Welcome to the New World Order, Phase Two

Washington and European governments dictate austerity for working households under the pretext of deficit reduction.

When asked, during his Senate confirmation, why he’d consider going after Social Security to help reduce the National Debt, Bernanke quoted bank robber Willie Sutton. He said, “That’s where the money is.”

Destructive Neoliberal Austerity

thepeoplesvoice.org
November 23, 2010

Instead of vitally needed stimulus, Washington and European governments dictate austerity.

The pretext of deficit reduction is being used to transfer more wealth to those already with too much, plus the usual canard over the urgency to save national banking systems.

In other words, make ordinary people bear the burden of bailing out banking giants responsible for the severest economic crisis since the Great Depression. How? The usual IMF solution, involving preservation of capital at the expense of workers — a package including wage and benefit cuts, less social spending, privatization of state resources, mass layoffs, deregulation, lower "onerous" taxes, maintaining corporate debt service, and harsh crackdowns against resisters.

In the 1980s, it was called Reaganomics, trickle down, and Thatcherism. Today it's destructive "shock therapy" called austerity, the same scheme pitting capital against people — disposable workers tossed out for big money's gain.

It's how predatory capitalism works, destructively for so many to enrich an elite few — snake oil peddled as an economic elixir, corrupted politicians and central bankers forcing harmful policies that, in fact, don't work.

Three years of failure showed imposed measures have hurt, not helped, and the longer they continue, the more sickness will spread and deepen, causing imposed poverty. It's why independent experts see long-term depression, rising unemployment, human deprivation, and bigger than ever bonuses for bankers until the inevitable house of cards collapses. Welcome to the new world order, phase two.

In America, the Fed furiously monitized debt. First QE I, now II, likely III and IV coming that could have worked the first time if constructively, not destructively used. An earlier article explained, accessed through the following link:

http://sjlendman.blogspot.com/2010/11/quantitative-easing-elixir-or-poison.html

Swapping credit for toxic assets helps banks, not the economy. However, using it for productive investment works. In her September 8th Webofdebt.com article titled, "How to Reverse A Deflation: Helicopter Ben Needs to Drop Some Money on Main Street," Ellen Brown explained that:

"Running the government's printing presses to pay its bills has not seriously been tried since the Civil War, when President Lincoln saved the North from a crippling war debt at usurious interest rates by printing greenbacks (US notes, interest free). Other countries, however, have tested and proven this model more recently. They include Germany, which pulled itself out of a massive financial collapse in the early 1930s by printing a form of currency called "MEFO bills," and Australia, New Zealand and Canada, all of which successfully funded public works in the first half of the 20th century simply by advancing the credit of the nation. China, Malaysia, Guernsey, Jersey, India, Argentina, and other countries" also tried it successfully during hard times to revive their economies. The U.S. government could do this too. It could print dollars (or type them into electronic bank accounts) and spend the money on the sorts of local public projects that would put people back to work and get the economy rolling again."

Why not ailing America and European ones today. Central bank money creation (credit) for public projects and other productive investments stimulates economic growth, creates jobs, and turns depression into prosperity — inflation free by keeping credit and productive investment in balance. Whenever and wherever it's been tried, it worked when done right.

Instead, sweeping austerity measures are dictated for America and Europe. Last spring, an EU summit announced a Greece bailout package, dependent on "budgetary discipline" and imposed poverty, the same IMF prescription for Latvia, Iceland, Hungary, Romania, and Ukraine. Now eurozone shock therapy, what economist Michael Hudson calls a:

"neoliberal experiment....to drastically change the laws and structure of how European society will function for the next generation. If (successful, they'll) break up Europe, destroy the internal market, and render that continent a backwater."

Calling it a "financial coup d'etat," he said "bankers are demanding (and getting governments to) rebuild their loan reserves at labor's expense." Washington's using the same ugly scheme.

Throughout the West, neoliberals are empowered.

"From Brussels to Latvia, (they) aim to shrink their economies (by) roll(ing) back wage levels by 30 percent or more — depression-style levels," making Europe and America banana republics.

In late September, EU countries, led by Germany, increased pressure on member states to cut deficits by lower public spending, Chancellor Angela Merkel, in fact, demanding sanctions on offenders and suspending their voting rights for continued policy breaches. At the same time, corporate taxes have been cut, continuing a burden shift to workers. Since 2000, 12 of the 27 EU countries raised VAT rates, Hungary, Denmark and Sweden now charging 25% for commodity purchases while wages and benefits are being slashed. Some new world.

Across the continent, painful worker hammering continues, Ireland the latest troubled country making headlines. On November 13, Wall Street Journal writers Neil Shah and Marcus Walker wrote: "Ireland Stirs Specter of EU Default," saying:

"Europe's debt crisis is still smoldering (months) after relative calm," showing it deceptively hid big trouble, awaiting its moment to surface. The challenges facing Ireland "show few signs of abating soon," a worrisome contagion affecting Europe's largest economies, leading analysts to wonder what shoe will drop next.

Workers, of course, are most affected, spending cuts and high unemployment taking a punishing toll. More are coming, assuring greater deprivation and added impetus for increased emigration. Monthly, 1,250 students leave Ireland as well as thousands of young workers, seeing no future at home. Those remaining face growing burdens, including homeowners to avoid forclosure. One in eight mortgages is underwater. The worst is yet to come, and similar trouble affects Greece, Italy, Spain, Portugal, Britain, and elsewhere across the continent, yet policy fixes assure worse ahead, not better.

Also in America, planned austerity is the wrong solution for a sick economy, yet bipartisan support and two deficit cutting commissions back it. An earlier article explained, accessed through the following link:

http://sjlendman.blogspot.com/2010/11/obama-teams-deficit-cutting-proposal.html

It covered Obama's proposed social spending cuts, while leaving defense, banker bailouts, and other corporate subsidies intact, a prescription from hell promising harder than ever hard times for millions. On November 10, Obama's deficit cutting commission outlined its plan. The above link discussed it, a thinly veiled scheme to serve capital, not people when they most need it.

The Bipartisan Policy Center (BPC) was also mentioned, a lesser known group for the same purpose, its proposal imminent at the time. Now it's out with draconian measures as destructive as Obama's commission — proposing Social Security, Medicare, Medicaid, and other social benefit cuts, harming working households most, the way elitists always cheat ordinary people for themselves.

Co-chaired by former Senator Pete Domenici and Alice Rivlin, former director of the Office of Management and Budget and the Congressional Budget Office, it's called "Restoring America's Future," saying:

America "fac(es) two huge challenges that can only be surmounted" by bipartisan support "to curb the mounting debt (to) reinforce recovery, not impede it."

Typical elitist boilerplate, then proposing punishing measures on working households for greater enrichment for themselves. They include:

• Indexing Social Security benefits to life expectancy to reduce benefits as longevity increases; in other words, "incentiviz(ing) people to work longer to compensate for lower benefits;


• Eliminating annual cost of living adjustments (COLAs), justified by claiming inflation is overstated when, in fact, it's higher, especially for retirees facing costly medical expenses;


• Over the next 38 years, "rais(ing) the amount of wages subject to payroll taxes (now capped at $106,800) to cover 90% of all wages" — suggesting bonuses, capital gains, dividends, and other executive compensation be exempt, for many, the lion's share of their earnings;


• Instituting a one-year payroll tax holiday for workers and employers, Social Security to get no funding for 12 months to save an estimated $650 billion; supposedly, future general revenue will replenish the shortfall;


• Cutting Medicare benefits, including by higher Part B premiums (from 25 to 35% of total program costs), co-pays, and fees for outpatients services; also establishing privately owned, lower-cost, health insurance exchanges to be given competitive cost advantages over Medicare — a de facto Trojan horse to replace it eventually, leaving recipients at the mercy of predatory insurers that profit by denying expensive care;


• By 2018, cutting Medicaid by the amount it grows faster than GDP, providing less care to the indigent, perhaps eventually none;


• Shielding insurers and drug giants from malpractice lawsuits by making it harder to file them; then capping non-economic and punitive damage awards, suits to be adjudicated in "specialized malpractice courts," that may, in fact, be civilian equivalents of military commissions, used to deny so-called "terrorists" due process and judicial fairness;


• Instituting a 6.5% national sales tax (called a Debt Reduction Sales Tax — DRST); like European VATs (value added taxes), they'll hit ordinary people hardest and can be incrementally raised anytime to hit harder;


• Simplifying the tax code to two brackets (15 and 27%), favoring the rich; regressively cutting the top personal and corporate tax rate from 35% to 27%, claiming it "will make the tax system more progressive;"


• Eliminating home mortgage and most other deductions and credits;


• Taxing employer provided health insurance to encourage less comprehensive coverage and make healthcare cost more;


• Freezing non-defense discretionary spending for four years, then capping it according to GDP growth — a prescription to slash social benefits, perhaps eliminating them later;


• Freezing "discretionary" defense spending for five years, then capping it with GDP growth; doing it, among other ways, by "reforming military health care;" in other words, cutting veterans' (and perhaps active duty forces') health benefits; and


• Various other schemes hitting working households hardest.

BPC said:

"19 Americans (elitist ones) from across the country, with diverse backgrounds and views, examined a broad range of spending and revenue options for the federal government [see story below]...We believe (their plan) provides a comprehensive, viable path to restore our economy and build a strong America for future generations and for those around the world who look to the United States for leadership and hope."

More boilerplate, disguising a scheme to enrich the few while denying equal opportunity to growing millions, especially the poor, disadvantaged, needy dependents, disabled and retirees, leaving them more than ever on their own and out of luck, the "future America" none of them want or deserve.

Stephen Lendman lives in Chicago and can be reached at lendmanstephen@sbcglobal.net. Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

http://www.progressiveradionetwork.com/the-progressive-news-hour/.

Perfect Storm May Be Brewing for Social Security, Medicare Cuts

New America Media
June 30, 2010

Less than a year after cries of “death panels” dominated headlines about town hall meetings on health care reform, a new round of town hall events was held in 19 cities, and 40 smaller get-togethers around the United States, all joined together via a sophisticated online system.

This time the target was the National Debt.

Organized by the respected AmericaSpeaks group, Saturday’s event was blandly titled, “Our Budget, Our Economy.” It attracted 3,500 people in such cities as Portsmouth, N.H, Chicago, Ill., Dallas, Texas and San Jose, Calif.

Although AmericaSpeaks director Carolyn Lukensmeyer called the event “the largest and most diverse town meeting ever held in this country,” critics of the town halls are challenging the group for “stacking the deck” toward reducing the National Debt in part by cutting Social Security and Medicare benefits.


Social Security: Elders Repond to the "Debt Panel" from New America Media on Vimeo.

From Town Halls to Halls of Power

Far from being a mere civic exercise, AmericaSpeaks will bring its town hall report to Washington’s halls of power. The group was invited to present the meetings’ nationally tabulated polling results at today’s meeting of the new National Commission on Fiscal Responsibility and Reform.

Also, Lukensmeyer will present the summary to key congressional committees, such as the Senate Budget Committee and House Ways and Means Committee.

Created by President Obama, with members appointed by the White House and Congress, the bipartisan debt commission includes 18 members of Congress plus a few prominent citizens. If 14 members agree to present a set of recommendations to Congress by their Dec. 1 deadline, chances are strong that the package will become the law of the land.

Editor's Note: One of the "prominent" citizens appointed to the debt commission is Andy Stern, president of the Service Employees International Union, represents 2.2 million healthcare workers, janitors, security officers, public employees, and other hardworking women and men in the United States, Canada, and Puerto Rico. According to the White House press leader: "As both a labor leader and an activist, he is a leading voice and aggressive advocate for practical solutions to achieve economic opportunity and justice for workers. Stern began working as a social service worker and member of SEIU Local 668 in 1973 and rose through the ranks before his election as SEIU president in 1996. He is a graduate of the University of Pennsylvania."

Another presidential appointee is Alice Rivlin, former Vice-Chair of the Federal Reserve, senior fellow in the Economic Studies Program at the establishment think tank, the Brookings Institution, and visiting professor at Georgetown University. According to the White House: "Before returning to Brookings, she served in a variety of senior public policy roles including vice chair of the Federal Reserve Board, director of the White House Office of Management and Budget, chair of the District of Columbia Financial Management Assistance Authority, and founding director of the Congressional Budget Office. She is a graduate of Bryn Mawr College and received her Ph.D. in economics from Harvard University."

