Austerity Measures Only Lead to More Bailouts.... So Who's Going to Bailout the ECB When It Goes Bust?


Don’t let the title fool you here. I am in no way condoning the profligate spending and absurd debt levels that comprise the welfare economies of Europe (and most of the developed world for that matter).


However, the idea that somehow imposing austerity measures will work on the PIIGS, which are already watching their economies go down the tubes, is outright insane. These countries are broke. Trimming spending here and there doesn’t do anything when you’re sporting Debt to GDP levels over 160% (over 300% when you include unfunded liabilities).


In the case of Greece in particular, one has to wonder if the austerity measures (especially those coming out of Germany) are in fact just a means of forcing Greece out of the Euro without explicitly demanding it.


Let’s consider Greece’s economy from the perspective of age demographics.


Real Clear Markets shares the following facts.


  • Greece’s fertility rate is 1.3 children per women. This is nearly a full child below the “replacement rate”: the number of children needed to maintain the current population.


  • Greece’s population of 65 and over has soared from 11% in 1970 to 24% in 2010. It will hit 33% by 2050. Meanwhile, Greece’s working population will decline to 20% over the same time period.


  • Because of this, Greece spends 12% of its GDP on pensions.


As if this weren’t bad enough, the unemployment rate for Greeks aged 15-24 is 40%. For Greeks aged 24-34 it’s 22%. Imagine being a young person, not being able to find a job, and then knowing that huge percentage of your efforts (42%) are going to be taxed to fund all the crazy social welfare programs for Greece’s aging population. Small wonder that seven out of ten young Greeks want to work abroad and four of out ten are actively seeking work outside of Greece.


Also, it’s no surprise that those Greeks who do have jobs, don’t want to pay this massive tax load. Consider that the Greek working population is roughly seven million people. 95 percent of them declare annual income of less than 30,000 euros.


So that’s the situation in Greece. Terrible age demographics, an economy that’s in the toilet, and a culture that believes paying taxes is for suckers. The idea that this country will solve things by receiving more debt while imposing austerity measures is ridiculous. If anything, the austerity measures make it even less likely that Greece will pay off its debts or get its fiscal house in order… which in turn means it will need more bailouts.


I’m not a fan of welfare states nor am I a fan of fiscal idiocy. But I’m equally offended by stupid ideas that have no chance of working and involve wasting hundreds of billions of Dollars.


After all, there’s literally no proof that bailouts even work: Greece received 110€ billion in bailout funds in 2010 (an amount equal to almost half its GDP)… and still posted GDP growth of -4.5% in 2010 and -6.8% in 2011.


The reality is Greece needs to complete a MASSIVE debt restructuring to the tune of bondholders taking a 70% haircut across the board. That and that alone would get Greece on sound footing. Anything else is just kicking the can AKA wasting money and making everyone’s lives more miserable.


Speaking of which, the ECB, which is somehow supposed to be saving Europe just handed out €529 billion to some 800 banks. Only two months ago, it handed out €489 billion to just 523 banks.


And this is a sign of progress for Europe? More banks needing greater amounts of money?!?


The reality is Europe is finished. Done. Curtains. The ESM, LTROs, all of that stuff is pointless as the math simply doesn’t add up. As Jagadeesh Gokhale of the Cato Institute put it, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”


The money isn’t there. Europe is broke. Completely and totally broke. The whole notion of bailouts and debt swaps is pointless here, you’re talking about systemic failure due to the entire financial system being overleveraged and based on spending patterns that are unsustainable in any way.


Make no mistake, we are heading into a Crisis that will make 2008 look like a joke. The money for all of these various programs (both in Europe and the US) simply isn’t there. So this time around we’re going to see stock crashes AS WELL as civil unrest, food shortages, and the like.


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Good Investing!


Graham Summers


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