Drifting west again, three European economies have grabbed the headlines for the same bad reason – they are broke. Each enjoyed massive booms during the heady days of the last decade and each economy came crashing down in the wake of the GFC. However the different ways they are responding to the issue of private banks racking up huge bad debt is instructive of the level of capture of their respective governments by the banking sector.
The responses of Ireland, Latvia and Iceland are interesting case studies in public choice theory.
Case one: The Irish. Long time cannon fodder of the British Empire, the Irish can be expected to take one for the team pretty much on demand. True to form, they have nationalised private bank debt, firstly by guaranteeing those debts and now with the issue of government bonds for near worthless toxic assets.
To pay for this, they have crushed their public sector salaries, raised taxes and slashed benefits including €760 million from social-welfare programs. The plan is destroying the average Irish citizen, however its winning praise from the financial world for its prudence.
Case two: Latvia. The Latvian government, perhaps just so grateful to be out from under the Soviet thumb, implemented harsh austerity measures following the collapse of the Latvian property bubble. Teachers’ pay was cut by a third, taxes raised and public services cut so drastically that they couldn’t even clear snow from the streets in Riga in the middle of winter. These measures sent 26% of the population into poverty.
But the good news is that Lativa might pay off its foreign creditors 100 cents on the dollar, so happy days...right?
However, just maybe, the Latvians are not as captured as the Irish. Yesterday a major partner of the ruling coalition walked out over the next round of tax increases, at least delaying if not preventing further austerity measures.
The sudden development of a spine in some members of the Latvian parliament might have something to do with the work a group of naughty techies who hacked the tax records of some of the most wealthy in the country and released them on Twitter.
Seems that the average worker finds it hard to understand why they take a cut when the bosses get bonuses.
Case three: Iceland. The Icelanders have a long and proud tradition of telling major countries like the UK where they can shove it. Back in the 70s they sent their tiny navy out to defend their fishing zones from the British and successfully stared down the Royal Navy. So it really came as no surprise that Nordics have shown the least interest in destroying their economy to save foreign creditors of private banks.
A polite enquiry from the UK and Dutch governments as to whether the good people of Iceland would cough up €3.8 billion to cover investor losses in those countries following the collapse of their Icesave accounts was met with and equally polite rejection by 93.5 per cent of voters in a referendum last Saturday.
Now I’m not saying that the Icelanders will get away with thumbing their noses at the Brits and Dutch; the IMF is holding a gun to the Icelanders’ heads by threatening to exclude them from global credit markets if a deal can’t be done. However, the very fact that they haven’t just rolled over like a beaten dog, shows some courage on the part of the Icers.
Its my contention that Ireland’s government has been effectively captured by the banking sector to the point where the ordinary citizens must pay for the excesses of the banks. Latvia’s government was well on the way to capture until an intervening hacker revealed the inequity of the bail out. The Icelanders, on the other hand, put it to the people and the people said “No thanks, generally we get chocolates and flowers before we let people do that to us”.
Lets hope the people of Iceland can hold out, at least for a nice meal and a movie...