Will europe ruin the rest of the world?
While headlines are mainly covering Greece, two other recent news highlights why the European Union is experiencing a serious economic and political crisis that could have devastating consequences for both the US and the rest of the world.
One event is widely known. The European Central Bank (ECB) has announced that it will take large scale quantitative easing measures to pull out the continent’s stagnant economies from the crisis. The ECB repeats the same mistakes made by the US Federal Reserve and Japanese banks. It will buy government securities (even though in theory the risk is beard by each country’s central bank) in order to increase bank reserves and control interest rates. In normal circumstances the banks would issue more credits by taking this powerful money and multiplying it. Once upon a time one euro from new reserve created 8 -10 euros in new loans. Not any more it doesn’t. Interest rate is the price the borrower pays for letting the money. Price control is always damages and cripples the market. Controlling interest rates can seriously distort the lending market worldwide by making it difficult for young, small and medium size businesses to receive adequate loans under reasonable conditions. The majority of households are in a similar situation.
Now we’ve come to a less familiar story. The ECB had just begun implementing the Federal Reserve’s failed policy (no coincidence that at the time when the Federal Reserve came to their senses and ceased the quantitative relief policy the situation in the United States had improved with the emergence of new jobs), it was reported that the ECB would also introduce stricter capital requirements for European banks. Now even institutions that have met the regulator’s capital requirements are required to strengthen their capital pillow.
The helplessness of the ECB is really staggering. How can a bank increase its capital pillow? Selling new securities, reducing dividends and granting less loans. Regulators are obsessed with the bank risk adjusted asset valuation. In the corrupted opinion of a banking supervisor it turns out that granting a loan to Portugal is less risky than granting a loan to Apple. Politically unrelated businesses mainly private sector is being disfavoured.
Most of the reserves that have emerged in this new version of the quantitative easing will remain in the hands of the ECB. Even worse, the ECB provides European politicians with an excuse to not to carry out the necessary restructuring in their own countries which would trigger real growth such as reduce the greatly inflated public sector, lower increased tax rates and liberalize the labour market.
The troubled European economies will continue to stagnate. As seen in the Greek elections, these problems may cause unpleasant political echoes. The French xenophobic, fascist National Front has gained new, unprecedented support. It is expected that radicals will dominate the Spanish elections this year. The British election possibly might trigger a series of events to which the outcome would be the withdrawal from the European Union. A collapse of the European Union and the euro could be horrific creating a chaos in the world that has not been experienced since the 1930s.
GREECE CAN MAKE THE WORLD LEARN AN IMPORTANT LESSON
Dear Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis! Although you have obtained four months of payment deferment from your lenders your situation is still remains hopeless. Everyone knows that, especially Germans – the biggest payers in the EU budget. As you have seen recently, your ability to blackmail your creditors is no longer as significant as before. Companies, banks and others have had enough time to prepare for the worst scenario – the fact that Greece will withdraw from the euro area. Your citizens no longer believe in you. This is evidenced by the large withdrawal of cash from Greek banks and the movement of capital away from Greece to safer places.
IN THE CORRUPTED OPINION OF A BANKING SUPERVISOR IT TURNS OUT THAT GRANTING A LOAN TO PORTUGAL IS LESS RISKY THAN GRANTING A LOAN TO APPLE.
You are partly right if you don’t want to increase Greece’s huge 23% VAT (national turnover tax form). And you are also right to say that the current program does not work properly. However other ideas from the offered (higher taxes for wealthy, more bureaucrats in public administration, virtually no privatization, higher minimum wages) are even worse.
If you really want to save the country and its inhabitants from a horrific economic disaster there are some simple steps that will quickly increase economic growth. At the same time it would give you an invaluable political opportunity to tell the triad – the IMF, the ECB and the EU (for example the Germans) that they should disappear. 
There is no reason why the Greek economy could not develop. It is enough to look at the neighbouring countries – Bulgaria, Albania and also Macedonia. Although they have quite a lot of problems their performance is considerably better than that of Greece. Their economies have evolved over the recent years while yours have experienced a major decline. Should Greece forever remain the waste collector for EU when speaking of economic growth? No. You can rid of beggar’s role forever.