Appointees, National Commission on Fiscal Responsibility and Reform:

Presidential Appointments: The President appointed former White House Chief of Staff Erskine Bowles and former Senator Alan Simpson as co-chairs of the Commission. He also appointed to the panel: Andy Stern, President of the Service Employees International Union; Dave Cote, CEO of Honeywell; Alice Rivlin, former Vice-Chair of the Federal Reserve and former Director of the Congressional Budget Office; and Ann Fudge, former CEO of Young and Rubican Brands.

Senate Majority Leader Harry Reid's Appointments: Richard J. Durbin of Illinois; Max Baucus of Montana; and Kent Conrad of North Dakota.

Senate Majority Leader Mitch McConnell's Appointments: Tom Coburn of Oklahoma; Judd Gregg of New Hampshire; and Michael Crapo of Idaho.

Speaker of the House Nancy Pelosi's Appointments: John Spratt, Jr. of South Carolina; Xavier Becerra of California; and Jan Schakowsky of Illinois.

House Minority Leader John Boehner's Appointments: Paul Ryan of Wisconsin; Dave Camp of Michigan; and Jeb Hensarling of Texas.

Critics worry that the debt panel includes too many deficit hawks — both Republicans and Democrats — and that even if they concur on some tax hikes desired by the President, the potential entitlement reductions, such as by raising the age for full Social Security benefits, would inflict disproportionate harm on lower- and middle-income Americans most in need.

Ethnic communities are especially vulnerable to potential reductions. According to the Social Security Administration, for example, in 2008, 62 percent of older Latinos and 54 percent of African American seniors living on their own “relied on Social Security for 90 percent or more of their income.”

Simpson’s “Lesser People” Gaffe

Not helping much to promote civil discourse has been the debt commission’s inflammatory co-chair, former Sen. Alan Simpson, R-Wyo. Two weeks ago he said in a video that the commission is considering benefit reductions and other measures to help “the lesser people.”

Simpson’s “lesser people” gaffe — only a week after the chairman of BP remarked that the oil giant cares for the “small people” — was only his latest incendiary remark. The former senator, age 78, recently derided seniors as “greedy geezers,” who disagree with proposed cuts in social supports.

In the “lesser people” interview, Simpson repeated the false statement that the Social Security’s trust fund is nothing but a pile of worthless “IOUs,” even though he agreed in the interview that the program’s trust fund is backed by “the full faith and credit of the United States government.”

What’s more, the commission’s Democratic co-chair, Erskine Bowles, who was President Clinton’s chief of staff and is a current board member of Morgan Stanley, recently told the North Carolina Bankers' Association that if the debt panel doesn't “mess with Medicare, Medicaid and Social Security ... America is going to be a second-rate power.”

The debt panel’s heavy emphasis on spending cuts in the federal budget has prompted numerous progressive economists and experts to call on it to balance any recommended program reductions by showing the human impact — how many people cuts would affect and in what ways.


Alan Simpson: Cutting Social Security Benefits to “Take Care of the Lesser People in Society” (Transcript of the Video)

Perfect Storm for Cuts

Saturday’s AmericaSpeaks program received major funding from the controversial Peter G. Peterson Foundation. Although the foundation claims to have no say in the town hall sessions, it drew accusations from liberal critics that it influenced the content of program background materials to guide participants too strongly toward reductions in social programs.

Peterson, a Wall Street power, who was Commerce Secretary under President Richard Nixon, has aggressively militated against social-insurance programs for over three decades.

Compounding the worries of Social Security advocates that a perfect storm is brewing that could tear at America’s safety net program are international pressures on the United States from this week’s G-20 summit in Toronto.

Progressives are concerned that G-20 pressure to cut U.S. deficit spending will give the “Administration and Congress the cover they need to embrace the Commission's austerity measures,” said Maya Rockeymoore, president of Global Policy solutions and former research director of the Congressional Black Caucus Foundation.

While global finance seems remote and eye-glazing to most people who would be affected by cuts in Social Security and Medicare, conservative leaders in Germany, England and other nations are calling on the United States to slash its projected debt and secure its long-term position in global markets.

Rockeymoore notes that Social Security is not only the nation’s most successful anti-poverty program for elders, widows, children and people too disabled to work, but it is a completely separate program from the U.S. budget, and now boasts a very healthy $2.6 trillion surplus that guarantees paying its retirement and family benefits for decades to come.

Also, even conservative economists agree that cutting Medicare alone will not solve its long-range budget woes. Huge federal deficit costs stem from largely uncontrolled health care inflation that is unique to the United States among advanced economies. Health care reform passed this year does little to reign in escalating health care spending.

AmericaSpeaks Offered Limited Options

In a YouTube posting, one of Saturday’s AmericaSpeaks participants, a woman who identified herself only as Robin of Bucks Country, Penn., echoed others in saying that AmericaSpeaks provided participants with a limited set of federal budget areas and instructed them to cut $1.2 trillion in spending by the year 2025. “Our table refused,” she said.



Roger Hickey of Campaign for America's Future reported that during Saturday’s town hall meeting, AmericaSpeaks head Carolyn Lukensmeyer “had to acknowledge a rebellion in the ranks. People were demanding to have the option of voting for ‘single-payer’ [health care] reform, instead of cutting Medicare and Medicaid.” She eventually relented and announced “a complicated process of including the single-payer alternative as a write-in vote, he said.

After the final vote, though, Hickey joined other progressives in cautious optimism.

“Despite a very biased and manipulated set of options presented to participants,” he said, some winning policy choices preferred by the participants turned out to be “pretty progressive.”

For example, AmericaSpeaks town hall groups voted to increase the amount of earnings that can be subject to Social Security tax among more affluent Americans. They also want to raise tax rates on corporate income and for those earning more than $1 million. And Saturday’s voters called for reducing defense spending by 10 to 15 percent, as well as for creating a carbon and securities-transaction tax.

However, they also favored cutting Medicare, reducing non-defense spending (transportation, education and so on), and raising Social Security’s full retirement age to 69.

Barbara Burt, executive director of the Frances Perkins Center, named for the original architect of Social Security, was among multiple observers who worried that raising Social Security’s full retirement age would unfairly burden vulnerable Americans, while doing nothing to increase the national debt.

“There's no reason why Social Security should even be considered in this discussion, as it is a pay-as-you-go program by law, and thus has no impact on the deficit,” she said.

Still, as the debt panel’s Republicans and blue-dog Democrats close in on social entitlement programs, the stale joke uttered by Federal Reserve Chairman Ben Bernanke may resound with little laughter.

When asked, during his Senate confirmation a few months ago, why he’d consider going after Social Security to help reduce the National Debt, Bernanke quoted bank robber Willie Sutton. He said,

“That’s where the money is.”

See: The Final Red Herring - The Threatened Bankruptcy of Social Security

Second Group of Deficit Hawks Calls for Regressive National Sales Tax

The Huffington Post
November 17, 2010

The nation and its workers remain in grave economic distress, but it's a bull market for alarmist Washington insiders coming up with draconian solutions to projected fiscal problems that might or might not arise years from now.

A second group came out with a deficit reduction plan Wednesday, exactly a week after the two chairmen of President Obama's fiscal commission floated their controversial draft recommendation. (A third group also has some advice as well.)

This latest group hails from the Bipartisan Policy Center, and its signature proposal may end up being a whopping 6.5 percent national "Deficit Reduction Sales Tax" -- just the sort of thing that is devastating to people who live on a budget while not really mattering so much to the rich.

In its quest to control health care costs, the group also recommends significant increases in Medicare premiums in the short term. And after 2018, Medicare beneficiaries would either be forced to pay out of pocket for any and all cost increases more than one percent greater than the growth rate of the economy -- or they would be invited to leave the government program entirely and find private insurance instead. That would no longer be Medicare as we know it -- or as future retirees expect it.

The group's next most major recommendation for cutting healthcare spending is the imposition of an excise tax on the manufacture and importation of beverages sweetened with sugar or high-fructose corn syrup.

Like the plan from presidential commission chairmen Erskine Bowles and Alan Simpson, this one also would significantly reduce Social Security benefits for most retirees. It doesn't technically call for an increase in the retirement age, like Bowles-Simpson does, but it accomplishes essentially the same thing under another name.

This plan would "index the benefit formula for increases in life expectancy" starting in 2023. In both cases, the net result would be lower monthly benefits. It would also dramatically reduce benefits by changing the calculation of cost-of-living adjustments, and by chopping checks for top quarter of beneficiaries.

Meanwhile, much like Bowles-Simpson, it would actually lower income tax rates for the rich (albeit while removing hugely lucrative deductions). There would be two individual income tax rates, 15 percent and 27 percent, instead of the current six rates that range up to 35 percent. The corporate rate would drop to 27 percent from 35 percent. Capital gains would be taxed at a higher rate, as ordinary income.

Almost all deductions would be wiped away, including the deduction for employee-paid health insurance. The mortgage interest, charitable donation and retirement savings deductions would be replaced with a capped 15 percent credit.

And unlike the most dramatic of the tax options put forth by Bowles-Simpson, this one would not eliminate the earned income tax credit or the child care tax credit, two crucial boons to low earning families.

But the latest proposal is in some ways even more regressive and cowardly than the earlier one, most notably in its imposition of the sales tax and its cloaking of what would be staggering cuts in government programs under the guise of freezes and caps to be enforced by automatic triggers. Discretionary government spending would be frozen at 2011 levels, ostensibly saving $2.1 trillion by 2020.

In the plan's one acknowledgment of the current jobless recovery, the group endorses a one-year payroll tax holiday. Allowing both employees and employers to keep the 6.2 percent Social Security tax they would otherwise pay on salaries would put more money in employees' pockets and, by removing what is essentially a tax on employment, would create 2.5 to 7 million new jobs over two years, according to the group's report.

Former Republican Senator Pete Domenici -- who co-chaired the panel along with former Federal Reserve Vice Chairman Alice Rivlin -- introduced the report on Wednesday using cataclysmic rhetoric.

"We confront a quiet killer that is eating away at the foundation of America," Domenici said -- twice, in fact, just to make sure reporters got it all down. "Every part of government must share in this sacrifice so this quiet killer will not eat us alive before we have a chance to fix what is our doing," he said.

In a Washington Post op-ed this morning, the duo described theirs as "a bold, comprehensive plan." Rivlin insisted that the end result of all the tax changes would result in a system that is "slightly more progressive," as well as "definitely simpler and pro growth." But Dean Baker, the co-director of the progressive Center for Economic and Policy Research, told HuffPost Wednesday that for the super-rich, what matters most is the tax rate.

"My best guess is that the vast majority of these people come out way ahead," he said.

And Baker took issue with the whole thrust of the report.

"It's silly and misleading because the deficit problem, contrary to what they say, is a healthcare problem."

His group's healthcare budget deficit calculator allows you to see that if U.S. healthcare costs were comparable to those in other countries, there would not be a deficit problem.

But the new report offers no solutions there.

"They don't propose reducing healthcare costs, they propose reducing what the government pays for healthcare. And it's really a fundamental dishonesty," Baker said.

The plan also doesn't consider any sort of Wall Street financial speculation tax, or financial transaction tax.

Baker said he also doesn't get either report's focus on cutting tax rates for the rich.

"I'm just amazed that here we have this 'huge deficit problem' and all they seem to be able to think about is how to reduce tax rates," he said.

All three of these deficit-reduction plans are the product of a particular class of Washington policymakers who consider it a sign of their seriousness that they worry about imaginary problems rather than real ones.

Perhaps, with federal borrowing costs at their lowest levels ever, what we need are not more deficit commissions, but a growth commission or a jobs commission.

UPDATE at 2:19 PM ET:

"Neither plan recognizes that America needs recovery and prosperity, not austerity," Tamara Draut, a vice president at Demos, a progressive policy group, said in a statement about the Domenici-Rivlin and Bowles-Simpson plans. "Growing the economy again through public investment is the fastest, fairest way to address our fiscal challenges.

"Of the many fiscal policy proposals offered thus far, only one -- Rep. Schakowsky's Nov. 16 plan -- has asked the core question that will determine the extent of American greatness in the 21st century: what will it take to grow and secure the middle class?"

UPDATE at 5:42 PM ET

Deficit hawks everywhere are celebrating!

A (not very bipartisan) press release just issued by the Bipartisan Policy Center summarizes the praise its plan has received from the Chamber of Commerce, the Concord Coalition, the Committee for a Responsible Budget and the Peter G. Peterson Foundation.

President Obama at the White House with the chairman of his fiscal commission, Alan K. Simpson, left.

