Blight of the Irish

After a short period of false hope, it turns out the Greeks were lying, the Irish were about to start lying and Portugal and Spain and trying to figure out what lie they can tell in the coming months.

This is of course in reference to the collapse of the European Union, the Euro and the restoration of bailout fever.

It seems as if the Irish have managed to bankrupt their country by buying up tons of troubled banks when they had no money. Turns out after you buy bad banks, they remain bad banks. This was good news for the Greeks who had to admit (for the second or third time now) that their debt projections are massively flawed and that they are in fact, even more in debt than was originally known or planned for. The Greeks did a nice job of sneaking their own incompetent accounting announcement in behind the Irish admission that they were in it up to their necks. Took some of the heat off. This was not so good news for Portugal and Spain, who now have to flip a coin to see who goes bankrupt next.

A reasonable person would see these developments as proof that the collective bailout model that the EU has been trying to force everyone into isn't a feasible course of action to take. Germany has recognized this and rather than throw all their money into a deep, dark pit, they have tried to force the deadbeat EU members to actually improve their budgets or get cut off from German money. Why should the Germans be punished for keeping a sound house, after all.

This predictably has enraged other EU nations who have accused the Germans of being selfish and focused only on saving their own economy. Gee, why would the German chancellor be more interested in saving Germans that Greeks, Irish or Spanish? Science may one day crack that mystery.

What this scenario does is once again put on display the problem with social welfare programs, which is what the EU is, no doubt about it. In any welfare arrangement you have two parties, the guys with the money and the guys without the money. The idea being that if the guy with the money helps out the guy without, eventually the guy without money will be able to get the ball rolling on some kind of path to independence. This is a lovely fairy tale but a fairy tale nonetheless because the hoped for transition is impossible the way these programs, the EU included, are constructed.

To get the welfare money, the guy without (in this case Greece or Ireland) must simply promise to alter a behavior that has led to their demise. The problem is that there is never any enforcement mechanism that is actually enforced. Sure, the EU had debt limits that were supposed to be adhered to but the Greeks lied to the EU, cooked the books and went straight into destitution. Were they punished? Nope, they were given a big stack of money and forced to make more worthless promises, which we now know were more lies. This is a good deal for the guy without money. He only has to promise to change, not actually change and he still gets all the money he was promised even in the face of flat out criminal behavior. Their is no incentive for the guy with no money to change the scenario and every reason for him to fight to maintain the status quo.

And what of the guy with money, in this case Germany (or France, or the Netherlands, etc.)? First of all, they never really have as much money as they say, just a fact of life that money flows out faster than you think and that government projections are notoriously rosy. The big problem is that from their end, welfare money isn't just wasted, it's actually becomes an exponential negative investment. In the simplest terms possible, what Germany has been doing is buying poverty. Wise investors like to buy assets that will increase in value over time. Property, cars, art, gold, stocks, etc. are all bought with the idea that when you want to sell them, they will be worth more than when you bought them. The difference between the price you paid and the price you sell is profit. Simple. If prices deflate for some reason and you can only sell for less than you paid, you either have to keep the asset or take a loss. Again, simple. So what is Germany buying in bailing out the Greeks and probably Irish? Just poverty. The best case scenario results in these countries becoming self sufficient. Even in that case, Germany will never get paid back the money they loaned. No country ever does. This makes the best case scenario a total loss for Germany.

Far more likely (and what is actually happening) is that the guy with money has to take an accelerated loss. Since the guy with no money isn't trying to become self sufficient (why should he when you pay for everything?) the guy with money's obligation to that country only increases because they have pledged financial support until the recipient becomes self sufficient. This never happens. What happens is that the country lending the money simply goes broke, then joins with the original country looking for a bailout of their own. You paying attention France? After all, if Germany goes broke trying to help Greece, don't they deserve bailouts more than anyone? The cycle never ends. Making matters worse is that no matter how many bailouts there are, there still isn't any tangible assets to be had. The guy who buys cars, stocks, etc. always has the option of keeping his assets and waiting for a brighter day. This isn't so bad, even if you can't sell them at least you have some houses or a couple Lambo's in the garage. What does Germany have to hold onto for a better day? Greek poverty? Given the rules in place, that's an investment that will never see a brighter day. Germany would be better of burning Euro's for heat than investing in bailouts. At least you would gain the warmth and then end the transaction rather than adopt a ward of the State that does nothing but ungratefully devour money.

What the EU is learning, far to slowly, is that any situation where the poor bleed the rich for nothing in return only ends with everybody being poor. It's like having a massive tapeworm in your stomach. Even if you want to help the tapeworm, have no grudge against the tapeworm and are willing to try and eat enough for both of you, eventually that tapeworm will strip you of the resources you need to survive leaving both of you helpless or dead. The only way this scenario can be corrected is to either get something tangible for the money you invest; or to simply disengage yourself from the process altogether. Germany is trying to institute option A by forcing the Greeks, etc. to stiffer rules for bailout money. If the rest of the EU balks to loudly at the one country with the money to help them, I suspect Germany will move to option B and close the bank doors. Germans will be fine but all the European tapeworms will be in a serious bind.