TAXES
Bulgaria and Macedonia have a flat-rate taxation system with a 10% tax on personal income. I suggest you to introduce 10% flat rate tax too. Then lower your corporate income tax till 10%. Continue with reducing your VAT to 15% which will show the frustrated people your determination to act on their behalf. When it comes to your ridiculously high 45% wage tax – reduce it to ten percent.
Of course, the IMF, the ECB, the EU, and all the others will scream that you cannot afford it. However your answer should be that you cannot afford not to do it. In Greece tax evasion is endemic. The terrible tax system in your country is one of the causes of the large shadow economy. To tease the Germans take an example from Russia. When Putin came to power in 2000, the Russian tax system was even more incomprehensible and more corrupt than in Greece. Putin ended it by introducing a flat tax rate of 13% on personal income and lowering other taxes. National income grew rapidly promoted by the introduced reliefs. The economy also experienced significant growth. (Yes and it was the highest achievement of Russia’s eternal president in public administration.) Taxes are both price and burden. When price is increased on things like productive work, success and willingness to take risks, the burden gets heavier and as a result hardly anyone gains anything from it. Resources are created by people, not by governments.
PRIVATIZATION
Is an easy way to obtain great amount of cash which will noticeably reduce the pressure on the budget. Previous governments did not want to count their belongings and find out how many people work in them. It’s irresponsible. But your government has taken on what the predecessors did not want to do.
In 2011 I attended a conference in Athens which discussed the future of Greek economy. There were representatives of the Polish government among the participants, who had led and conducted the sale of several governmental assets and companies thus acquiring many billions of euros for the budget. In a calm tone they said that the George Papandreou’s government has no desire to meet with them to discuss the lessons learned during the privatization process in Poland. The creditors, while they are still trying to save you, have every right to call your behaviour ridiculous if you refuse to focus on the implementation of such self-evident reforms.
STOP TAUNTING FORMER GREEK CITIZENS OR PEOPLE OF GREEK ORIGIN WHO WANTED TO HELP BY INVESTING MONEY IN THIS COUNTRY. The government should await such investors with open hands not with suspicion. You should also encourage your own society to not treat these people as unwanted parasites. The book, Money: How The Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It, has following anecdote: “When Demetri Politopoulos returned from the United States to his native Greece to open a brewery, his company was attacked by vandals, his car’s tires were punctured but he himself received mockery and threats.
MAKE THE PROCESS OF SETTING UP BUSINESSES EASY. Greece has moved forward by allowing people to establish legitimate businesses but this process is still too long and enables bureaucrats to demand bribes. Instead, use the New Zealand model! They only be pressing only a few keys on computer keyboard in order to sign up for business online. 
Another crucial aspect for the economy to function properly is to comply with the contracts. The World Bank has recognized Greece as one of the worst countries in the world in this category.
CHANGE THE LABOUR LAWS THAT DO NOT ENCOURAGE THE CREATION OF NEW JOBS. Suffocating laws which seem to protect jobs making redundancy expensive and difficult lead businesses to situation where they do not want to hire new workers and also promote illegal employment. Although some progress has been made in this area, you want to eliminate it. The trade unions will protest but a collapsed economy and increasing unemployment will not benefit the situation either.
DO NOT EVEN THINK ABOUT LEAVING EURO AREA. Your drachma will not be even worth the piece of paper on which it is printed on. The Greeks will avoid them and this will make euro (and dollar) the national currency de facto. It will destroy the rest of the Greek banking system, the economy will collapse, and difficulties that have just been experienced will seem like a paradise.
For God’s sake do not follow the example of Cyprus and do not confiscate bank deposits. Regarding capital control – if you implement the reforms mentioned above, capital will begin to flow into the depressed Greek economy. However it is unlikely that you will implement these measures to recover economy, especially tax changes. Neither you nor your creditors really understand what makes economy flourish. You are not the only ones. The world is ruled by uncertainty. When, two years later the United States will elect a new president, it will change but it will be too late to spare Greece of unnecessary suffering. Please convince us sceptics that we are wrong! Shift your country to a course that will make it the next Mediterranean Hong Kong or Singapore or Switzerland. Success will be your best revenge.