The United States is on the Brink of Financial Disaster

What “fiscal responsibility” really means is that, rather than saving the future for our grandchildren, as the President himself seems to think it means, it appears to be a code word for delivering public monies into private hands and raising taxes on the already-squeezed middle class. In the parlance of the International Monetary Fund (IMF), these are called “austerity measures,” and they are the sorts of things that people are taking to the streets in Greece, Iceland and Latvia to protest. Americans are not taking to the streets only because nobody has told us that is what is being planned. We have been deluded into thinking that “fiscal responsibility” (read “austerity”) is something for our benefit, something we actually need in order to save the country from bankruptcy. In the massive campaign to educate us to the perils of the federal debt, we have been repeatedly warned that the debt is disastrously large; that when foreign lenders decide to pull the plug on it, the U.S. will have to declare bankruptcy; and that all this is the fault of the citizenry for borrowing and spending too much. We are admonished to tighten our belts and save more; and since we can’t seem to impose that discipline on ourselves, the government will have to do it for us with a “mandatory savings” plan. The American people, who are already suffering massive unemployment and cutbacks in government services, will have to sacrifice more and pay the piper more, just as in those debt-strapped countries forced into austerity measures by the IMF. - Ellen Brown, Paying Down the Federal Debt When Money Is Already Scarce Just Makes Matters Worse, Web of Debt, March 2, 2010

Bernanke Tells the Truth: The United States is on the Brink of Financial Disaster

The Economic Policy Journal
October 6, 2010

Yesterday, Federal Reserve Chairman Ben Bernanke delivered a speech before the the Annual Meeting of the Rhode Island Public Expenditure Council in Providence, Rhode Island. In the speech, he warned about the current state of the government finances. His conclusion, the situation is dire and “unsustainable.”

It is remarkable that mainstream media has given this speech no coverage. I repeat, the central banker of the United States says in his own words:

Let me return to the issue of longer-term fiscal sustainability. As I have discussed, projections by the CBO and others show future budget deficits and debts rising indefinitely, and at increasing rates. To be sure, projections are to some degree only hypothetical exercises. Almost by definition, unsustainable trajectories of deficits and debts will never actually transpire, because creditors would never be willing to lend to a country in which the fiscal debt relative to the national income is rising without limit.

Herbert Stein, a wise economist, once said, “If something cannot go on forever, it will stop.”

One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.

This is as close as you are ever going to see a central banker admit that his country’s financial situation is so dire that it could breakup at any time.

Here’s more from Bernanke’s remarkable speech:

The recent deep recession and the subsequent slow recovery have created severe budgetary pressures not only for many households and businesses, but for governments as well. Indeed, in the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population.

There is no way around it—meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices.

But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.

Now, get this, he warns that it is not only the Federal government that has financial problems, but also states and local governments:

Although state and local governments face significant fiscal challenges, my primary focus today will be the federal budget situation and its economic implications.

Does Bernanke see the tsunami hitting or what?

Then, he put things in historical perspective:

The budgetary position of the federal government has deteriorated substantially during the past two fiscal years, with the budget deficit averaging 9-1/2 percent of national income during that time. For comparison, the deficit averaged 2 percent of national income for the fiscal years 2005 to 2007, prior to the onset of the recession and financial crisis.

The recent deterioration was largely the result of a sharp decline in tax revenues brought about by the recession and the subsequent slow recovery, as well as by increases in federal spending needed to alleviate the recession and stabilize the financial system. As a result of these deficits, the accumulated federal debt measured relative to national income has increased to a level not seen since the aftermath of World War II.

Then, he explains the deterioration and the problems it will create for the entire economy:

For now, the budget deficit has stabilized and, so long as the economy and financial markets continue to recover, it should narrow relative to national income over the next few years. Economic conditions provide little scope for reducing deficits significantly further over the next year or two; indeed, premature fiscal tightening could put the recovery at risk. Over the medium- and long-term, however, the story is quite different.

If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace.

Moreover, as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits.

Expectations of large and increasing deficits in the future could inhibit current household and business spending—for example, by reducing confidence in the longer-term prospects for the economy or by increasing uncertainty about future tax burdens and government spending—and thus restrain the recovery. Concerns about the government’s long-run fiscal position may also constrain the flexibility of fiscal policy to respond to current economic conditions.

Then he tells us how powerful the negative trends are and how the aging population and Obamacare are going to make things worse:

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors.

Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs.

As the health-care needs of the aging population increase, federal health-care programs are on track to be by far the biggest single source of fiscal imbalances over the longer term. Indeed, the Congressional Budget Office (CBO) projects that the ratio of federal spending for health-care programs (principally Medicare and Medicaid) to national income will double over the next 25 years, and continue to rise significantly further after that…the aging of the U.S. population will also strain Social Security, as the number of workers paying taxes into the system rises more slowly than the number of people receiving benefits.

This year, there are about five individuals between the ages of 20 and 64 for each person aged 65 and older. By 2030, when most of the baby boomers will have retired, this ratio is projected to decline to around 3, and it may subsequently fall yet further as life expectancies continue to increase.

Overall, the projected fiscal pressures associated with Social Security are considerably smaller than the pressures associated with federal health programs, but they still present a significant challenge to policymakers.

Then he goes back to warn that the financial mess also exists at the state and local level:

The same underlying trends affecting federal finances will also put substantial pressures on state and local budgets, as organizations like yours have helped to highlight.

In Rhode Island, as in other states, the retirement of state employees, together with continuing increases in health-care costs, will cause public pension and retiree health-care obligations to become increasingly difficult to meet.

Estimates of unfunded pension liabilities for the states as whole span a wide range, but some researchers put the figure as high as $2 trillion at the end of 2009. Estimates of states’ liabilities for retiree health benefits are even more uncertain because of the difficulty of projecting medical costs decades into the future.

However, one recent estimate suggests that state governments have a collective liability of almost $600 billion for retiree health benefits. These health benefits have usually been handled on a pay-as-you-go basis and therefore could impose a substantial fiscal burden in coming years as large numbers of state workers retire.

Bernanke then breaks the news that the problem is global:

It may be scant comfort, but the United States is not alone in facing fiscal challenges. The global recession has dealt a blow to the fiscal positions of most other advanced economies, and, as in the United States, their expenditures for public health care and pensions are expected to rise substantially in the coming decades as their populations age. Indeed, the population of the United States overall is younger than those of a number of European countries as well as Japan.

Bernanke then re-emphasizes the damage this will do to the overall economy:

Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks.

• In the short run, as I have noted, concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring.


• In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth.

Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time. Income paid to foreign investors is not available for domestic consumption or investment.

And an increasingly large cost of servicing a growing national debt means that the adjustments, when they come, could be sharp and disruptive. For example, large tax increases that might be imposed to cover the rising interest on the debt would slow potential growth by reducing incentives to work, save, hire, and invest.

He then states that we do not know how much time is left before all hell breaks loose:

It would be difficult to identify a specific threshold at which federal debt begins to pose more substantial costs and risks to the nation’s economy. Perhaps no bright line exists; the costs and risks may grow more or less continuously as the federal debt rises.

What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policymakers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term.

From there Bernanke goes into a bit of wishful thinking by identifying ways Congress can rein in spending and make the tax system more efficient. Good luck with all of that.

The real important part of Bernanke’s speech is the first half where he warns of the financial crisis just ahead.

Three Horrifying Facts About the U.S. Debt “Situation”

Zero Hedge
October 7, 2010

Since too often financial articles consist of some stooge blathering on and on with opinions instead of facts, I thought today we’d simply focus on some FACTS about our current financial system which few if any want to acknowledge.

#1: The US Fed is now the second largest owner of US Treasuries.

That’s right, this week we overtook Japan, leaving China as the only country with greater ownership of US Debt. And we’re printing money to buy it. Setting aside the fact that this is abject lunacy, this policy is trashing our currency which has fallen 13% since June… as in four months ago. Want an explanation for why stocks, commodities, and Gold are exploding higher? Here it is.

#2: “There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years.”

This horrifying fact comes courtesy of Morgan Stanley analyst David Greenlaw. And it confirms what I’ve been saying since the end of 2009, that the US has entered a debt spiral: a time in which fewer and fewer investors are willing to lend to us for any long period of time… at the exact same time that we must roll over trillions in old debt and issue an additional $100-150 billion in NEW debt per month in order to finance our massive deficit.

And only $550 billion of the debt we’ve got to roll over has a maturity greater than 10 years!?!?

So we’re talking about TRILLIONS of old debt coming due in the next decade. The below chart depicting the debt coming due between 2009 and 2039 comes courtesy of the US Treasury itself. In plain terms, we’ve got some much debt that needs to be rolled over that you can’t even fit it on one page and still read it.

#3: The US will Default on its Debt

… either that or experience hyperinflation. There is simply no other option. We can NEVER pay off our debts. To do so would require every US family to pay $31,000 a year for 75 years.

Bear in mind, I’m completely ignoring the debt we took on with the nationalization of Fannie and Freddie, AIG, and the slew of other garbage we nationalized or shifted onto the Fed’s balance sheet. And yet we’re STILL talking about every US family making $31,000 in debt payments per year for 75 years to pay off our national debt.

Obviously that ain’t going to happen.

So default is in the cards. Either that or hyperinflation (which occurs when investors flee a currency). Either of these will be massively US Dollar negative and horrible for the quality of life in the US. But they’re our only options, so get ready.

Good Investing!

Graham Summers

IMF Austerity Measures (New Taxes, Spending Cuts, Public Sector Pay Cuts and Pension Reforms) Coming Soon to a Nation Near You, Including Each of the 50 States

We suspect that when the Dow hits 4,000, the average pension fund will have assets to cover 30% to 40% of benefits. That said, they will probably cut payouts by some 50% or more. This should occur in a year or two. In two to three years public pensions and Social Security will be cut an equal amount.. As we have said previously, pull cash values out of life policies and terminate annuities. Many insurance companies will go under. We have listed several already near the edge. State insurance funds will be unable to cope with the losses as the financial edifice falls apart. - Bob Chapman, Crime, Corruption and Collapse on Wall Street, The International Forecaster, March 11, 2009

We are deeply concerned that the drastic package of austerity measures in Greece will provide a template for dealing with the fallout from this economic crisis. The IMF demands that Greek wages be cut, public services decimated, and pensions curtailed. - Beware Greek-style Cuts to Services, The Guardian, May 7, 2010

Greece's financial problems could spread Europe-wide. Image: TSPL

The outbreak of the Greek sovereign debt crisis has left the governments of the developed economies with little excuse. Market forces now dictate that they must take drastic austerity measures even at the risk of short-circuiting the fragile economic recovery. - Greek wage cuts teach grim lesson, China Daily, July 28, 2010

A train wreck waiting to happen. That's the only way to describe the mess that state pension systems are in right now, according to a report published today by the Pew Center on the States. According to Pew, there's a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefits states promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay them. What's worse, the gap may be even higher given that the study was conducted prior to the market collapsing in 2008 and given the way most states allow for smoothing of investment gains and losses over time ... Many states shortchanged their pension plans in both good times and bad, and only a handful have set aside any meaningful funding for retiree health care and other non-pension benefits. And now, state policy makers who ignore the current shortfall do so at their own peril. Indeed, states that fail to address under-funded retirement systems face the very real possibility of raising taxes or taking taxpayer money that could be used for education, public safety, and other necessary services just to pay public-sector retirement benefit obligations. - Pension Systems on the Brink?, Pension Pulse, February 21, 2010

Greek Government Plans New Taxes, Spending Cuts

The Wall Street Journal
August 20, 2010

The Greek government is preparing a series of new tax increases and spending cuts to comply with deficit limits set for 2011 by the International Monetary Fund and the European Union.

Two senior government officials, speaking on the condition of anonymity, said the package will be presented to the Greek parliament in November.

As part of a its agreement for the €110 billion ($141 billion) EU/IMF rescue package in May, the government agreed to raise another €9.1 billion in new proceeds next year.

Some €2.5 billion will be carried over from measures already imposed this year. The government seeks to generate another €5 billion with new taxes, with the balance to come from unspecified spending cuts.

"The extra revenue is imperative if we are to cut our budget deficit to 7.6% of GDP in 2011, as we have promised," said one official familiar with plans being drawn up by the government.

Greece currently carries a budget deficit amounting to 13.6% of gross domestic product, more than four times the EU's 3% limit.

The government already has announced such austerity measures as tax increases and cuts to pensions and public-sector wages. The unpopular steps have forced Greece deeper into recession and driven unemployment up to 12%.

Additional revenue raising and cuts to public-spending measures could deepen and prolong the recession, potentially tearing the social fabric and damaging the government's standing with voters.

