The probability of a Greek default at the end of this month has increased. The IMF has left the talks for D.C. due to the absence of any progress and The European Commission said that a meeting today was the last attempt to reach a deal. Most non-Greek politicians who have spent 4+ months by "negotiations" with the new government of Greece have understood that these meetings have been a complete waste of time – in the same sense in which the "loans" to Greece in previous years have been a complete waste of money.
It is especially the ideological situation in Greece that seems completely hopeless. Pensions are the #1 example of the topic in which the insanity of the new Greek leaders is made so obvious. Even though Greece will go bankrupt in 3 weeks if someone else won't save them again, Greece still pays the highest percentage of its GDP to the pensioners among all European nations. The average Greeks are still retiring about 10 years younger than their German counterparts. Poor Greek pensioners have electricity for free. To make things worse, a top Greek court made a bizarre decision. The reduction of the pensions 3 years ago was "unconstitutional" because according to their constitution, the government is obliged to make everyone live a prosperous life forever. So the court says that the government has a duty to add 5%-10% to the pensions now!
Holy cow. I think that what really drives me – a physicist by reasoning – up the wall about these Marxist lunatics is that they think that they may defeat the laws of physics, mock Nature, or prove that mathematics doesn't work.
A German newspaper article discusses the obsession of the Greeks with the word "austerity" in recent years. Almost no people like when their salaries or pensions are lowered. And they may scream that it's a "bad policy". But from a nation-wide and long-term (and now even medium-term and short-term) viewpoint, "austerity" isn't a decision. Austerity is a law of mathematics. If you don't have the money, you just can't pay them! It's that simple.
Various Keynesians promote the idea that the government should accumulate debt when the economy is not doing well. Let's assume that it's fine and one may articulate semi-rational reasons to believe in these cyclical policies. I don't really believe them – to lower the taxes is a better way to revive the economy, if something (because the private sector knows how to spend the money more efficiently, whether it's the earned money or borrowed money) – but there exist reasons to try to protect the economy against stopping, perhaps even by government spending.
But the second part of this policy must be that you must sometimes reach the situation in which you are doing better than in the average. And in those good times, you must be able to lower the debt and you must actually be lowering the debt (or at least the debt/GDP ratio) again. If you never establish good enough times to lower the debt, then you are an economically unviable entity in the long run and you simply have to die. Except for very short-lived exceptions, the Greek nation hasn't shown any ability to lower its debt for more than 40 years. That's why it would be irrational for others to "lend" Greece additional money. This money is just wasted! And without the money, a country that got addicted to "loans" simply has to go out of business.
It's obvious that the creditors have to demand primary budget surpluses (surpluses of the budget before the repayments and interests on the debt are included in the expenses), and substantial ones in a foreseeable future, for Greece to become able to repay at least the principal of their debt. Almost all the interest has been pretty much forgiven by the haircut, anyway! A Greece that is not willing to produce significant primary budget surpluses is a Greece that guarantees that the money you send there is wasted! Everyone realizes that. It's only rational to send new money if there are good reasons to think that this is an "investment" that will increase the probability and/or expected amount of money that Greece will repay (at least by the same amount!). If Greece can't do it or even admits that this is not even their plan what to do with the new money, you would have to be a loon to send this new money. It would be much more reasonable to throw this money from the helicopters above Pilsen. ;-)
Now, the leaders don't want to reduce e.g. the huge pensions that the population has been trained to interpret as some kind of an entitlement, regardless of the financial condition of the country. The Greek government doesn't want to reduce any – and in fact, it wants to hugely increase all – the government spending. Income taxes are very limited because productive work has become scarce so their increase won't help much. So the best revenues they may get are the higher sales (value-added, VAT) taxes, taxes on consumption – because every Greek consumes as if they were the wealthiest nation in the world. But as a biased defender of the average "consumers", Syriza hates the need to increase the VAT taxes, too.
Can there be another solution to produce budget surpluses?
The Greek government's alternative "proposals" read like some jokes. A Slovak newspaper was able to get a copy of a recent 47-page proposal by the Greek government. It reads like some of the conspiracy theory Word files that you may be getting from the crackpots into your mailbox. No reductions of spending, no increases of taxes. How can we increase the revenue?
We want to tax the rich, Syriza unsurprisingly wrote. But the details are funny. In particular, the proposal talks about some extra fees for owners of yachts and helicopters. When will they start to collect the billions of dollars ;-) from these fees? How much money they can actually collect? The proposal contains three dots ("...") as answers to both questions. That's quite an accurate document, isn't it?
The reason why there have to be just three dots is simple. The whole idea of getting any substantial amount of money from yachts or helicopters – or any other ultra-luxurious products – is absolutely ludicrous. The overall expenses that the owners of these luxurious vehicles pay are much smaller than the money that Greece needs. Of course, you can ask them to pay so huge fees that the ownership of yachts and helicopters becomes many times more expensive, perhaps 10 times.
