Politics in Europe is beginning to resemble Halloween. Trick-or-treaters like Greece and Spain come to the doorstep of Germany and the European Union for bailout money. But these visitors are not polite neighborhood kids asking for a Snickers bar. These are the characters that bring on eye rolls every Halloween as they walk up the front steps.
You know the kid who claws deep into the candy bowl even after you’ve asked him to only take two pieces of candy… and then comes back a second time for more? That’s Greece.
After receiving bailout funding from the International Monetary Fund (IMF) and European Union (EU) in May 2010, Greece quickly fell behind in implementing the reforms conditional upon taking the rescue money. But that wasn’t enough. Greece came back for a second helping when it received another bailout package in March 2012. And again, Athens has failed to meet targets for shrinking its public sector, privatizing state-owned companies, and boosting competitiveness. Now after reneging on two agreements, Greece is asking for even more time to implement its reforms – doubtless to be followed by yet another thrust into the candy bowl.
If Greece is the kid who just can’t help himself, Spain is the petrified trick-or-treater taking slow anxious steps toward the front door. Spanish officials are just plain terrified of officially requesting bailout funding. Madrid keeps moving ever closer to reaching its hand into the bailout bowl, but it still isn’t ready to accept the accompanying reform conditions. Spain claims that it might request €50 billion, but my recalculations of the Spanish banking system stress test released last month – adjusting for the report’s underestimation in capital adequacy requirements and overoptimistic profit projections – estimate a heaping handful of between €91 billion and €113 billion by 2014. Meanwhile, Spain is putting off the inevitable by riding the dissipating market high brought on by the European Central Bank’s (ECB) announcement last month that it plans to buy, under reform conditions, an “unlimited” amount of government debt.
Ding-dong. Who’s next? It’s the costume-less high-schooler wearing a cheap mask and looking for some free candy. He should know better. So should Italy. With the lowest bond yields and best credit ratings in Southern Europe, Italy has plenty of breathing room to implement needed economic reforms before financial markets turn up the heat. Instead, Italian Prime Minister Mario Monti has been clamoring for ECB President Mario Draghi to flood the Italian economy with newly minted euros. Monti should put away his trick-or-treat basket and get serious about reform, especially to Italy’s bloated public sector and overregulated labor markets.
So, many Europeans aren’t getting treats this Halloween. That’s because the German and ECB houses on the block are handing out austerity apples. And only one type of trick-or-treater eagerly takes those: the nice polite ones who showed up early and go home to do their homework.
Take Latvia, for instance. It was the first EU country to get bailout money and also the first to implement real austerity. The government cut public wages by 40 percent and government spending by roughly 18 percent of GDP over three years, according to Latvian Economic Minister Daniels Pavļuts. After enduring a severe economic contraction in 2009 and widespread unemployment peaking in 2010, Latvian growth bounced back to 5.5 percent in 2011 and will finish with an estimated 4.5 percent in 2012, according to IMF data. Unemployment has been steadily declining since 2010.
Latvia didn’t get the temporary sugar high that its fellow trick-or-treaters seek. Instead, it quickly bit into the bitter austerity apple and avoided the candy binge-induced stomachache its peers are bound to endure for a while when their bailout candy runs out.
German Chancellor Angela Merkel and ECB President Mario Draghi should put away the “Bailout Size” candy bag this Halloween. Passing out apples is the only way to get these trick-or-treat misfits to change their ways.