. it has been discovered that they paid banks like goldman sachs millions of dollars to fix the books since early 2000 to hide the level of borrowing.

spain's problems is mostly from a property bubble and mortgage debt. similar to what we saw in the u.s.

similar with ireland. low corporate taxes led to more risky lending for business investment and mortgages.

portugal - source

A report published in January 2011 by the Diário de Notícias, a leading Portuguese newspaper, demonstrated that in the period between the Carnation Revolution in 1974 and 2010, the democratic Portuguese Republic governments have encouraged over expenditure and investment bubbles through unclear public-private partnerships. This has funded numerous ineffective and unnecessary external consultancy and advising committees and firms, allowed considerable slippage in state-managed public works, inflated top management and head officers' bonuses and wages, causing a persistent and lasting recruitment policy that has boosted the number of redundant public servants. The economy has also been damaged by risky credit, public debt creation and mismanaged European structural and cohesion funds for almost four decades. Apparently, the Prime Minister Sócrates's cabinet was not able to forecast or prevent any of this when symptoms first appeared in 2005, and later was incapable of doing anything to ameliorate the situation when the country was on the verge of bankruptcy in 2011.

iceland has a different story. banks were deregulated in 2001 and that's when they started to upload debts when foreign companies were accumulated and of course, they weren't able to refinance this debt and it went downhill from there.

Edited September 28, 2011 by bud

[eyeball]

I want to understand what caused the hardships for these European countries. I don't want this to turn into a partisan debate of socialism vs. capitalism; just facts. I'm curious because my daughter came home from school today and told me that her teacher claimed these countries failed because they aren't paying enough taxes which caused these countries to default on their loans. Any insight is greatly appreciated.

I've read the same thing. My take is that the example of powerful and wealthy Greeks enriching themselves with no regard for accountability inspired everyone else to start acting the same way.

I figure the greedy sneering lack of noblesse oblige trickled down through the rest with predictable results. Look around, you see a lot of that these days.

[Bonam]

the greek economy was one of the fastest growing economies in the eurozone between 2000-2007. then the financial crisis happened and greece's two biggest industries, tourism and shipping, plummeted and revenues fell by 15%. the greek government didn't address this problem and continued to borrow more money. it has been discovered that they paid banks like goldman sachs millions of dollars to fix the books since early 2000 to hide the level of borrowing.

Indeed, since 2000. The "fastest growth" which you claim was from 2000-2007 was largely fraudulent.

Anyway, the solution for Greece is simple. Leave the monetary union and go back to their own currency. They can let their currency inflate against the euro, thus cheapening their exports while making imports more expensive, which strengthens domestic production and boosts tourism. This would let their economy rebound a bit while they figure out how to cut their bloated social spending back to more reasonable levels.

[bush_cheney2004]

...Anyway, the solution for Greece is simple. Leave the monetary union and go back to their own currency....

Yes, that would be best for Greece, but bad for a frail Eurozone with other members ready to bolt from the Union. French and German banks would take a bath.

[Oleg Bach]

Those countries aren't competitive.

For being a bit of a lefty to use the word `competative` might be an mistake - competition does not always bring out the best - as arch captitalist like to say - sometimes competition causes the best to retract their services...leaving the less capable to foolishly compete with poor results in the end. I like protectionism....it is much like an honest person being capable of anger...which is frowned upon these days. Social engineers insist that a man must not have any righteous indignation - that he must be totally submissive and compliant...and not complain as you saw off his arm....`what.....he is pissed off that we are screwing him - better give him some medication and some anger management course....not that this is on topic - but those in control do not want competition - so why even mention it - competitive actions are not acceptable...or should I say that.......The truely diligent and capable need not apply.

[August1991]

Anyway, the solution for Greece is simple. Leave the monetary union and go back to their own currency. They can let their currency inflate against the euro, thus cheapening their exports while making imports more expensive, which strengthens domestic production and boosts tourism. This would let their economy rebound a bit while they figure out how to cut their bloated social spending back to more reasonable levels.

I agree, but this is far easier said than done.

If Greece (or Spain or Italy) had their own currency, they could simply devalue and this would make everything cheaper compared to foreign prices. In the absence of having their own currency to devalue, they must wait until their euro prices/wages fall relative to euro prices/wages abroad. This may take a long time.

We have a comparison in Canada: the maritimes, Newfoundland and Quebec. For many years, these regions had unused capacity because their prices/wages were stuck at a level too high. If they had had their own currency, they could have devalued and quickly achieved full employment, reached capacity.

