IEA Blog

Indecisive outcomes are periodic features of the Westminster model, even though the plurality (first-past-the-post) system is custom-made to secure a single-party majority. Hung parliaments occurred in the 1970s, for example, always resulting in short-lived governments and new elections. For the most part, such hung parliaments have been accidental consequences of close-run competition between the two major political parties, each driven by significantly differing political philosophies. The 2010 Election differs sharply from this model, for reasons that I must explain.

Over the past 13 years, since New Labour under Tony Blair secured a landslide electoral victory, a decisive plurality of the electorate in each of the 1997, 2001 and 2005 elections, threw its support in favour of a political party that has pursued a supposed Third Way in domestic politics, paying lip-service to laissez-faire market economics, while aggressively endorsing a progressive social market policy agenda. Ultimately this Mediterranean diet has proved to be indigestible, as F.A. Hayek long ago warned would be the case, and as the PIGS (Portugal, Italy, Greece and Spain) of Euroland unambiguously exemplify.

When governments set out to bloat their public sectors, to protect individuals from the economic consequences of privately uneconomic behaviour, and to securitise their citizens against all misfortunes, from the cradle to the grave, they shape and form a people less and less capable of forging its own success by rational decision-making, hard work, thrift and healthy living, most especially in difficult times. Once a politically decisive majority of the electorate has become addicted to such a diet, and has become individually disabled by that diet, no major political party can distance itself from the “PIGS diet” without courting ongoing minority status; at least until final economic collapse.

In consequence, the 2010 British Election has not been fought out among political parties with significantly varying philosophies, outlined in the form of significantly divergent political platforms. The words of Margaret Thatcher are now unambiguous harbingers of landslide defeat in a largely socialised Britain. So the 2010 Election has been waged over a narrow social market terrain, with the three relevant political parties separated by hair’s-breadth differences on matters economic. In spatial terms, the Liberal Democrats are probably to the left, Labour is in the middle, and the Conservatives are to the right. But the distances are slight.

Given the serious nature of the economic indigestion confronting Mediterranean-diet Britain in May 2010, one might have thought that the voters would have sensed the importance of decisive government. Given the scandals that have encompassed New Labour throughout the Prime Ministership of Gordon Brown, one might have thought that the British electorate would have coalesced around a majority Conservative administration, especially once it became apparent that the Conservatives enjoyed a plurality in the pre-campaign polls. That this has not come to pass, I suggest, is no accident. A plurality of the British electorate is addicted to its PIGS diet. It does not wish to adjust its lifestyle towards rational decision-making, hard work, thrift, and healthy living. By endorsing weak government, this plurality intends to stave off diet change, to continue living unsustainably just as long as it can.

This is the forked tongue message that has flickered out from the British electorate on May 6, 2010. All the rest is pomp and circumstance.

An earlier version of this article appeared on Charles Rowley’s blog.

“Borrow as much as you like – the ECB will bail you out” – that was arguably the implicit message of European Central Bank president Jean-Claude Trichet last week as he announced that the ECB would continue to accept Greek sovereign bonds. The statement came after fears that Greek government bonds would be further downgraded and would therefore lose their status as collateral for ECB open market operations. In addition, a current relaxation of collateral quality requirements to BBB- is supposed to be extended.

Certainly, the ECB acted in the belief that their actions would safeguard the eurozone and the euro. If Greek government bonds were excluded from ECB monetary policy operations, Greece would find it even harder to sell their government bonds at “acceptable costs”. However, Mr Trichet’s rash promise to help Greece imposes a long-term threat for the eurozone.

Firstly, credibility is an important “tool” in today’s monetary policy. Markets must believe in monetary policy to make it effective. However, changing the rules to help Greece is highly discretionary. Accordingly, markets will anticipate discretionary policy in the future and they will treat monetary policy statements with scepticism. The resulting uncertainty in monetary policy (or even higher inflation), will not, however, help the eurozone economies recover from the crisis. Special aid to Greece will therefore have a negative impact on other members of the zone.

Secondly, the guarantee by Mr Trichet is virtual a “no-default-guarantee” and implicitly accelerates central bank financing of Greek government debt. Irrespective of rating or fiscal stance, commercial banks are likely to buy Greek government debt. They receive high yields and can use the junk bonds as collateral for low interest central bank loans. At the end of this process, Greek government bonds end up on the ECB balance sheet. This could have a “crowding out” effect on high quality collaterals. Yields of high rated countries could increase.

Thirdly, the ECB statement encourages moral hazard. Why should another country in a similar situation to Greece today (maybe Portugal) be willing to undergo painful austerity measures? Why should Greece stick to its announcements on public spending cuts? The ECB (together with the EU bailout plan) has created an environment where government debt can be rolled over repeatedly and increased. Market forces are switched off and the requirement to cut deficits and public debt is substantially reduced.

Although the ECB has acted to safeguard the eurozone, its guarantee to help Greece may prove to be counterproductive in the long term.

The euro is currently under intense scrutiny. Why? Because the reputation of the single currency – originally based largely on that of the Bundesbank for its (relatively) sound money policy – is under threat, alongside that of the EU’s Stability and Growth Pact (SGP).

The most recent danger has come from the near-certainty that Greece will be bailed out by the EU, despite its fudging of the books for its adoption of the euro and its blatant disregard of the SGP ever since, where it is not alone.

