| It appears from the previous post that the country in my example could have decided to deal with problem of not budgetting for roads by cutting services instead of taking on debt. That would have meant that the people did not get the health care or education or roads or employment benefits etc at the level they expected. it is reasonable to say that they did not vote enough money for those things and that they should therefore accept the lower level of service. If everything else is equal that is fine, and indeed that is largely what we are asked to assume when thinking about this. The story told is that all these countries in europe have been reckless with spending on services for the people; have funded those services through taking on debt; and must now pay the price for their irresponsibilty. It does not seem to matter how this situation has arisen: the people have to pay the price regardless. But each of these countries has a different history and the problem is not the same everywhere unless you only look at a snapshot of debt right now. Greece is not the same as Italy in a number ways
1. Greece had high economic growth after joining the euro
2. Greece suffered from enormous tax evasion by the rich: running at 30% according to some reports
3. Greece engaged with banks such as Goldman Sachs to get money to fund spending: this money was not conventional loans but was rather characterised as currency transactions and this meant that the liability was hidden.
4. Greece is charged more than 20% interest to borrow money
5. Greece suffered more than most from financial downturns because much of its economy is dependent on tourism and shipping.
If we take our notional country of 100,000 people, as before: and assume they are generating £1,000,000 gdp in year one, then if they agree a tax rate of 24% the government income should be £240,000. On this basis spending agreements of £240,000 are fine. But that assumes that everybody pays the tax. That did not happen anywhere, of course: tax evasion by the rich is a scandal in every country. But it seems to have been particularly bad in Greece: or perhaps not discounted as it is in other places, where it is taken for granted the the rich don't pay. Whatever the reason, Greek people made their decision about what to spend on the assumption that tax would be paid: and it wasnt. If the estimate of 30% evasion is correct then the government only received £168,000 to meet its obligations.
So if the decision was to pay for services as outlined in the previous post then in year one:
Cost is:
Justice: 25000
Army: 15,000
Unemployment: 75,000
Health: 75,000
education: 50,000
Total: 240,000
The actual receipts are £168,000 and the shortfall is £72,000. This country has also forgotten about roads and it also needs roads or GDP will fall. Roads cost £50,000.
The government has fewer options than before: raising tax is not going to work, since the folk are not paying it anyway. Cuts to the services, if implemented, are going to be quite draconian: the total shortfall is more than half of the total. Borrowing is still open to them: but again printing money is not allowed by the EU, so that is not an option.
What happens now is Goldman Sachs. Goldman Sachs has a super wheeze: the government does not need to take a loan or cut services or raise tax: what it can do is something quite new: Goldman Sachs will give the government money in return to the rights to future income from things like the lottery and landing fees at airports. This is not a loan which needs to be disclosed as a liabilty by the EU rules. There is no interest as such: there is no fixed term for repayment; in short there is no bond. Goldman Sachs will do this for a very large fee. For some reason this is classed as a currency transaction. And Goldman Sachs is not alone: lots of banks will do this.
So far as the people know they made their decisions and they paid their tax and the government bought the services: they knew about the shortfall for roads and grumbled as before. But they thought they were in the same position as Italy. That is they have debt of £51,000 from the loan and interest for the roads and they have both roads and services
Greece had economic growth of about 4% in year 2: I do not know the rate of inflation so let us say it was 1% as before. And let us suppose the tax rate stayed the same as before. There are still 100,000 people. This year they generate £1,050,000 gdp through growth and inflation. The tax rate is still 24% and so government income is £252,000, on paper. To keep the original services at the same rate they need to pay £242,400 because of the inflation: and another £10,000 to maintain the roads: and they need to repay the debt of £51,000. The shortfall is £51,400. They are in a slightly worse position than before, and will need to raise another loan or take a different decision. Income to debt ratio is about 20%. So another loan looks fine. But the real situation is quite different: because there is debt of £72,000+large arrangement fees the people know nothing about. What that means it that the tax take in the following year is going to be less: because some of the tax the people pay is through the lottery and the airport fees: and that money is pledged. So the tax which is not paid is higher than it was in year one when there was direct evasion, only. And the real debt ratio is more like 50% than 20%.
I do not know why the government chose to do this: and I do not know how widely known it was inside Greece: but I cannot imagine that ordinary people were aware, because the EU was not.
As before the situation which was known was getting worse: but very slowly and there was no reason to worry on the face of it. So the people believed they were paying for the services they chose to have. I cannot see any evidence of recklessness from them
I can see it from Goldman Sachs, however. And from the governments.
What is assumed is that the people should be held responsible for this mess: and their lives should be ruined. Curiously it is never suggested that the bankers and the rich people who did not pay their taxes should be reduced to penury instead. And yet there are far fewer of them. If you take a utilitarian view that would seem to be the way to achieve the greatest good for the greatest number. If you think that people should take responsibility for their own actions then that would seem to be the moral outcome too.
So why is that not what is to happen? Well one can argue that some of the other banks were not involved in this, and so lent in good faith: I have no idea how far the debt is of that sort and how much is the goldman sachs sort. But I do know that the level of debt is supposed to be capped by EU rules. If the very high level of debt is a problem then the banks could be expected to know about at least that part which was not hidden: and so should not have lent. But it is interesting to find that the economy was badly hit by the global problems which hit their major industries from 2007 onwards: the Goldman Sachs stuff was revealed in 2010; debt was estimated at 216 billion in 2010: and yet greek government bonds issued in that year were oversubscribed. In other words foreign investment banks lent Greece a great deal of money after the problem was revealed: so far as I can tell. And I say hell mend them.
I see no reason at all that the Greek people should pay this money: and every reason that the banks should. Why should interest and capital take priority over people? Apparently because if we dont pay them they will stop lending: but then if we dont pay them they won't have all the money: we will. It might be argued that is theft: but that is how they got it in the first place, so far as I can see. The biter bit
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