Officials said the plans so far call for higher value-added taxes on certain retail goods and services, such as entertainment, hotels and restaurants. Environmental, or "green," taxes could come in the form of more increases to car registration fees to reflect engine size and emissions.

These officials said the government also is considering raising so-called objective valuations of real estate, which will correspondingly increase the intake from transfer taxes and stamp duties. Objective valuations are values set by the government on properties because many purchasers in Greece understate the real amount of the purchase price to lower their taxes and stamp duties.

The government also is considering again imposing an extraordinary tax on highly profitable companies. The additional tax is levied on profits above a certain threshold—in 2009 it was 4% to 10% of company profits—on an increasing scale for companies whose profits exceed €100,000.

Extra revenue will also come from new licenses on gambling, taxation on those who lease cars, and more taxes on luxury goods, the officials said.

The freeze on pensions and salaries could extend into next year, high pensions could be trimmed, and there are plans to replace only 20% of public-sector workers entering retirement.

The government is hoping the measures will be persuasive to investors and result in lower borrowing costs.

"We are concentrating on the measures agreed with the [EU and IMF] and expect that our efforts will be recognized by the markets and [bond] spreads will start shrinking starting this year," said one official.

"In 2011, we have to issue a bit less than €5 billion in long-term debt. This will be the big test," this person said.

Since the rescue package was signed in May, Greece has returned to bond markets only once, with a 13-week and 26-week Treasury bill auction in July as part of its quarterly bill rollover, but decided against issuing 52-week bills.

"I admit, it will take a big effort to persuade the markets that we will get out of this crisis unscathed," one official said. "We are doing all we can."

Arnold Schwarzenegger Calls for State Welfare to be Ended in California

The Scotsman
May 16, 2010

California Governor Arnold Schwarzenegger has compared his state's financial crisis to that of Greece and called for scrapping the state welfare system to close a $19.1 billion budget gap.

He said the US state, with an economy that ranks as the eighth largest in the world, faced the same budget deficit crisis as eurozone countries such as Greece, Spain and Ireland.

California's government has been forced to cut $12.4 bn in spending over the remainder of this fiscal year and the next, Schwarzenegger revealed yesterday. He said:

"You see what is happening in Greece, you see what is happening in Ireland, you see what is happening in Spain now. We are left with nothing but tough choices."

Democrats and Republicans, who must muster a two-thirds majority to pass a budget, are likely to ignore many of his suggestions in a debate which could drag on for months.

Democratic State Senate President Darrell Steinberg said his party, which controls both chambers of the legislature, could not support Schwarzenegger.

"The cuts are absolutely unacceptable," Steinberg said, adding that instead of slashing spending Schwarzenegger should delay business tax breaks.

Republican Assemblyman Jim Nielsen, the vice chair of the budget committee, said both sides felt the "absolute imperative" for immediate action and praised the governor's decision not to push for new taxes.

Investors have scooped up recent offerings of California debt with high yields, convinced by state payment guarantees. But the financial crisis has resulted in schools cutting teachers, social services drying up and state employees facing redundancy.

The spending cuts in Schwarzenegger's proposed $83.4 billion 2010-2011 budget include eliminating the CalWORKS welfare program and many child care programs and cutting funding for local mental health services by 60 per cent.

California's budget deficit had been estimated at $19.9 bn at the beginning of the year.

Outside the event, protesters denounced Schwarzenegger's deficit plan, chanting "Shame on you." Handicapped activists said they feared losing caregivers funded by the state.

"I might as well just die," said Carmen Rivera-Hendrickson, who uses a wheelchair and relies on daily in-home health care.

California Pensions Have Become the State's Next Fiscal Crisis

PublicCEO
August 20, 2009

At a time when the state government has reduced education spending, cut back services to the poor and implemented workplace furloughs to close a $24.6 billion deficit, California faces additional financial problems from its public pensions.

The nation's largest pension fund, the California Public Employees' Retirement System, or CalPERS, reported a record 23.4 percent drop in the value of its assets last year to $180.9 billion from $237.1 billion a year earlier.

Even before the recession, the annual taxpayer contribution to the fund increased from $4.2 billion in 2003-04 to $7.2 billion last fiscal year.

"Pensions are a major issue, because unfunded liabilities could bankrupt a number of cities and counties," Bob Stern, president of the Center for Governmental Studies in Los Angeles told PublicCEO.com. "The recent rebound in the stock market has eased the pressure on pension funds. But pension funds will have to seek additional payments from cities and counties to cover unfunded liabilities as more employees reach retirement age."

Gov. Arnold Schwarzenegger has cautioned CalPERS that his administration will push for pension reform.

"In these challenging economic times, we cannot afford everything we have funded in the past," Schwarzenegger said recently. "And we will take on pension reform to cut down on unfunded liabilities and save the state billions of dollars."

CalPERS officials continue to discuss how to respond to the governor and others who may take aim at the fund.

At a fund meeting last month, Chief Investment Officer Joseph Dear told CalPERS' board the fund could be fully funded in 15 years if it posts annual returns of more than 8.0 percent and contributions grow by more than 4.0 percent.

The California State Teachers’ Retirement System (CalSTRS) investment portfolio ended the fiscal year set to ride out historically bleak economic times.

Preliminary estimates are that CalSTRS saw a loss of 25 percent in the fiscal year ending June 30, with its market value of assets totaling $118.8 billion. The news from the second-largest public pension fund in the U.S. comes in the face of an unprecedented worldwide economic downturn. Global markets declined 30.8 percent for the year, according to Standard & Poor’s Global Equity Indices.

"Despite the recent losses suffered by public pension funds, defined benefit pensions remain the bulwark of our economy with trillions of dollars in the marketplace," said CalSTRS Chief Executive Officer Jack Ehnes. "As patient, long-term investors designed to withstand market turmoil, we provide financial security to our members and essential liquidity to the market."

Stein cautioned that CalPERS and other public pension funds might have to ask members to accept benefit cuts. State employee unions would surely oppose that and resist demands for high contributions to retirement accounts from their members.

Meanwhile, government employers paying CalPERS may ask decline to pay higher contribution rates.

Voters in Pacific Grove backed a November advisory measure calling for officials to explore withdrawing from CalPERS and switch new city employees to a 401(k) style retirement plan. City officials blamed CalPERS for an annual pension payment that took 15 percent of the general fund in 2006.

There are estimates that leaving CalPERs could cost Pacific Grove $8 million to $25 million to pay for future pension obligations. The plan is under review.

Santa Barbara County is among the first to have an outside expert look at how the declines in the stock market will increase retirement costs. Annual pension costs were 6.3 percent of the county budget five years ago and are estimated to increase to 9.1 percent next fiscal year.

Two years from now, pension costs were expected to cost between 10.9 percent and 17.6 percent of the county's budget, according to the report by Mercer Human Resource Consulting.

While counties and cities debate the future of their defined benefit pension plans, voters may get the chance to decide the issue by statewide initiative.

"Right now we are planning on doing a survey to see how our initiative would be worded to sell it to the voters," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility. "We expect to file our title summary with the state Attorney General's Office in October. We are shooting for the November 2010 ballot."

Fritz said the initiative would seek to require existing public employees to increase their contributions to retirement accounts and have new public employees work longer to secure full retirement benefits.

California Foundation for Fiscal Responsibility estimates that by making a public employee work an average six years more than they do currently would save $500 billion over 30 years.

"It's obvious to everybody that it needs to be done today," she said. Based in Citrus Heights, the group caused a stir by naming on its Web site individuals with annual pensions through CalPERS of $100,000 and more.

According to data it posted online, it has found more than 5,000 six-figure recipients statewide. In response, the fund issued a statement, saying,

"They represent about 1 percent of the 476,000 CalPERS retirees."

In an interview with PublicCEO.com, Fritz said she expects the list to grow to 15,000 when county and city pension funds along with the California State Teachers' Retirement System are included.

Thousands Strike in France Over Pension Reforms

CNN
September 7, 2010

Thousands of workers across France staged a one-day strike Tuesday to protest government plans to raise the retirement age.

More than 200 demonstrations were planned throughout the country Tuesday to coincide with the walkout.

Workers from both the public and private sectors were on strike, including those in transportation, education, justice, hospitals, media, and banking.

The strike, planned since June, is a reaction to government pension reforms aimed at raising the age of retirement to 62. The maximum retirement age is currently at 60, though some people in hardship posts may retire earlier, depending on the job.

More than a dozen unions and federations called for workers to strike Tuesday, though not everyone walked off the job. The Ministry of Education, for example, said only 30 percent of their sector is affected.

The strike also led to a reduction in train services.

President Nicolas Sarkozy's planned reforms have angered many in France.

Among them is postal worker Isabelle Alouges, who has delivered the mail for 30 years. She had been planning to retire next year when she turns 55, but if the reforms become law, she may have to work until age 60 or beyond in order to earn a full pension.

An official from her union, PTT Sud, says postal workers feel betrayed because they are being made to pay by working longer when the government could fix France's ballooning pension plan deficits by imposing more taxes on the rich.

"My feeling is one of unfairness because there is a bad sharing of national wealth," Nicko Galapides told CNN. "That's the thing -- unfairness."

Pension reform is likely to be a defining moment in Sarkozy's presidency. There have already been repeated national strikes and demonstrations over the reforms and it has unified the opposition like no other previous issue.

One of Sarkozy's top aides said over the weekend that while there is some flexibility on the details, the fundamentals of pension reform must be enacted, since increasing life expectancy increases the financial burden on the pension system.

Complicating things for the government are Sarkozy's poor approval ratings, which over the summer hit the lowest point of his presidency.

"There is a kind of antipathy against Nicolas Sarkozy at the moment," said Guillaume Petit, of the polling agency TNS Sofres. "His approval rating is very low. We have just 30 percent of French opinon trusting him as a president. This is very low for a president."

Last month, polling agencies sent another political wakeup call when polls for the first time indicated that several French politicians could beat Sarkozy if he runs for re-election in 2012.

Bank Run in Spain and Its Destabilizing Ramifications for the Entire EU

Spanish banks are borrowing record amounts from the European Central Bank.

Economic Policy Journal
June 16, 2010

According to FT, Spanish banks borrowed €85.6bn ($105.7bn) from the ECB last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5 per cent of net eurozone loans offered by the central bank.

“If the suspicion that funding markets are being closed down to Spanish banks and corporations is correct, then you can reasonably expect the share of ECB liquidity accounted for by the country to have risen further this month,” said Nick Matthews, European economist at RBS.

Bottom line: This is nothing but a sign of a run on Spanish banks. They can't get funding in the markets and there is a steady withdrawal of funds from the banks. For all practical purposes, the ECB is supporting the Spanish banking system with life support measures. This means that the ECB will have to drain funds from elsewhere in the system to sterilize this rescue operation. Without sterilization the effort becomes very inflationary, with sterilization the effort distorts the entire EU economy. It's all destabilizing.

The only reasonable alternative is to allow the Spanish banks to go into bankruptcy and restructure.

Spain's Credit Rating Takes Tumble as Domino Effect of Debt Crisis Spreads

The Scotsman
April 29, 2010

Europe's debt crisis deepened yesterday as Spain saw its credit rating lowered, a day after Greece had its national bonds reduced to junk status.

Ratings agency Standard & Poor's downgraded Spain after warning that it was set to suffer an "extended period" of economic crisis. The move followed its warnings to investors on Portugal and Greece, which sent shockwaves through world markets, sending shares tumbling in London, New York and Asia.

There were stark warnings from leading economists that the debt crisis "contagion" could spread to other countries unless it is tackled, with current debt levels "unsustainable."

Greek prime minister George Papandreou yesterday said that every member state of the European Union must "prevent the fire that intensified through the international crisis from spreading to the entire European and global economy."

Meanwhile, the European Commission called on credit rating agencies to act responsibly after the S&P downgrades sparked widespread chaos in financial markets.

"It is not up to the commission to say whether the rating given by any one credit rating agency is correct or not. What we can say is that we have full trust in Greece and action being taken," said an EC spokeswoman.

Senior economists yesterday warned that the crisis could lead to further shockwaves, unless governments moved to prop up ailing countries.

"If the IMF and European governments don't come up with something quickly, then I see the market going down further quite rapidly. Investors are starting to react emotionally," said Paul Mortimer-Lee, an economist at the French bank BNP Paribas.

The crisis prompted Juergen Stark, an executive board member of the European Central Bank, to say yesterday:

"The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis."

