by Sydney M. Williams
“Will she, or won’t she?” That is, will Greece, with a population of eleven million, abandon the Euro and strike out on her own, or will she just strike out? Will she default? Would there be collateral damage? It is not as though Greece is critical to Europe’s economy (her GDP represents less than 1.5% of the Eurozone’s GDP), but her exit could start a precedent – contagion is the word preferred by the cognoscenti. But the most important question: Why has this happened? Are Europe and the West also vulnerable?
Europe, along with much of the world, suffered a protracted recession in the wake of the 2008 credit crisis. Other than a brief interlude of little over a year, Europe’s recession lasted five years, from early 2008 through early 2013. (Greece’s GDP is still 30% below where it was in 2008.) But the troubles in Europe are more pestiferous than simply the aftershocks of a damaging recession. According to Eurostat, for the twenty years ending 2014 Europe’s GDP growth has compounded annually at a mere 0.35%. Europe’s problem is (and has been) a lack of economic growth.
Two factors have been principally responsible for this depressed state: First, Europe’s population is in decline. The advent of the “pill” around 1960 brought freedom and relief to women, especially to those in the West. Family size could be controlled. Postponed marriages and fewer children became options of choice. As a result, Europe now has a fertility rate of 1.6. (A rate of 2.1 is needed for populations to grow.) In Greece, the fertility rate for 2013 was 1.3, one of the lowest in the Eurozone. This is a long-tail quandary, not easily reversed. It will have increasingly negative consequences for future economic growth, as the number of elderly, compared to those of working age, rises. Immigration can help. But, as we know from the expansion of Muslim communities and migrants crossing the Mediterranean from North Africa, such solutions do not come without complications of their own.
The second impediment to economic growth has been the expansion of the welfare state. In the aftermath of World War II, after a decade of Depression and six years of war, a benevolent, democratic state was seen by Western Europeans as a welcome antidote to the Nazi and Fascist governments that had brought Europe to its knees. (As an aside, the dictatorial nature and murderous brutality of the Soviet Union was downplayed because of the role the Soviets had played in the defeat of Hitler. Yet Stalin may well have killed more people than Hitler. In electing Alexis Tsipras as Prime Minister this past January, Greece elected a former Communist and leader of the far-Left party, Syriza. Are lessons never learned?)
Without claiming cause and effect, a changed population mix has been accompanied by declines in civility and cultural standards. We see the latter reflected in attitudes toward families and lifestyles, including glorification of the self and its unintended consequences – the Kardashian effect, if you will: A focus on narcissism, spectacle and money. It can be seen in the substitution of institutional responses to humanitarian needs, rather than community groups and individuals. It manifests in a people concerned more about safety and comfort than risk and reward. It is a society that has become less tolerant and less civil. We see it in a political class that has become isolated from the masses – politicians and bureaucrats attended by sycophants. Some of these factors have been discussed by Robert Putnam in his books, Bowling Alone and more recently, Our Kids: The American Dream in Crisis. While Professor Putnam writes about the United States, the problems and their causes have applicability across Western Europe.
The welfare state was intended to relieve people from threats of starvation, house those without shelter and help those who were ill and/or old. It blossomed in Europe, in part, because defense was largely relegated to the U. S. Ironically, it is a perversion of the rigidly stratified 19th Century European aristocracy, when a small number of nobles (today’s politicians) lorded over millions of serfs (today’s citizens). It is based on the demeaning assumption that a sanctimonious elite knows best. Over time, it has emasculated the people it was designed to help. From the provision of services to the few evolved a sense of entitlement by the many. As the power of political leaders increased, that of the people waned. Its founders saw it as utopian – they saw a state nearing their concept of perfection, and marketed it as such. But it is paternalistic, encourages sloth and it discourages individual creativity, aspiration, risk-taking and investment. It is anti-growth.
Debt and the burden of future obligations are a natural outgrowth of the welfare state. Europe’s (and especially Greece’s) economy has grown less rapidly than debt has accumulated. Entitlements are a “third-rail” problem not limited to Greece, or even Europe. According to charts in Martin Wolf’s last Wednesday’s column in the Financial Times, the expansion of government debt has greatly exceeded growth in GDP. It suggests each new Euro borrowed contributes correspondingly less to real growth. Following the credit crisis, Europe adopted austerity. By austerity, they meant a government that would raise taxes and reduce spending. That didn’t work. Recoveries come about when spending expands. But that would have meant both raising taxes and increasing state spending. On the other hand, they could have cut taxes and reduced regulation. That would have allowed the consumer to lead the way out of recession, but would have risked encouraging free market capitalism, an anathema to high priests of the welfare state.
When Mario Draghi and the European Central Bank (ECB) decided, as expected, to invoke the Bernanke principle of quantitative easing, Europe’s equity markets rallied, and so did bond prices. But has QE done naught but put a band aid on a wound gushing blood? Are investors playing the “greater fool” game? Have we become so focused on the short term, both in terms of obstacles as well as solutions, that we can no longer see the forest for the trees?
“You can run, but you can’t hide,” is the title of a song written by Tom Keene in 1979 and is the title of Duane Lee “Dog” Chapman’s 2007 autobiography. But the origin of the quote is usually attributed to Joe Louis, who, while being interviewed in 1946 about an up-coming fight with Billy Conn, said, “He can run, but he can’t hide.” What Mr. Louis said about Mr. Conn then is true about Greece today. The problem is not just that Greece may go into default and be forced out of the Euro. Theirs is a story of the perfidious effects of cultural and political paradigm shifts gone wrong – too low birthrates, an unsustainable welfare state, soured civility and the rise of a narcissistic culture. What is needed is a massive change in thinking – the appearance of a Margaret Thatcher, someone who will return opportunity to the people, give them confidence in the future, to work, take risk and invest in plant, equipment and jobs. Unless those fundamentals are addressed, Greece will prove a prelude, not only for Europe, but also for America.
The Opinions expressed above are mine alone, and do not represent those of the firm Monness, Crespi, Hardt & Co., Inc., or of any of its partners or employees.