It would be very, very messy for Greece (Italy, Spain) to leave the euro now so devaluation is not really a solution. An initial attempt would be if the Greek government started to pay its employees/pensioners in special "Greek euros" (ie. drachmas). But I doubt this will happen - anymore than if a PQ government were to start to pay its employees/pensions in "Quebec dollars".

Some of these problems in Europe can be mitigated (as they are in Canada) through equalization payments. In effect, it is in the interest of Ontario/German taxpayers to subsidize Nova Scotia/Greek taxpayers to stay part of a single currency union. Go figure.

In the meantime, it is highly likely that the Greek government will default (ie. miss a few monthly credit card payments) in the near future. IOW, the bondholders will see their coupons taxed at 100%. (Trick Question: What's the difference between a tax and a bond default? Answer: None.)

IOW, the Greeks/Germans will likely muddle through as we in Canada have done over the past 50 years or so. Greece/Spain may discover oil/shale gas as Nfld and Quebec have!

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How did Greece and Italy etc get into this position? As others in this thread have pointed out, a collapse in aggregate demand. (In case you don't know, we are in a recession around the world.) In addition, recessions have a tendency of exposing all the Ponzi schemes from Greek tax avoidance to Bernie Madoff. I think Warren Buffett said that when the tide goes out, you see who has been skinning-dipping.

So, before 2008, the Greek government had been indulging in an age-old past time of all governments: spending too much of other people's money, and the world wide recession exposed its skinny legs/sloppy bookkeeping.

For being a bit of a lefty to use the word `competative` might be an mistake - competition does not always bring out the best...

Oleg, I think MH was referring to "price competition" not "sports competition". There's a big difference. Edited September 28, 2011 by August1991

[Scotty]

I've read the same thing. My take is that the example of powerful and wealthy Greeks enriching themselves with no regard for accountability inspired everyone else to start acting the same way.

I figure the greedy sneering lack of noblesse oblige trickled down through the rest with predictable results. Look around, you see a lot of that these days.

I have no information on how it started, but avoiding taxation is the favorite sport of Greeks, and as I understand it, half the national economy is underground and thus can't be taxed. Despite this the Greeks have a social welfare state which would make Canadians envious for its lavishness and generosity.

How do you pay for that while half your taxes are not being paid? You borrow. You keep borrowing because the electorate is spoiled rotten and will throw you out of office if you dare to propose lowering benefits. And then you hide the level of borrowing until its too big to hide any more and hope by that time someone else is in power to have to take the heat.

[ToadBrother]

I want to understand what caused the hardships for these European countries. I don't want this to turn into a partisan debate of socialism vs. capitalism; just facts. I'm curious because my daughter came home from school today and told me that her teacher claimed these countries failed because they aren't paying enough taxes which caused these countries to default on their loans. Any insight is greatly appreciated.

The stories are a little different in each, but in general, imprudent governments who through various means, overspent massively, relying particularly on the credit bubble that finally burst in 2008. In Greece's case, it's even worse in that it has always had shaky foundations to its economy, and has probably one of the highest rates of tax avoidance of any Western economy, so that even if the economy recovers, the Greek government is deprived of the revenue benefits inherent in that.

[ToadBrother]

Yes, that would be best for Greece, but bad for a frail Eurozone with other members ready to bolt from the Union. French and German banks would take a bath.

British banks are also heavily exposed both directly and via their exposure over Irish debt.

[August1991]

I have no information on how it started, but avoiding taxation is the favorite sport of Greeks, and as I understand it, half the national economy is underground and thus can't be taxed. Despite this the Greeks have a social welfare state which would make Canadians envious for its lavishness and generosity.

How do you pay for that while half your taxes are not being paid? You borrow. You keep borrowing because the electorate is spoiled rotten and will throw you out of office if you dare to propose lowering benefits. And then you hide the level of borrowing until its too big to hide any more and hope by that time someone else is in power to have to take the heat.

Governments around the world do this all the time. Nothing new.

What is different this time is that, when the sh*t hits the fan and a negative shock hits, the Greek government does not have a drachma to devalue.

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In Canada, we have equalization payments. In the US, the Fed bails out Wall Street banks. And the UN has UNICEF.

IOW in Canada, we take money from competent individuals and give it to unaccountable organizations. (In Canada, equalization means Albertan taxpayers -for example- do not give money to individual Quebecers - they in effect pay taxes to the Quebec government.)

Given European history, let's see how this equalization idea works in Europe circa 2010, after millions of deaths in the 20th century.

----

Meanwhile, we boring uncivilized fat uncultured religious Big Mac eating, F150 driving, backward American/Canadian/North Americans have accomplished for centuries/decades this equalization idea.

And Europeans now, they cannot.

Edited September 30, 2011 by August1991

[August1991]

Double post.

Edited October 3, 2011 by August1991