In a stark warning to countries such as the UK that have massive debt mountains, he added: "The current trend in fiscal policies is simply not sustainable."

Stock and bond markets had begun to recover after the downgrades of Greece and Portugal, when S&P's delivered more bad news by cutting Spain's rating to AA from AA+ yesterday.

The agency said Spain's growth prospects were weak after the collapse of a credit-fueled housing and construction bubble.

Spain's economy is much larger than that of Greece or Portugal and many think it could be too big to bail out if it gets into serious trouble, as Greece has, by failing to tackle its debts.

"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," said S&P credit analyst Marko Mrsnik.

Greece has said it cannot pay debts due on 19 May without 45 billion (£39bn) bailout loans from the eurozone countries and the International Monetary Fund, raising worries that it is on the verge of financial collapse. But Germany, which would be the biggest single contributor with 8.4bn, has insisted Greece must agree to a lasting austerity plan before it will approve its share of support.

The bailout is proving unpopular with Germans, who fear they will have to pay higher taxes as a result.

Chancellor Angela Merkel said yesterday that as soon as Greece agrees to austerity measures, then Germany can go ahead with its approval of financial help.

"Germany will make its contribution, but Greece has to make its contribution," she said.

Portugal Announces Austerity Package

Financial Times
September 30, 2010

Portugal has announced a new package of austerity measures designed to reassure markets that it will meet ambitious deficit-reduction targets and not seek emergency funding in a Greek-style crisis.

The measures include a 5 per cent cut in the public sector wage bill and a 2 percentage point increase in value added tax to 23 per cent, José Sócrates, Portugal’s centre-left prime minister, said on Wednesday.

The package was “absolutely essential to defend the international credibility of our economy”, he said.

Portugal, like Ireland, has seen its cost of borrowing rise to record levels this week amid market concerns that two countries could be forced to seek bail-out loans from the international community, triggering a new eurozone crisis ...

Portugal Approves Tax Increases, Salary Cuts

Lisbon Takes a Cue From Spain in Launching Additional Austerity Measures Designed to Prevent a Crisis Like Greece's

Wall Street Journal
May 14, 2010

Portugal followed in Spain's footsteps on Thursday by announcing new austerity measures to shore up investor confidence and avoid a Greece-style financial crisis.

Just days after European Union leaders put together a giant euro-zone financial backstop that was designed in part to ease investor concerns about their debts, Portugal and Spain delivered on commitments to accelerate deficit reduction efforts.

"These additional measures are fundamental to defend Portugal and our economy, and to reinforce our credibility in international markets," Portuguese Prime Minister José Sócrates told journalists after a weekly cabinet meeting.

The Socialist prime minister said he agreed on the measures with Pedro Passos Coelho, leader of the country's biggest opposition party, the Social Democratic Party.

The government approved a value-added tax increase of one percentage point across all categories, to 6% for necessities, 13% for restaurants and to 21% for most other goods and services. Companies with profits of more than €2 million ($3.6 million) will pay an extra 2.5% tax on their profits.

Government ministers and other top state employees will have their salaries reduced by 5% starting this year. All the new measures will last until the end of 2011.

Mr. Sócrates said the government has accelerated its planned deficit cuts to 7.3% of gross domestic product for this year and 4.6% of GDP next year, from previous goals of 8.3% of GDP in 2010 and 6.6% of GDP in 2011. Portugal had a budget deficit equal to 9.4% of GDP in 2009.

Citigroup economist Giada Giani estimates the new deficit-cutting measures, plus existing measures included in the country's 2010 budget, amount to about 3% of GDP this year.

"The overall fiscal effort is now quite large," she said.

Earlier this week, Vitor Constancio, who on June 1 will become vice president of the European Central Bank, said that Portugal needs to accelerate its program to reduce its budget deficit and adopt new measures to help cut the spending gap and spur economic growth.

"The country has to increase its savings rate, starting with speeding up the consolidation of public finances, as a condition for achieving more significant economic growth in the medium term," said Mr. Constancio, who is currently governor of the Bank of Portugal.

Portugal's measures differ from the Spanish plan in that they are skewed toward raising taxes while its larger neighbor focused more on spending cuts.

On Wednesday, Spain's Socialist prime minister José Luis Rodriguez Zapatero said his government will save €15 billion over two years by cutting public-sector wages by 5% this year and freezing them next year.

Also next year, pensions will be frozen and what is known as the baby check, a €2,500 payment to families for every new-born child, will be eliminated. Mr. Zapatero said public investment will be cut by €6 billion during this year and next.

Speaking in parliament, Mr. Zapatero appealed to Spanish society to make an additional belt-tightening effort.

"We need it to fulfill our European commitments, we need it to attract investors and, of course, we need it to transmit an image of stability," he said.

The measures were welcomed by other euro-zone policy makers. European Commissioner for Economic and Monetary Affairs Olli Rehn said they were steps in "the right direction," while Italian Prime Minister Silvio Berlusconi said he appreciated "the important anticrisis measures."

The Spanish measures went some way toward easing investor concerns that had started to creep back into the euro-zone's financial markets despite this past weekend's agreement by EU leaders and the International Monetary Fund to create a €750 billion backstop for countries such as Spain and Portugal.

British Debt 'Will Be Higher Than Any Other EU Country'

The Scotsman
May 6, 2010

The European Commission entered Britain's election debate on the eve of polls after warning that British public debt is expected to be higher than any other European Union country this year.

In its spring economic forecast, the group predicts UK net borrowing will be 12 per cent of output in 2010 – a higher proportion than any other country in the 27-member block and above Greece's 9.3 per cent.

The Commission revised growth estimates for the UK upwards – although the 2011 figures still undershot government expectations – while it boosted predictions for the euro area as a whole as officials sought to calm nerves over the Greek debt crisis.

It also cut predictions for UK borrowing, but it still sees the budget deficit in the next two years as higher than projected by the Treasury.

The report forecasts net borrowing of 11.5 per cent in the financial year to March 2011 and 9.4 per cent the following 12-month period, compared to forecasts of 11.1 per cent and 8.5 per cent respectively.

"Restoring the UK public finances is a central task, as they have been greatly weakened by a combination of the severe downturn, its impact on previously tax-rich income and expenditure, the operation of automatic stabilisers and the fiscal stimulus," the report said.

The EU expects the 27 European nation block to see growth of 1 per cent this year and 1.7 per cent in 2011.

But growth in the region will be dragged down by the shrinking economies of Spain, Greece and Ireland – contracting 0.4 per cent, 3 per cent and 0.9 per cent respectively this year.

While Greece's deficit is not the highest in the EU, concerns about the government's ability to pay it back are higher because of its high debt levels and weak economy.

Concerns about the Greek crisis and possible contagion of its problems across the eurozone have sent stock markets into a tailspin over recent days.

But the Commission insisted a £94 billion bailout for the country would help stop the crisis spreading to other European nations.

EU commissioner Olli Rehn said investor fears that Spain and Portugal would be dragged into the fray was "overshooting."

He stressed the Greek case was "unique" because of its heavy debt level and because it had "cheated" on its statistics for years.

"In order to safeguard the economic recovery which is still rather modest and somewhat fragile, it is absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole," he said, denying that a rescue package had been prepared for Spain.

Shadow chancellor George Osborne seized on the forecast, saying:

"The day before the election the European Commission has issued a damning indictment of Gordon Brown's economic record.

"He has left this country with the largest budget deficit in Europe – larger even than Greece – and projections for future growth well below his own forecasts."

But Chancellor Alistair Darling said the forecast meant the Commission was now in line with government predictions.

George Osborne Puts the UK on Austerity Alert; Scotland to be Hit with 'Double Whammy' in 2011

The Scotsman
May 18, 2010

The countdown to "austerity day" began yesterday as new Chancellor George Osborne revealed an emergency Budget will be published on 22 June.

The spending review will unveil £6 billion of cuts, although Mr Osborne promised to protect "key," although not "all," frontline services.

And while he confirmed the promise that devolved budgets would be protected until next year, opposition parties warned that this would mean Scotland would be "hit by a double whammy" in 2011.

Scottish Labour MPs privately suggested that the cuts would be designed to avoid an impact until after the Holyrood election in May next year.

Meanwhile, there are growing concerns raised that the new Con/Lib government is preparing to halt the building of a second aircraft carrier.

If this were to happen, the future of shipbuilding in the Clyde and Rosyth would come under serious threat.

Facing the media in his first official press conference as Chancellor yesterday, Mr Osborne claimed that the finances were in a far worse state than had first been feared. He accused Treasury officials of colluding with Labour ministers to "cook the books" over the state of the economy with over-optimistic growth forecasts.

And he announced that he would create a new Office for Budget Responsibility to be headed by former Treasury chief economist Sir Alan Budd, which would make future economic forecasts, removing the political interference from the process.

Mr Osborne said that tackling the deficit was the "most urgent issue" facing the Lib-Con coalition. He warned that failure to get to grips with the problem could lead to the sort of problems now afflicting Greece.

"Greece is a reminder of what happens when governments lack the willingness to act decisively and quickly, and when problems are swept under the carpet," he said. "If we fail to tackle the deficit we inherited from the previous government, the consequences could be disastrous."

David Laws, the Liberal Democrat Treasury Chief Secretary, accepted both parties in the coalition would have "hands stained with blood" as a result of the cuts, but it had to be done for the good of the country.

He added that they were "united in our resolve to deal urgently and decisively with the unacceptable state of our public finances."

But former Labour chancellor Alistair Darling accused the two men of taking a leaf out of Yes, Prime Minister and "playing the oldest trick in the book" to justify harsher cutbacks. He said:

"The suggestion that Treasury civil servants have colluded in publishing anything other than accurate figures is just plain wrong.

"Far from being over-optimistic, the ONS public finance figures published in April showed that borrowing last year was actually lower than forecast in the Budget."

There were questions about why Mr Osborne was "seeking" areas to make £6bn cuts to stop the proposed increase in National Insurance contributions, when just a few weeks ago during the election he claimed to have "identified" them.

Neither minister would be drawn on whether there would be a rise in VAT, although they admitted that capital gains tax would go up.

This led to an attack by former Scottish secretary Lord Forsyth, whose paper calling for capital gains tax to be abolished for many people had previously been accepted by Mr Osborne.

Lord Forsyth suggested that the acceptance of a Lib Dem proposal would be an "attack on the middle classes" and investments they had made for their pensions.

But in Scotland there were concerns about the impact of a double hit, when this year's cuts are added to next year's for the 2011-12 Scottish budget. SNP Treasury spokesman Stewart Hosie, MP, said:

"A double whammy from the Tory-Liberal cuts coalition will only endanger Scotland's fragile economic recovery further."

Meanwhile, with health, education and international development budgets all secure, there were fears that potential defence cuts could see the second carrier, the Prince of Wales, cancelled. It is believed that too much work has been carried out on the first carrier, the Queen Elizabeth, for it to be cancelled.

Glasgow South West MP Ian Davidson said he would be "seeking assurances about the carriers."

Ireland Plans Drastic Cuts to Prevent Debt Crisis

Ireland is to demand pay cuts for civil servants and public employees to prevent the budget deficit soaring to 12pc of gross domestic product by next year -- becoming the first country in the eurozone to resort to 1930s-style wage deflation to claw back competitiveness.

London Telegraph
January 15, 2009

"We will take whatever decisions are necessary," said premier Brian Cowen. The Taoiseach yesterday denied reports that he invoked the spectre of the International Monetary Fund to terrify the trade unions into submission. But the threat -- uttered or not -- has been picked up nevertheless by labour leaders.

"The IMF's normal prescription in such situations involves mass dismissals and pay cuts, along with cuts in pensions," said Dan Murphy, head of the public service union, who accepts the need for draconian retrenchment.

The budget deficit will soar to 9.6pc of GDP this year as property tax revenues collapse. It is so far above the EU's Maastricht limit of 3pc that Brussels will have to impose sanctions. It is still rising fast.

"On the basis of existing policy, A General Government Deficit in the range of 11pc to 12pc of GDP is in prospect for each of the years to 2013. This is untenable," said the finance ministry in a fresh revision to its (already dire) Stability Programme. It has drafted a swingeing five-year plan, slashing spending by €16bn (£14.4bn) or 8pc of GDP by 2013.

The markets are watching nervously. Yields on Irish 10-year bonds have risen to 180 basis points over German Bunds. Standard & Poor's has issued a "negative outlook" alert on Ireland's AAA rating, noting that the bank bail-out has increased state liabilities by 228pc of GDP. This guarantee may be tested. While Dublin's "Canary Dwarf" has been a success story -- leading a finance sector that makes up nearly 10pc of Irish output -- it has also become an Achilles Heel.

