The German Problem

The Greko-German dispute over bailout terms has worsened in recent days, with the Greek Justice Minister threatening to seize German property in Athens to pay for alleged unpaid WW2 reparations.

To many in the UK, and certainly in Germany, this may sound like the posturing of a spoilt and ungrateful child. The reality is that, whilst bringing up Nazi crimes is irrelevant and an exaggeration of current Greek turmoil, Germany's demands of austerity have imposed colossal welfare costs upon the Greek people.

The conditions attached to extending Greece the EU's loan facility have largely been driven by Germany. France, the second-greatest power in the Eurozone, has taken a more liberal view of the requirements that ought to be placed on Greece, saying that Greece's primary budget surplus is open to discussion.

The requirements that Germany has placed on Greek are unprecedented. The UK's fiscal austerity, criticised as it is by economists for being too draconian, has amounted to 3.5% of GDP between 2009 and 2014, whilst the Greeks' has shrunk by 19.7% of GDP, more than five times as much! In 2010, meanwhile, Merkel called her plans to implement a mere 1.5% fiscal turnaround by 2014 an "unprecedented feat". I wonder what the Merkel of 2010 would have said about a fiscal turnaround of 19.7% of GDP...

The double-standards, however, are probably not a major concern for most Greeks, as most of them are too busy trying to earn a living. 44% of Greeks now live below the poverty line, up from 2% in 2009, and 26.9% are unemployed, more than during the Great Depression in the USA.

The German hypocrisy is even greater when you take into account the fact that Greek membership of the Eurozone has been instrumental in facilitating German economic growth since 1999. By running a trade deficit Greece, along with other countries like Spain, applied depreciating pressure to Euro. The trade surplus Germany was running would have caused the Euro to appreciate had it been in a monetary union without Greece. In other words, Germany's trading competitiveness came at the expense of Greek uncompetitiveness.

The blame for this does not necessarily lie with Angela Merkel, Wolfgang Schauble, or any other German politician. The cultural transition which now allows Germany to see itself as a victim has come at an inopportune moment for Greece, as the German public apply pressure on its political leaders. In the 20th century, Germany was far more shy and apologetic, keen to throw off its Nazi past. In the 1990s, when former Communist countries like Poland applied for NATO membership, Germany was vocal in expressing its support. This was partially the result of war guilt.

The Germany of the 21st century is a very different country. It now has both the means and the will to persuade and force change. Unfortunately for Greece, the double-standards Germany has enforced upon it has been devastating for its people. If kinder terms are not agreed, Germany will be responsible for a generation of Greek sorrow.

Breaking: Democracy Makes Budget Less Bad than Otherwise

Today George Osbourne announced the final budget of the 2010-2015 parliamentary cycle. Let's make no mistake, the coalition government's economic plan for the country is still wrong. However, it seems to be less wrong than before. Below I have highlighted some of my thoughts about the pros and cons of this budget.

Political Opportunism

This was a slight pro. The predictions of huge pre-election giveaways turn out not to have been true. Sure, there's the promise of raising the 40p tax rate at a rate slightly higher than inflation, and the tax breaks on savings will primarily help the old and affluent who actually have savings (9m people have little or none), but there was nothing on the scale of the pensioner bonds that were given away a few months ago. I'm going out on a limb here, but it's entirely possible that this is the result of the public and media pressure applied to George Osbourne, which resulted in him promising no additional giveaways three days before the budget. The cynical view is to say that he had already given away all that he needed to. Either way, however, there was a noticeable lack of clear pre-election giveaways.

Planning for Future Giveaways

However, as I suggested may be the case in my previous blog, the trend towards planning future giveaways seems to be in full swing. The announcement that austerity will end one year early was encouraging (but it still didn't loosen fiscal policy anywhere near enough, and cuts to public spending will still be far greater than what Labour propose), though it is now timed so that public expenditure can start rising from 2019, laying the groundwork for a pre-election boom for 2020.

Helping the wealthy
No Tory budget would be complete without helping the best off. The giveaways are small and, by lowering the the amount that people can accumulate in their pensions tax-free, not all the policies help the wealthy. However, 'helping the savers' is equivalent to helping people who have savings, who tend to be middle-aged or older, and relatively affluent. As Piketty has highlighted in his recent book, this is the exact opposite of the types of measures which would lead to lower inequality (I will blog at some point about why that is important). Likewise, raising the threshold on the 40p tax rate above the rate of inflation has not happened for a few years; the Tories are clearly trying to tie in their core support before what will be an incredibly tight election.

Shafting Labour
No politically sensible budget would be complete without something to stick it to the opposition. The bank levy makes the Tories look progressive. Also, Labour previously announced that they would lower the lifetime allowance of accumulated pensions in order to pay for a tuition fees decrease. Now that the Tories are implementing this, they can ask Labour their favourite question during the campaign; "Where will the money come from".

Helping the 'Northern Powerhouse'

Some moves were made towards increasing the role of the north as a tech hub to compete with London and Cambridge, though the amount of funding offered was still fairly small. Most of the infrastructure commitments were the same as those promised before, including a reaffirming of the promise of HS3. One promising move includes money for the creation of incubators in Sheffield and Manchester, which should help to stimulate the innovation and productivity that the UK sorely needs.

Maintaining the Status Quo

The general takeaway from the budget should, however, be that not much has change. Osbourne has lifted his foot a millimeter off the austerity accelerator pedal but cuts in the next parliament will still be unprecedented at around £30bn. The changes in income tax thresholds and tax breaks on savings are fairly small in magnitude, as is the bank levy and lifetime allowance for pensions savings that can be accumulated free of charge.

In other words, Osbourne has produced a cleverly uncontroversial budget which provides him with a few points of evidence that will allow him to say "Hey, look, the Tories aren't so bad". Expect to hear the Tories droning on about how socially responsible the bank levy is. Also expect them to talk about how Labour are offering nothing new, after nicking their policy of lowering the tax free pension accumulation allowance. In short, a politically savvy budget.