Tom Sgouros: Why is Greece like Central Falls?
Monday, September 26, 2011
A few weeks ago, a couple of reporters from a French television station interviewed me at my house. They were here recording interviews with various people about bankrupt governments, and since I can't seem to get Central Falls off my mind, they found me through the magic of Google.
As I talked with them, I understood the reason they were so interested in bankrupt US cities (Central Falls, Vallejo, CA) is because the European Union is facing a similar situation, with entire countries at stake. Greece, of course, is the closest to the edge, and the parallels between its plight and that of Central Falls are positively eerie.
What parallels, you ask? Actually I'm not talking about the power of labor and the incidence of corruption in Greece, or in Central Falls. I'm talking about the way the real problems of both governments are hidden under vast mountains of sanctimony, exuded by people who ought to know better, and who could actually help, if they did.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTWhen the nations of Europe were bundled together into their monetary union, they made it a lot easier for anyone to move money around the continent. That was the whole point: allowing people in Germany to buy Spanish goods without having to change currency. The hope was that the continental market would create all sorts of wonderful new efficiencies and lower prices for everyone, and they'd all live in a free-market paradise for ever after.
But it hasn't quite worked out that way. For one thing, currency union meant that Spanish goods were available to German consumers, but it also meant that German banks were available to Spanish consumers.
500 million speculators
One of the important consequences of the global financial meltdown has been capital's "flight to quality." All over the world, investors big and small have decided that now is a pretty good time to take on as little risk as possible. So they vote with their money. and ten-year US bonds are currently paying what is effectively a negative interest rate. People are paying us to hold their money.
So look at Europe again. Instead of thinking of the EU as 500 million people, think of it instead as the home of 500 million speculators, all of whom can engage in international bank risk arbitrage. Euros are flowing to where investors perceive the least risk, and right now, that's Germany. The flow is fastest from Greece, since the perceived risk is higher there, but it's flowing as well from Spain, Portugal, Italy, and even Ireland, until 2009 the darling of free-market zealots everywhere. Even France is feeling the heat, and its banks are under a surprising amount of pressure. Some of those nations had balanced budgets, which is apparently irrelevant. All it takes is a perceived difference in risk, and the money flows. And the more that flows, the more risk, and the flow rapidly becomes a crisis.
Greece (and its banks) had to raise interest rates to stem the flow of money, and since Greece had a lot of debt, they suddenly had a debt crisis. It's not to say the Greeks are blameless; their economy was never very vigorous and there was too much debt, much of which was taken on with artifically low rates of the early Euro years. Still, the proximate source of the crisis was in the worldwide financial meltdown and the lack of planning for financial crisis shown by the elites who designed the monetary union in the first place.
And here, the parallels with Central Falls are nearly perfect. Though not completely blameless, Central Falls is primarily the victim of decades of encouraging (and subsidizing) suburban growth. As people voted with their feet, Central Falls property shrank in value until the city could no longer support its services. In response to the Greek crisis, the European Central Bank (ECB) has vigorously done pretty much nothing except insist that Greece repay its debts. In response to the crisis in Central Falls, the state of Rhode Island has been equally vigorous in doing pretty much nothing beside forcing them to use the Governor's choice of receiver, and insisting they repay all their debts.
Whose problems are these?
Greece has been told that their problems are theirs alone and so has subjected itself to brutal budget cuts with no end in sight, riots resulting. Similarly, Central Falls is also being forced to solve its own problems, and so no longer has a municipal library or community center, and will soon be giving up a police chief, a large number of police and firefighters, and much more. (No riots, as yet.)
Worst of all, though, is the parallel lack of a solution. By refusing to admit any responsibility for the Greek crisis -- not to mention the crises in Spain, Portugal, Italy, and the rest -- the ECB governors guarantee the problem cannot be solved without endangering the whole monetary union. Greece can only impoverish itself just so much, but the logic of the ECB approach demands much more.
By refusing to admit any responsibility for the Central Falls crisis -- not to mention the crises in Providence, Pawtucket, Woonsocket, Cranston and so on -- the Assembly leaders and Governor guarantee the problem of funding urban areas will continue to fester and grow. Central Falls can only impoverish itself just so much, but sooner or later, it won't be enough. The solutions on the table don't reverse the trends, they just make Central Falls weaker. Without addressing the underlying causes, eventually, the "solution" in Central Falls will fail, just as the "solution" in Europe will, too.
Many of us look at this kind of thing as a morality play, that somehow, governments that make wrong choices need to be punished. But that's not the way the world works. In both these cases, elites have made bad choices, and have shied away from taking responsibility, with the result that actual solutions can't be discussed, only band-aids. And in both these cases, the elites will not be hurt, only the people who did no wrong.
Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
If you valued this article, please LIKE GoLocalProv.com on Facebook by clicking HERE.
