Kudlow and Yardeni on Greece

May 5, 2010

Some illumination on Greece. First, The Great One, Larry Kudlow:

Merkel and other European leaders would like the IMF to be the fiscal-discipline policeman for Greece and the rest of southern Europe. But as Nobelist Robert Mundell has argued, while the unified and fixed exchange rate of the euro currency system, along with liberalized trade, has been good for economic growth, things have broken down with the failure of the so-called fiscal-stability pact that was never enforced.

With tens of thousands of Greek government union workers marching in the streets of Athens calling for more general strikes in protest of IMF austerity measures to cut back on bloated pensions, voters in Germany and perhaps other EU countries do not believe the bailout conditionality will ever work. Voters see solvent nations being saddled with more debt that the European Central Bank may well monetize into higher inflation.

Indeed, the debt follies of Europe and the bankruptcy of the European entitlement state should be a lesson for Obama’s Washington, where overspending and borrowing have reached absurdly grand heights. As a share of GDP, U.S. debt is projected to move toward 100 percent in the wake of the new Obamacare entitlements. That’s near the 125 percent debt ratio of Greece.

Now Ed Yardeni:

The risks of a sovereign debt contagion clearly increased over the past 48 hours on mounting evidence that the bailout of Greece has been botched. The response of the EU wasn’t swift enough, and Greek workers are staging strikes protesting austerity measures including a second set of wage cuts for public workers, a three-year freeze on pensions, and a second increase this year in sales taxes and the price of fuel, alcohol, and tobacco. … Governments around the world are rapidly becoming the problem rather than the solution. In addition to all the anxiety about a sovereign debt contagion triggered by the mess in Greece, there is mounting evidence that governments are making it more expensive to do business, especially for oil companies, mining companies, and banks:

(1) BP’s liability for the massive Gulf of Mexico oil spill on April 20 is capped by law at $75mn. But Senator Robert Menendez (D-NJ) is co-sponsoring a measure that would raise the liability limit to $10bn–retroactively, so it can apply to the April 20 spill. The measure reportedly has the Obama administration’s support.

(2) The left-center Australian government on Monday slapped a 40% tax on mining company profits to fund increases in worker wages and pensions during this election year. The new tax would raise about A$12bn (US$11bn) and force the companies to reconsider whether to continue their huge investment programs. Shares of Rio Tinto and BHP Billiton fell sharply on the news.

(3) Treasury Secretary Timothy Geithner told the Senate Finance Committee on Tuesday that financial regulatory legislation should include a tax on large financial firms to help recoup financial crisis bailout funds.

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