Chris Pryce from Fitch Ratings said Ireland had shown great courage by facing up to the full implications of the global crisis earlier than others.

"We're very impressed by the vigour of the Irish government," he said. Even so, the public debt will jump from 25pc of GDP in 2007 to 62pc by 2010.

It is a grim moment for the Celtic Tiger after achieving so much as a high-tech hub with an educated work-force and one of the most flexible economies in the world -- all qualities that should help the country pull through in the end.

Dublin expects the economy to shrink by 4pc this year as the post-bubble hangover goes from bad to worse. Unemployment will hit 12pc by December, up from 4.9pc in early 2008.

Ireland is paying the price for letting wages spiral upwards during the long boom, eating away at competitiveness. The computer group Dell, Ireland's top exporter, has stunned the country by announcing plans to shift its EU manufacturing arm from Limerick to Poland, taking 4pc of Irish GDP with it. Workers in Eastern Europe are closing the technology gap, and they are much cheaper.

Dublin house prices have fallen 28pc from their peak. Professor Morgan Kelly from University College Dublin -- the first to predict last year that Irish banks would need a state rescue -- fears that prices will drop 80pc in real terms before the glut of unsold property is cleared.

"It has taken us 10 years to get into this situation. It will in all likelihood take us 10 years to get out of it. Construction will fall to zero for the foreseeable future," he told a Dublin conference. There may be net "demolition."

It is hot debate whether euro membership is making matters worse at this stage. The country has not been able to "get ahead of the curve" over the last year by slashing interest rates. Indeed, Frankfurt raised rates in July.

The euro has jumped almost 30pc against sterling in a year. This amounts to an "asymmetric shock" for Ireland, which depends on Britain for 21pc of its exports. John Whelan, head of the Irish Exporters Association, said the strong euro puts100,000 jobs at risk this year.

"Most companies cannot make money selling into the UK at an exchange rate above 0.80 pence and today the euro is worth 0.91 pence. Currency hedges will run out by March, and the small guys are feeling the full whack instantly," he said.

Mr Whelan said there was a feeling of betrayal that Britain did not join the euro alongside Ireland – or shortly after – despite Labour's pledge to do so.

"We thought Britain would join in 2003, but then Tony Blair lost his popularity in Iraq and never tried," he said.

Finance Minister Brian Lenihan has even accused Britain of pursuing a beggar-thy-neighbour strategy.

Public Puzzled by Campaign on Pension Cuts in Switzerland

swissinfo.ch
February 16, 2010

The nationwide ballot on planned pension cuts on March 7 is of key importance both to the business community and to trade unions -- for different reasons.

But less than three weeks ahead of the vote it is not clear to what extent campaigns by supporters and opponents have had an impact on the public perception despite a flood of propaganda material.

Voters will be asked to decide on the minimum conversion rate of the occupational pension scheme. The rate presently stands at about seven per cent and is to be reduced to 6.4 per cent by 2016 if the government and a majority of parliament have their way.

It means that employees will see benefits from the occupational pension scheme -- the so called second pillar -- reduced.

Under the current rate, a retired man with accumulated capital of SFr100,000 ($93,686) in the pension fund would receive SFr7,000 annually. The new rate would see payments drop to SFr6,400 a year.

However, trade unions, consumer groups and centre-left parties collected more than 200,000 signatures within three months -- four times more than necessary -- to challenge the decision to a referendum.

They argue the reduction is unnecessary and tantamount to “benefits theft” by the Business Federation and private insurance companies.

“Insurance managers want to siphon off as much money from the pension scheme as possible,” said Ruedi Rechsteiner of the centre-left Social Democrats.

The planned pension cuts would threaten “a dignified life” for the older generation, says the Unia trade union -- one of the driving forces behind the referendum.

Consumer groups accused insurance companies of scaremongering and using inaccurate figures to prove that the accumulated capital is insufficient to cover for an aging population.

“The reduction of the conversion rate is necessary to guarantee the future of the pension scheme for the younger generation,” said Gerold Bührer, president of the Swiss Business Federation.

The Employers Association adds that failure to adapt the rate would leave pension funds no choice but to make risky investments to ensure the financial stability of the insurance scheme.

The government, alongside the main centre-right and rightwing parties, warned the country’s unique social security system and economic prosperity were at stake.

“Voters can choose between security and insecurity,” said Interior Minister Didier Burkhalter at the launch of the yes campaign in December.

The mandatory occupational pension benefits are part of the three-tier retirement system, including the state old age pension and individual savings made on a voluntary basis.

The run-up to the vote on March 7 has been marked by an unusually early campaign launch, including posters and advertisements particularly by supporters of the pension cuts.

“It is an indication that the business community and centre-right parties consider it an important vote,” says Thomas Milic, political scientist at the universities of Bern and Zurich.

Pension fund consultant and journalist Werner C. Hug describes the vote as a “reputation issue” for supporters.

Trade unions for their part made it clear that they consider it a key element of their opposition to any plans to “undermine the achievements of the welfare state” ...

It is estimated that supporters will spend about SFr10 million on the campaign, while the unions announced their budget was one tenth that amount. But they hope to make up for it with grassroot members setting up picket lines at public events, activists distributing leaflets, brochures and other campaigning.

Both sides have pledged to step up their efforts with more posters, newspaper ads and online games, including a pension calculator.

In the absence of the usual pre-vote data compiled by a leading polling institute on behalf of the Swiss Broadcasting Corporation, the unions commissioned their own survey.

It showed that opponents of pension cuts have a clear lead with 40 per cent against and 12 per cent in favour. But more than 40 per cent said they are either undecided or refused to answer.

In Greece, New Austerity Measures Rile Many (Transcript)

PBS
July 20, 2010

The economic crisis in Greece is bringing a new wave of anger among its citizens over austerity measures to control its debt. Paul Solman looks at how Greek citizens are coping with the debt crisis and speaks with Prime Minister George Papandreou ...

MANOS MATSAGANIS: Greeks have grown accustomed to a level of consumption which is Northern European, combined with a business culture that is decidedly Middle Eastern, which is not really feasible, not very productive.

PAUL SOLMAN: Not really feasible because, among other things, private sector employees are actually outnumbered by Greece's not-very-productive government workers.

MANOS MATSAGANIS: You know, people don't turn up for work, or they turn up at 10:00, and they leave at 11:00, they go shopping, and they come back. No, they don't do -- basically, they -- they do nothing. Pay is not great, but it's secure. And we retire at the age of 50. Fantastic.

PAUL SOLMAN:Retire at 50?

MANOS MATSAGANIS: Absolutely. Government has handed out concessions in the form of pension privileges to favored groups. First, it was the military or the judiciary. Then it was civil servants. Then it was worker -- workers in state-owned enterprises. And this is how the system developed.

PAUL SOLMAN: It's a system of buying off political pressure groups that the government's new reforms aim to change. But with half the work force employed by the government, no wonder so many Greeks civil servants are upset by the cuts, among them, George Tzaferis and Ioanna Radeou.

GEORGE TZAFERIS, Greece (through translator): There's a mis-impression that all of us Greeks have been living large. But if you looked at the small salaries we have been getting, you would see they can't be cut much further.

IOANNA RADEOU, Greece: All we want is all the rights that we have gained through the past years, from one century now, and everything is gone with all this plan, no social security, no public sector, no nothing.

PAUL SOLMAN: Vasilis Polymeropoulos of the civil service union was defiant. We don't like this economic attitude toward life you have in America, he said, prompting the question: How will Greece pay back its lenders unless it adopts a more American, market-driven approach?

VASILIS POLYMEROPOULOS (Civil Servants Confederation through translator): When I speak to my friends or relatives in the United States, they are always talking about how much money, how many dollars, how many houses does he own. It's a sickness. They're always talking about how much that person is worth. He's worth $100,000, $300, 000. And, ultimately, it's not important, because, at the end of the day, however many houses you earn, you are going to end up in the same place, and be three-and-a-half under the ground.

PAUL SOLMAN: Meanwhile, as the economy shrinks at a projected 4 percent annual rate, private employment is shrinking, too. And private Greek workers are also resistant.

SOTIRIS PANAYIOTIS: Greece is facing something close to a social explosion.

PAUL SOLMAN: So Sotiris Panayiotis preps students for college entrance exams at a private school where three colleagues were just laid off.

SOTIRIS PANAYIOTIS: All this austerity package implemented by the government and dictated by the European Union and the IMF, it's not as simple as temporary pay cuts, one or two or three years of difficulty. It means like being thrown back into the Stone Age it was -- concerns social rights.

PAUL SOLMAN: In an immigrant section of town, more graphic instances of the toll unemployment, now near 12 percent, and a reduced public safety net are starting to take. Doctors of the World, or Kosmou (ph), runs a free clinic for poor foreigners, but says Dr. Elena Mavropoulou.

DR. ELENA MAVROPOULOU, Doctors of the World: Now Greek people are coming in our clinic because they have not insurance and they have not even money to pay the little bit for the medicine. But they are obligated to come here because of the way the situation it is in Greece now. And I feel that they're ashamed.

PAUL SOLMAN: Immigrants still queue up for medications, but so do out-of-work natives like Nioltos Nikas (ph), suffering from stress-related bleeding ulcers.

MAN (through translator): The only thing that keeps me from committing suicide is my daughter and my parents. I feel like a parasite.

PAUL SOLMAN: What do you mean you feel like a parasite?

MAN (through translator): Because there's no work. I can't offer anything to my family. I can't buy my daughter a cookie, an ice cream. I'm a nothing.

PAUL SOLMAN: In fact, workers are being laid off, unheard of in Greece. That's what teacher Panayiotis and friends were protesting.

If the schools can't afford to pay them, due to the economic crisis, then isn't the school within its rights to lay people off?

SOTIRIS PANAYIOTIS: The owners refer to that they have fewer students, but I think the problem is that they were teachers with dignity who demanded their rights. A job is not a privilege. It is a right.

PAUL SOLMAN: But almost every person has said to us the problem with Greece is, we spent more than we earned for the last 20 or 30 years. And everyone having a job would be an example of that.

SOTIRIS PANAYIOTIS: Yes, there is a problem with debt. But it wasn't ordinary working people that created the debt. The Greek government must say, no, we're not going to pay the debt.

PAUL SOLMAN: But Theodoros Pangalos, the larger-than-life number-two man in the government, says not paying, default, is the worst possible option.

THEODOROS PANGALOS, Greek Deputy Prime Minister: This would mean poverty, real poverty, real unemployment, and marginalization in the contemporary world for, let's say, 20 or 50 years. We are in a global market. We are in a global market of capital and goods. And whoever doesn't understand that doesn't live in a contemporary world.

PAUL SOLMAN: In fact, one of Greece's problems, says economist Matsaganis, is that too many Greeks are living in the past.

MANOS MATSAGANIS: I think we would be better off if we had a less illustrious history, if we were a normal country, you know, of mediocre ancestry. I think that has ruined us. It's like, you know, young offsprings of very rich self-made people. This is us.

PAUL SOLMAN:S o, you might ask, is there any hope? Government, under pressure, tries to change the system. The people resist. In fact, the best hope for reform may be dealing with the problem everyone here deplores: the endemic tax fraud that has so long hobbled the Greek economy.

And, so, tax reform is the subject of our second report on the Greek economic crisis.

Greece's Prime Minister Cuts Summer Bonuses for State Workers

The economy contracted at an annual rate of 3.5 percent in the second quarter, the statistical office said yesterday.

August 12, 2010

Bloomberg - Eleni Alexiou says she can’t afford to take her two children to a Greek island on vacation this year after the government axed her summer bonus and reduced her pay.

“We’re not going anywhere, just any place that friends and family can put us up,” said Alexiou, 38, a state employee at a citizens’ advice bureau in Athens. “The crisis is the reason. The summer bonus has been cut. Everything’s gone up in price.”

Alexiou is at the sharp end of Prime Minister George Papandreou’s measures designed to meet the requirements for 110 billion euros ($141 billion) in rescue funding from the European Union and the International Monetary Fund. As well as squeezes on pensions and higher taxes, it’s the first time Greece’s 768,000 state workers haven’t received the traditional extra 15 days of salary paid in the summer as Greeks decamp to the beach.

Lower spending on hotel rooms, flights and ferry trips is translating into a drop in revenue for the tourism industry, which the London-based World Travel and Tourism Council estimates accounts for about 16 percent of Greece’s 237 billion- euro economy and more than one in five jobs.