Well, that's something that Greece has already done to the owners of BMW cars. The result? Greece's BMW salesmen are laughing. Owners of BMW come to these salesmen and give them the car keys (including the car) for free simply because it became too expensive to operate it! It's just insane. Won't you agree that the market conditions have been heavily distorted once people donate BMW cars to each other for free?
Did it help to repay the Greek debt? Not really. The extra revenue from this witch hunt against the rich drivers is basically zero. What these things do is to further reduce business, reduce the motivation to work hard or be entrepreneurs, and force the Greeks who are not losers waiting for the welfare money to either escape their homeland or switch to the welfare funding (e.g. join the long list of the unemployed). The obvious fact – not only in Greece but especially in Greece – is that you may only seriously improve your state budget if you make the ordinary people pay more or get less. It would be convenient for Marxist robbers and their brainwashed voters to find a "scapegoat" among some rich people or bankers whose "sacrifice" could fix the Greek finances. But nothing like that exists. There are no big enough scapegoats waiting to be sacrificed. The imbalance was created almost entirely by the average people who have lived beyond their means for decades – and voted for parties that were making this vicious cycle even worse. And the better-than-average and richer-than-average people in Greece have been largely eliminated, anyway (either robbed or forced to flee the country). So you can no longer rob them – they ceased to exist.
What you're left with is mostly a burglarized nation of losers with big debt and empty wallets. This is what you basically have to work with.
It's hard to predict whether Greece will be able to get the money before it will fail to pay the International Monetary Fund on June 30th. The communist leaders are too stubborn and too many leaders in the West came to agree that Syriza's attitude is a blackmail, nothing good could come out of concessions (especially because a success of this blackmail would inspire Syriza's comrades in several other countries), and the Greek bankruptcy won't be a serious event for anyone else, anyway. French finance minister Sapin said that Grexit is no drama for the EU and there are many similar examples.
Planning the post-default Greece
While most people agree that the Greek demands are out of reality and probably should be rejected despite the "fear of the consequences of a default" that you may have, these insights haven't influenced the European politicians' and bankers' behavior too much yet.
Sensible politicians and economists should seriously start to plan what to do after the Greek bankruptcy which has become more likely. And they should do it in negotiations with each other that don't include the representatives of the Greek government because the presence of these people turns any meeting into a waste of time, an exhibition of lying and unhinged kooks.
The fabric of the Greek society may be dismantled very thoroughly when the capital, investments, and brains begin to be massively withdrawn from Greece and when the Greek government starts to suck blood from the remaining parts of the economy even more aggressively than what it is doing now. But there are some things in Greece that have worked well and several people who are not completely useless folks waiting for the government money – waiting for their government to get another ransom from the other Europeans.
I think that the Europeans should plan how to save most of these assets and creative potential. If and when Greece goes bankrupt, I would expect Syriza's ideology to harden and their support to go up. This is what usually happens when leaders may argue that they're defending the national interests against the evil foreign enemies (even though it's spectacularly obvious that the default is the Greeks' fault, and to a large extent, even Syriza's fault because Greece was actually on the right track just half a year ago).
We will almost certainly face a rather hostile government at the periphery of Europe, one that will escalate the propaganda blaming everyone else – instead of themselves – for the mess that awaits them. I think it's desirable for all of us to try to make this government as weak as possible and to protect viable commercial entities that may become easy targets of the communist terror once it runs out of the money "completely".
My proposal is to establish something I will call "The European Republic of Greece" (ERG) which is controlled primarily by the Western countries and whose ultimate goal is to replace "the Hellenic Republic, country in liquidation". Companies and individuals should get the right to switch their nationality to this "new [so far virtual] Greece" and declare that they pay taxes and similar things in ERG. ERG should probably be formally accepted as a member of the EU and the Eurozone.
I even think that the European authorities should try to physically move the maximum possible amount of cash and assets from the Greek banks etc. before the capital controls are going to be established (which will probably take place only after the default). A bank could effectively store its assets e.g. in Bulgaria but it would be formally registered in ERG if it could show its past in the Hellenic Republic.
All these companies re-registered from the Hellenic Republic in liquidation to ERG should enjoy the same protection as their non-Greek European counterparts. ERG would politically compete with the cash-strapped Hellenic Republic in liquidation. It could be expected that as things become really sour in the Hellenic Republic, the support for alternatives would go up and ERG could be ready. However, ERG would only be allowed to be controlled purely by the Greek people again once its constitution would be supplemented by enforceable rules preventing a similar catastrophic fiscal development we saw in recent years. The ERG constitution would have legally enforced budget surpluses etc. and clear methods to repay the debt.
It's great that people are adapting to the "no longer too unlikely" possibility of the Greek default but it's unfortunate that the people who are paid for similar things aren't doing anything else that is both substantial and visible yet.