Greeks Fall Victim To A Fantasy Government

Greek leadership has finally put forth another proposal to solve the country’s fiscal problems. The latest effort to meet targets set by EU officials includes tax increases, but no meaningful spending cuts.

Yet, it appears eurozone leaders will accept the proposal.

There’s just one problem with the plan: Most Greeks don’t pay their taxes.

Any revenue gain Prime Minister Alexis Tsipras says the government will realize via tax increases is pure fantasy.

At this stage, honest Greeks who aren’t hopelessly corrupted by their country’s pathologies should be screaming for Greece to exit the euro and restore market discipline.

Packed in a Pita

The Greek package presented to the EU on June 22 raises value-added tax on certain goods and removes exemptions that had been granted to the Greek islands. It adds a 12% excess corporate profits tax on all profits above 500 million euros, and raises the overall level of corporate tax from 26% to 29%. The proposal also adds a 3.9% annual pension contribution to the Greek government’s main pension scheme.

On top of that, the Greek government proposed eliminating some of the incentives for early retirement and raising the retirement age to 67 in 2025. This yields few immediate savings, but it does gain some longer-term ones.

Still, Tsipras’ radical left Syriza government’s reversal of the previous leadership’s reforms of restoring previously cut government jobs and pensions has been left in place.

The proposal is still far from what eurozone leaders would prefer, but it now seems likely that the Greek concessions will be accepted, meaning a little more of European taxpayers’ money will be released into the spendthrift hands of Greece’s government.

There’s little doubt in my mind that similar future crises – like the 3.2 billion euros due to the European Central Bank in August – will be dealt with in the same way.

Encouraging Freeloading

Apart from the cost to EU taxpayers, which will be moderate, saving Greece from defaulting on its loans will have a number of negative effects.

The most important of which is that it won’t solve Greece’s problems.

The additional taxes levied by Greece will yield far less than anticipated. As I said before, economic uncertainty causes Greeks to evade taxes even more than they already do. Instead, they’ll find all sorts of ways to smuggle money out of the country.

The taxes also won’t stop subsidies from pouring out of the EU and into Greece. Most of these come in the form of European Central Bank loans to Greek banks.

And the changes won’t remove the uncertainty surrounding the euro. This is sure to damage economic growth across the eurozone.

But the most dangerous effect of these wimpy European politicians is that their actions will reinforce the idea that there are no consequences for economically irresponsible governments elsewhere.

You see, if Greece can elect a leftist mob that barely addresses fiscal responsibility and succeeds in gaining additional resources from northern European taxpayers, then similar parties will attempt to repeat the trick in Spain, Italy, and elsewhere.

For example, Spain’s Podemos – the third-largest political party in May’s regional elections – could win in December’s general election. These socialists could rightly assume that if northern European taxpayers can be forced to bail out Greece, then their spending power is also unlimited.

Climbing Over the Hard Place

Now, if you’re a moderately honest member of the Greek middle class, you don’t want to be bailed out by the eurozone.

Syriza has shown that any austerity required by eurozone leaders will be accomplished through tax increases, which will inevitably come mostly at the middle class’ expense. Unemployment will remain astronomical as the new taxes drain purchasing power from the economy.

The only solution to re-employing Greece’s citizens and making Greek products competitive internationally is for Greece to exit the eurozone.

That solution isn’t much better for the Greek middle class because it will reduce their ability to buy international goods and services. Plus, on the euro system, Greeks are overpaid compared to what they produce. And who doesn’t like being overpaid?

Still, continued eurozone membership gives all that extra purchasing power to the government.

At this stage, middle class Greeks are better off if the country leaves the eurozone and creates a new currency (in the form of another drachma). Syriza will quickly run out of money under the conditions of the free market and, thus, disappear from power.

As for the EU, kicking Greece out of the eurozone would greatly strengthen the common currency.

It would increase the EU leadership’s credibility among the vast majority of citizens (who pay their taxes). It would scare Spain, Italy, and other economically weak euro users into correcting their policies before similar problems arise. It would reduce the danger of bad policies being subsidized by good ones. And, finally, it would restore the central principle of a common currency, which is that it must be buttressed by fiscal discipline on the part of all members.

But the reality is that EU politicians are choosing to kick the can down the road, which will certainly cause them trouble in the future. Especially if they end up having to deal with the rise of another Adolf Hitler or Vladimir Putin.

Of course, Tsipras is nowhere near as dangerous a threat as Hitler or Putin. But it is dispiriting that eurozone leaders can’t even deal competently with this olive-sized menace.