The effects of more thrifty locals along with discounts to lure foreigners mean revenue may fall 9 percent this year even as the number of visitors from abroad is little changed, said Andreas Andreadis, president of the Hellenic Hotel Federation.

“The Greek consumer is very scared at this point and very pessimistic,” said Andreadis. He reckons Greeks account for a fifth of the tourist industry and revenue from them might decline 20 percent in 2010. “There’s a significant fall in domestic tourism. More Greeks are staying home.”

Traffic and port authorities are reporting less movement than usual before the Aug. 15 exodus, when any Greek who hasn’t already gone on holiday leaves.

Airline companies are reporting a dip in demand on their domestic networks. Aegean Airlines spokeswoman Roula Saloutsi said the drop in recent months is by as much as 15 percent from a year ago, even with a decline in fares.

Visitors to Rhodes on charter flights, which primarily come from outside Greece, rose 11 percent in July, according to the island’s airport. The number of domestic tourists in the month, though, fell 17 percent.

Antonis Katsigouras, 40, who works in a shoe store in central Athens, said business is unusually brisk for an August.

“People obviously aren’t going on holiday,” he said.

Long deemed to be part of an ordinary income, bonus payments provided a spending lift for Greeks when most needed: one month’s wage at Christmas, and half each at Easter, which is the biggest holiday in Greece, and summer.

The payments are “unsustainable,” the IMF said in May.

Eliminating the “doro,” or gift, as the payments are known, will help save 1.1 billion euros this year. Cutting payments to pensioners will save another 1.5 billion euros. The government’s aim is to whittle the budget deficit to 8.1 percent of GDP this year from 13.6 percent. The limit is 3 percent for euro members like Greece.

The economy contracted at an annual rate of 3.5 percent in the second quarter, the statistical office said yesterday.

INKA, the national consumer rights group, said 59 percent of Greeks this year won’t take a vacation, an increase from 48 percent last year. The Athens-based institute surveyed 980 households between July 9 and July 13. Seventy-two percent of those planning a holiday will cut back the number of days they spend away, 45 percent will stay at their own home and 27 percent would stay with a relative or friend. Only 28 percent of those taking holidays this year will stay at a hotel or in rented rooms, the poll found.

“Greeks don’t have the financial ability to take holidays,” said Georgios Lehouritis, president of INKA. “Two reasons: expense and wage cuts. A civil servant with a four- member family who is now getting a summer bonus of 188 euros -- that’s not going to get him very far.”

To entice Greeks, Louis Plc, the biggest publicly traded tourism company in Greece and Cyprus, is offering discounts of up to 20 percent and deals such as two children staying free. Shares in Nicosia-based Louis have fallen 25 percent this year. Spokesman Michalis Maratheftis said Greek bookings at the company’s 10 hotels are little changed from last year.

Greeks spend more of their vacation time in their home country compared with other Europeans, according to research by Alpha Bank SA, the country’s third-largest lender. Spending on holidays abroad was 1.1 percent of gross domestic product in 2006, 2007 and 2008 compared with 2.5 percent for Germans and 2.6 percent for the British.

Alexiou, who left her children with friends during the summer vacation, said rising prices are making her think twice about traveling to see them while she works during the week in downtown Athens. An increase in fuel taxes has helped boost Greek inflation to the fastest in the 27-nation European Union. In July, the rate rose to a 13-year high of 5.5 percent.

“You go to the supermarket these days and spend 50 euros and it’s not even two grocery bags of things,” said Alexiou, who made 17,000 euros a year before the cuts.

Gerasimos Barounos, 39, took his wife and one-year-old son to the island of Zakynthos for a week, the first holiday in two years. With his annual salary cut by 1,200 euros, he opted for a cheaper hotel and cut back on eating out. His annual bonuses were replaced by a lower, flat rate.

“I went on a much tighter budget, for fewer days,” he said. “It’s compounded by the fear of the general situation that I may experience further salary cuts.

Katsigouras, the shoe-shop manager, said he will take holidays later this year to take advantage of cheaper prices on his preferred destination of Folegandros, a smaller island more popular with Greeks than foreign tourists.

“I get one holiday a year and spend the entire year looking forward to it,” he said. “We have to keep some things to get through this crisis.”

Spanish Cut Civil Servants' Salaries

Greek trade unions announced a new general strike to protest against pension reforms next week, as government officials waited yesterday for the first installment of a 110bn rescue package. Greece's two main public and private sector unions set a walkout for 20 May – a day after Greece must repay some 9bn in expiring debt.

The Scotsman
May 13, 2010

Spain will cut civil servants' salaries this year as part of a deficit-reduction plan to ease worries the country will slide into a debt crisis like that of Greece, the prime minister announced yesterday.

Jose Luis Rodriguez Zapatero told parliament the average 5 per cent reduction starting in June is part of a cost-cutting plan that also includes a suspension in automatic inflation-adjustments for retirement pensions, a drop in overseas aid, a 6 billion (£5.1bn) reduction in government investment in 2010-11, and elimination next year of a 2,500 (£2,130) tax break for couples that have babies or adopt a child.

With these measures, Spain joins other debt-ridden European countries, like Portugal and Ireland, in implementing painful belt-tightening to chip away at deficits that ballooned with the onset of the recession.

"We are going to ask everyone for a stronger effort. First, from Spanish society, but also from the government," Mr Zapatero said.

The goal, he added, "is to contribute, with our financial stability, to the financial stability of the eurozone."

Mr Zapatero fleshed out the details of the plan announced on Sunday for deeper spending cuts to reduce Spain's deficit from 11.2 per cent of GDP last year to 9.3 per cent in 2010, and eventually to 3 percent in 2013. For this year and next, the plan calls for spending cuts totalling 15 billion. The deeper cuts are designed to take an additional 1.5 points off the deficit by the end of 2011.

Mr Zapatero said his own salary and those of other senior members of the government would be cut by 15 per cent.

The reduction in civil servants' pay marks a U-turn for a government which had insisted as it weathered the European debt crisis in recent weeks that such salaries would not be touched.

Spanish unions called the measures harsh and said the government should consider cutting the deficit by raising revenue, not just reducing spending.

One major labour federation, Workers Commissions, said it could not rule out calling a general strike.

In Brussels, EU economy commissioner Olli Rehn said the measures "seem to go in the right direction."

Spain has come under intense pressure recently to take strong measures to slash its big deficit, namely at the weekend emergency EU meeting in Brussels at which the bloc devised a 750 billion rescue plan to prop up the euro and support debt-heavy governments.

Spain has run up a huge deficit because of heavy spending on unemployment benefits and stimulus measures as it struggled against recession that began in the third quarter of 2008.

As recently as last week, Mr Zapatero resisted calls from the conservative opposition to take firmer action to cut spending, saying it would jeopardise economic recovery.

Opposition leader Mariano Rajoy said yesterday that he supported the spending cuts, but accused him of rushing them through over three days to satisfy the European Union.

"It is sad that you reject measures just because it was me who offered them, then approve them the following Wednesday because Europe offers them," Rajoy said.

Athens Bomb Scare as IMF Backs Greek Austerity Plan

The Scotsman
August 6, 2010

Police evacuated Greece's finance ministry yesterday after a bomb threat just before finance minister George Papaconstantinou was due to comment on a positive review of the country's austerity package.

"The ministry received an anonymous call warning that a bomb would go off. We are now checking if it's a hoax," a police official said.

Police cordoned off the area ad the news conference was delayed for an hour. No explosives were found.

Mr Papaconstantinou was due was due to comment on the results of an EU/IMF inspection visit.

It found Greece had made "remarkable" progress implementing an austerity programme to tackle its debt crisis and was expected to receive the second installment of rescue loans next month.

Greece came to the brink of defaulting on its mountain of debt in May, and was saved by the first installment of a ?€110 billion (£91 billion), three-year package of rescue loans set up by the International Monetary Fund and by other EU countries using the euro.

Athens is set to receive the second installment -- ?€9bn - between 13-15 September.

"I'm definitely confident that we are going forward with this disbursement," IMF mission chief for Greece Poul Thomsen said after a two-week inspection visit by officials from the IMF, European Central Bank and European Commission, locally dubbed the "troika."

Formal approval by IMF, ECB and Commission headquarters is needed before funds can be released. Athens received the first installment of ?€20bn in May.

"The first assessment is totally positive, the next tranche of the loan is secured," Mr Papaconstantinou said following the bomb scare delay. It would be disbursed by 15 September.

"The there no new memorandum or new (austerity] measures. But there are new challenges," Mr Papaconstantinou said.

In return for the rescue loans, Greece has been pursuing a strict austerity programme which has seen it cut civil service pay, trim pensions and increase taxes.

The government's progress has been under quarterly review by the IMF, the ECB and the EC, the EU executive.

"Our overall assessment is that the programme has made a strong start," the organisations said.

All end of June targets had been met, they said, "led by a vigorous implementation of the fiscal programme, and important reforms are ahead of schedule.

Mr Thomsen said the government's austerity programme "is off to a very strong start but as expected there are pressure points," adding that there was "clearly a need to control extra budgetary expenses," including in state hospitals and at the municipal level.

Mr Papaconstantinou stressed the government was proving it was delivering on its promises despite the scepticism of some international analysts.

"We have defied all the doomsayers," he said. "They say we would suspend payment -- that didn't happen. They said we would not receive loans -- that didn't happen. Now they say we won't get the next installments of loans -- that won't happen either. We will get the second and third and all the installments -- because we are implementing our commitments."

Servaas Deroose, a representative for the European Commission, said major reforms, particularly in the pension system, were ahead of schedule.

Greece has pledged to reduce its deficit from 13.6 per cent of gross domestic product last year to 8.1 percent at the end of 2010.

Rebel Sect Guns Down Reporter

The Scotsman
July 20, 2010

Left-Wing urban guerrillas shot dead a Greek reporter yesterday, the first murder of a journalist in Greece in more than 20 years, police said.

Sokratis Giolias, 37, was killed outside his home in an Athens suburb early yesterday, when three unknown assailants shot him several times at close range.

"The ballistic investigation showed that the guns used in the assassination today have been used in attacks claimed by the Rebel Sect," police said.

Greek political parties and journalist unions expressed outrage at the killing of Giolias, who was news chief at a local radio station T and a father of one.

"Somebody wanted to silence a very good investigative reporter who had stepped on a lot of toes with his stories," said Panos Sobolos, president of the Athens journalists' union.

Giolias' murder was the first killing of a journalist in Greece since the mid-1980s, when left-wing guerrilla group November 17 assassinated a conservative newspaper publisher.

The Rebel Sect, which has said that journalists are among its targets, opened fire last year on the headquarters of private Alter TV, without causing any injuries.

Rebel Sect is one of Greece's deadliest militant guerrilla groups. In June 2009, it claimed responsibility for the killing of a Greek anti-terrorism policeman in Athens. He was shot several times at close range.

Four people have died in attacks by left-wing militant groups since the police shooting of a teenager in 2008 sparked Greece's worst riots in decades.

Debt-ridden Greece Gets Tough on Its Tax Dodgers

The Scotsman
July 10, 2010

The Greek government yesterday threatened to punish tax dodgers by confiscating and auctioning off their luxury properties on popular Aegean islands as part of measures to deal with the country's debt crisis.

Finance ministry checks showed 990 people who owed more than 6.7 million euros in taxes owned a total of 2,917 real estate assets on the scenic islands of Mykonos and Santorini, worth more than 288 million euros. The ministry gave tax dodgers until July 20 to settle their debts.

"After this deadline, there will be urgent procedures of forced payment, including auctions," it said in a statement.

Greece has pledged to improve its dismal tax collection record as part of a mammoth 110-billion euro bailout by the European Union and the International Monetary Fund.

Tax evasion, particularly by well-off citizens such as doctors and lawyers, is rampant in Greece. Estimates on the size of the shadow economy range between 10 to 30 per cent of GDP.

Cracking down on tax evasion also is seen as a key factor to win public support as belt-tightening measures bite.

In the first such move in eight years, tax authorities ordered the temporary closure yesterday of ten restaurants and night clubs which had not been issuing receipts to customers, the ministry said.

Fines imposed on businesses and households for tax code violations rose sharply after the finance ministry sent more tax-men on the beat for inspections.

The total amount of fines rose to 1.83 billion euros from 895 million euros in the same period last year, the statement added.

In the past, however, many tax offenders managed to have these payments cancelled or delayed for years in the courts.