Last month, the basic issue was well put by Liam Halligan in the Sunday Telegraph:

“How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to its own electorate? The truthful answer is that you can’t – not unless you subjugate the autonomy of democratically elected politicians and, by proxy, their voters.”

Most recently, this question has been tested in Iceland, whose voters gave a resounding no to the idea that the criminal carelessness of many UK local authorities in putting money in Icesave should be made good by the ordinary people of Iceland. (Were the UK in the same situation, there would have been no similar referendum; such is the power of the UK government’s executive which permits breathtaking theft from its people for whatever purpose it likes.)

In fact, the UK may well be in a similar situation in that it will surely get caught up in bailouts for Greece and others (PIGS can’t fly!), even though it is not part of the eurozone. More generally, the importance of fiscal policy to monetary union suggests that members of the eurozone will eventually become part of a de facto single state unless they abandon the single currency.

In the 1960s, thousands of industrious Greek gastarbeiter came to work in West Germany. Immigration from Greece has been a success story of rapid integration and mutual economic benefit. With little capital, many of the incoming guest workers started their own businesses such as Greek restaurants and delicatessen stores, bringing Gyros, Souvlaki and Ouzo to the remotest village. Today, there is no such thing as a “Greek-German”. The child or grandchild of a Greek gastarbeiter is simply a German with black hair and an unusual surname.

One wonders what these people are making of the ridiculous mud fight currently taking place between Greek and German tabloids over the possibility of a Greek bailout. For parts of the Greek media, the debated austerity measures represent an imposition by foreign countries, motivated by sheer sadism. For them, export-intensive European countries owe them a bailout, because Greece has supported their economies for years by running up a huge trade deficit. For parts of the German media, this represents a brazen lack of gratitude from people who have received substantial EU-subsidies.

Taking the logic of the Greek media serious, one could argue that every regular consumer of Kalamata olives is entitled to a personal bailout by the Greek taxpayer, for supporting Greek exports. The flaw is, obviously, that these consumers have already received their due consideration from the transaction: the olives.

There is also a serious flaw in the reasoning of the German media. They are projecting a logic which would make perfect sense in relationships between individuals into the political sphere. They are confusing a forced transfer of taxpayers’ money with “solidarity”. The differences could not be greater.

In the personal sphere, when we receive help from somebody, we feel gratitude, and a desire to give something back. In the political sphere, when we receive an “entitlement”, we quickly get used to it and take it for granted. When it is threatened, we feel robbed.

This is not a conflict between two nations. Nothing of this kind has ever played a role in the relationship between native Germans and Greek immigrants. Meanwhile, the foreign minister’s mere mentioning of the fact that the money on which domestic welfare recipients live has to be paid by somebody has caused a political earthquake. It is politically fuelled tug-of-wars, domestically and internationally, which cause conflicts between people who would otherwise get along.

●  Philip Booth criticises bishops for supporting counterproductive welfare policies

●  David Henderson argues Climategate is just the tip of the iceberg

●  Oliver Marc Hartwich has concerns about the euro

●  Thomas E. Woods Jr. explains how government intervention caused the economic crisis

●  Andrew Lilico debates the debt crisis in Greece, Portugal and Spain with George Galloway (video)

●  And congratulations to Eamonn Butler and Madsen Pirie for winning the National Free Enterprise Award

European leaders did their best to avoid a clear stance on Greece yesterday. But with a budget deficit of over 12% of GDP, a debt ratio of almost 120% of GDP, an electorate fiercely opposed to the mere announcement of spending cuts, the leeway for tax increases largely exhausted, and European neighbours terrified of the consequences of a Greek default, a bailout is only a matter of time. Yet it will only exacerbate structural flaws at both the European and the Greek level.   

In principle, there are two ways to organise a confederation like the EU fiscally. Either each member state retains full fiscal autonomy and assumes full responsibility for its finances, or some form of bailout option is arranged, but at a substantial loss of autonomy for the member states. The EU was originally organised according to the first principle. With the fulfilment of the currency union, it was no longer credible that member states would stand idle if a neighbour went bust. Hence, the Maastricht criteria tried to move the EU closer to the second principle.

Except that absent an enforcement mechanism, they remained ineffective. Big member states softened these rules when required; small member states like Greece ignored them when required. So the EU ended up combining the worst bits of the autonomy principle and the vertical administration principle. “Conditions” attached to a bailout would suffer from the same problem. A bailout would exacerbate the perverse incentives arising from this combination.           

Furthermore, the history of Greece since the 1980s shows one thing: it is easy to import the social spending levels of a typical Western European social democracy, but it is not so easy to import Western Europeans’ willingness to pay the corresponding tax level and adhere to the strictures of a big welfare state. The Greek welfare state has become a hotbed of rent-seeking, with middle-class working-age households receiving more in cash benefits than the poor. At the same time, Greece has Western Europe’s largest shadow economy. Apparently Peter Saunders had a point when he wrote that:

“Social democratic welfare regimes [...] are probably only sustainable in countries with relatively strong collectivistic cultures.”

In short, there is no point in Greece trying to be Sweden. And there is no point in the rest of Europe subsidising the attempt through a flawed fiscal architecture either.