Bank Rating Cut Deals Fresh Blow to Crisis-hit Greece

Riot police fight off crowds who tried to force their way into the finance ministry on Thursday in protest against austerity measures.

The Scotsman
May 1, 2010

Greece's financial crisis deepened yesterday as a leading credit agency downgraded the debt rating of nine of its banks and the prime minister heralded drastic new cuts and tax increases to win rescue loans from European partners and the International Monetary Fund – and avoid a disastrous default on government debt.

Moody's Investor Services cut its rating of National Bank of Greece and eight other institutions.

It said the banks' might face further downgrades – and stressed that Moody's continues to review the country's sovereign debt rating.

Earlier this week, another ratings agency, Standard & Poor's, downgraded Greek bonds to junk status.

The latest move came as prime minister George Papandreou said cuts were inevitable if the country was to keep afloat.

"The measures we must take are necessary for the protection of our country, for our survival, so we can stand firmly on our feet," he told parliament.

Greece, the EU and the IMF are expected to complete talks this weekend over what extra steps Athens must take as a condition of the rescue, which would provide 45 billion (£40bn) in loans this year and up to a reported 120bn over three years.

A special meeting of finance ministers of the 16 nations using the euro takes place tomorrow to review the proposed bailout.

Jean-Claude Juncker, the head of the eurozone finance ministers, called the meeting for Brussels in the late afternoon.

Mr Papandreou is widely expected to detail the cuts tomorrow , the day after a mass protest planned by the country's biggest labour unions for May Day.

Late on Thursday, police in Athens used tear gas to disperse a crowd trying to forced entry to the finance ministry in Athens to protest against the planned austerity measures.

Officials briefed on the negotiations say the measures will include a further slash in civil service pay, as well as state and private sector pensions, and a new hike in indirect taxes, including a two percentage point increase in sales tax.

"It is a patriotic duty to undertake this, with whatever political cost, which is tiny faced with the national cost of inaction and indecision," Mr Papandreou said.

Once an agreement is in place, Germany – the largest EU contributor, which has insisted on strict conditions – is expected to push the issue through parliament so Greece can pay debts due on 19 May.

Berlin has stressed it needs to review the plan before it can pass legislation to free its 8.4bn share of the loans.

Greek finance minister George Papaconstantinou said an agreement was "very close" and that once it was concluded, there would be "a simultaneous announcement of the basic elements of this programme as well as the all the financing mechanism so Greece has no immediate borrowing problems – but more importantly, so we can carry out the major reforms without the angst of the daily market fluctuations."

Mr Papaconstantinou said the three-year programme was "the greatest fiscal reform ever in Greece. It is a difficult adjustment that will call on everyone to undertake a great effort."

He insisted that the Greek banking system would be "shielded against any attack" in the reforms.

A default would be a serious blow to the euro and could hit Greek and European banks that invested in Greek government bonds. The bail-out is designed to prevent that and to keep the crisis from spreading to other countries that use the euro.

Citigroup chief economist William Buiter criticised what he called "dithering and shameful brinkmanship" by Greece's EU allies, which if repeated, could lead to "a nasty, unintended default".

He expressed optimism that the 16-member eurozone would weather the storm.

A European bail-out package may be signed within days, but the downgrade of nine banks yesterday shows that Greece's problems are far from over.

Economists warn that a bail-out, even if it stretches to 120 billion over three years, will be only a sticking plaster for the country's deep-rooted financial problems.

The Greek economy is expected to shrink by 3.5 per cent this year. With no recovery in sight, its banking system will come under even greater strain as businesses and households fail to make loan repayments or seek extra financial lifelines.

As Willem Buiter, chief economist at Citigroup, told a conference in Athens yesterday that a bail-out would offer breathing space, but a major restructuring of Greek debt was inevitable.

More Tax Rises and Pay Cuts as Greece Tackles Debt Crisis

Riot police confront Greek pensioners as they try to force their way to the prime minister's office in a protest over the government's austerity measures.

The Scotsman
March 4, 2010

Greece has announced painful new austerity measures, cutting salaries for government workers and raising taxes, as it tries to claw its way out of a financial crisis that threatens Europe's economy.

The decisions were "not taken out of choice but out of necessity," prime minister George Papandreou said as he briefed Greece's president on the measures, which amount to savings of 4.8 billion (£4.35bn), or roughly 2 per cent of the entire Greek economy.

The cuts are aimed at winning European Union support for the country's efforts and possibly opening the door to a financial bail-out by other EU governments. That would pave the way for the issue of bonds needed to roll over debts that are about to come due. Greece must roll over 54bn this year.

A Greek default or an expensive bail-out would be a blow to the euro.

The measures contain 2.4bn in new revenues, such as taxes, and another 2.4bn in spending cuts. They include cuts in civil servants' salaries, pension freezes, an increase in VAT from 19 to 21 per cent, and increasing taxes on alcohol, cigarettes, luxury cars, yachts and leather goods.

Jose Manuel Barroso, president of the European Commission, and Jean-Claude Juncker, head of the eurozone finance ministers, said they were confident Greece could now cut its deficit by the required four percentage points this year, and that the country's ambitious programme "is now credibly on track."

Greece has come under intense pressure from the EU to tackle its finances, which include a budget deficit that stood at a staggering 12.7 per cent of gross domestic product in 2009. Athens has pledged to reduce it to 8.7 per cent this year, but many economists consider that an unrealistic goal.

Greece wants EU help to borrow money at lower rates, but European officials have remained tight-lipped over any potential rescue plan, insisting Athens must first improve its finances.

The crisis has severely shaken confidence in the euro and led to market expectations of some sort of rescue led by the German and French governments.

Mr Papandreou is due to hold talks with German chancellor Angela Merkel tomorrow and will then head for meetings with Nicolas Sarkozy in France and Barack Obama in the United States.

A spokesman for Ms Merkel said her meeting with Mr Papandreou was not meant to involve "pledges of help."

But German finance minister Wolfgang Schäuble said the latest Greek decisions "go in the right direction and deserve our respect." He went on:

"Our Greek partners thereby show their responsibility for Europe and the common currency. Now, it is decisive for Greece to speedily and fully implement all its decisions."

He said as soon as this was done, the markets' trust should be strengthened and Greece should be able to refinance its debt.

"All this taken together is of high importance for the stability of our common currency," he added.

Greek Fuel Supplies Run Dry as Strike Over Harsh Austerity Measures Bites

The Scotsman
February 20, 2010

Petrol stations ran dry in Greece yesterday as a customs strike over government austerity measures began to bite.

Customs staff initially walked out for three days on Tuesday over salary freezes and cuts in bonuses. But their union announced on Thursday three 48-hour rolling strikes that will keep customs offices shut until next Wednesday, when all workers are being asked to join a general strike.

The customs walkout has hampered imports and exports, but the supply of fuel has been the most affected.

Many service stations in Athens had run out of all fuel, while those still open were rationing supplies with a £20 limit per customer. Traffic police were called to some outlets as cars queued for hundreds of yards.

Taxi drivers also held a 24-hour strike yesterday over sections of the austerity package that increased fuel tax and will force them to issue receipts.

Greek unions have been opposing the Socialist government's harsh austerity measures, which were imposed in an effort to pull the country out of its worst debt crisis in decades – one that has seen its deficit swell to a massive 12.7 per cent of economic output.

European finance ministers warned Athens this week that it would have to impose even tougher budget cuts if its current measures do not manage to reduce the deficit to 8.7 per cent this year. Athens has until 16 March to report back to the EU on its progress.

Meanwhile, the Greek government said a complex debt deal with investment bank Goldman Sachs that has come under scrutiny by the European Union was above board and will be explained.

The EU's top economy official, Olli Rehn, gave Greece until yesterday to supply answers on how it used transactions known as currency swaps and how that affected the country's debt and deficit figures.

"There will be a response. There is a letter by the finance minister," a government spokesman said, last night.

George Papaconstantinou's letter "will analyse the compatibility of those acts with European Union regulations and (say] there is no problem, and that other countries have also carried out equivalent actions exactly because Eurostat accepted this until a certain time," said the spokesman, referring to the European Union statistics agency.

Athens insists that it stopped using the practice when the Eurostat rules changed.

Mr Rehn said earlier this week that a "profound investigation" must be carried out, and that "if it turns out that there is such kind of securitisation of swaps that are not in line with the rules of the time, then of course we would need to take action".

The EU can take Greece to court, under threat of daily fines, to change its statistics methods. It is already threatening legal action for Greece's failure to report accurate public finance figures last year.

French finance minister Christine Lagarde said Eurostat was looking into "how a merchant bank, in this case Goldman Sachs, helped Greece structure, postpone a certain number of debt repayments."

Asked whether the bank had broken rules, the minister said:

"That is the question that we have to ask ourselves and to which we need the answer. And I don't have that answer."

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A research paper, published in 2008, by the Canadian Federation of Independent Business, compared identical public-sector and private-sector jobs at the federal, provincial and municipal level. Municipal employees earned 11% more in wages than their private-sector counterparts; when benefits were included, they earned 36% more than private-sector counterparts.
Provincial employees earned 8% more in wages than their private-sector counterparts; when benefits were included, they earned 25% more than private-sector counterparts.
Provincial employees earned 17% more in wages than their private-sector counterparts; when benefits were included, they earned 42% more than private-sector counterparts. Today, a comparison between public-sector and private-sector wages and benefits would find that the gap has increased even more. The recession of 2008-2009 hit the private-sector hard. Many employees in the private-sector had to take cuts in wages and benefits just to retain their jobs. The public-sector was spared these cuts.
Toronto strike shines spotlight on public, private sector compensation
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Cost of U.K. public sector pensions 'nears £1 trillion'
Cost of Britain's public sector pensions is 'eye-watering' £915billion
Britain's public sector pensions bill is approaching £915billion and is 'set to get much worse', the CBI will warn today. The business lobby group said the 'truly eye-watering' bill will cripple today's taxpayers, their children and grandchildren. The current amount needed to pay the pensions of doctors, nurses, teachers and other State workers is nearly £30,000 for every taxpayer, according to the CBI. This is more than a typical private sector employee earns in a whole year.
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The real pension problem in the UK is not the affordable cost of public sector pensions, but the growth in the number of private sector employees with no pension.
Uzbekistan: Public-Sector Wage Hike to Make New Inflation Wave?
The minimum wage in Uzbekistan, along with civil servants' salaries and social benefits such as pensions and disability allowances, are to be increased by 12 percent as of December 1, 2009. It will mark the second significant hike in 2009 for state-sector wages and benefits. In August, state salaries and payments increased by 25 percent. The new minimum wage, which as of August 1 was $22 per month, will rise to just under $25 in December. Despite the apparent increase -- which does not apply to private-sector workers -- most households will be find their spending power reduced by up to 25 percent, the opposition news website, Uzmetronom.com, reported on November 17. "An analysis of the situation after each increase in the minimum wage [shows that] it is possible to predict with a high degree of confidence a rise in the cost of gasoline, utilities, public transport, essential goods, basic foods and so on," the report said.
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Romania's planned public spending cuts
Romania faces a wave of protests against drastic cuts in public sector wages, pensions and benefits to secure more international aid for its recession-hit economy. Romania's inefficient, oversized state sector is a millstone on public finances. It employs 1.3 million people, a third of total employees, and its wage costs have doubled from 2004. State sector wages grew by an average 79 percent in 2005-2008, and bonuses by 136 percent, exceeding the private sector average. This puts the wage bill at 9.4 percent of GDP this year, which analysts say is double what it should be. Romania's president has said public sector wages would have to be slashed by 25 percent from June. The IMF says the cost cuts will probably lead to the loss of 250,000 jobs in the state sector over a number of years.
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Public and private sector wages, Ireland, 1998-2008
Public sector workers were paid more per year than their private sector counterparts, 30% more on average! As you can see, the gap has widened, not narrowed over the decade. In fact, in euro terms, it widened 8 years out of 10! And after the two years of greater private sector increases, there were huge increases in public sector pay the following year. Public sector pay is at least five years ahead of private sector pay. What public servants earned in 2003 took their private sector counterparts until 2008 to earn (in fact, they’re not even there yet, another €500 or so to go!). With the Live Register now rocketing towards 400,000 and private sector wages now stagnant, bonuses disappearing, total earnings in the private sector are falling. Therefore, according to the principle of benchmarking, so must public sector wages. As they are paid €50,000 on average, compared to average wages of less than €38,000 in the private sector, this won’t be the biggest economic calamity to befall Ireland this year.

Updated 9/30/10 (Newest Additions at End of List)