Greece Gives Finger To Germany?

It may be starting….

(Reuters) – Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.

“There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that’s enough,” the source said.

That’s not going to work out very well.

There are many reports that Greece is “close” to a debt deal on the swap and release of the next tranche of funds from the IMF, but if it includes this provision I bet it blows up.  There are already rumblings that it has, with the BBC reporting:

Greek officials have reacted angrily to a leaked German proposal for an EU budget commissioner with veto powers over Greek taxes and spending.

The Greek government said it must remain in control of its own budget.

The European Commission says it wants to reinforce its monitoring of Greek finances, but Greece should retain sovereign control.

Meanwhile, Greece and its private investors are close to a deal which will pave the way for a second bailout.

Negotiators say a tentative agreement could be finalised next week.

Uh huh.  The two are linked folks, and Greece is not going to give up budget sovereignty.

The only solution is for Greece’s government to quit spending more than they take in via taxes — that is, stop deficit spending.  This is the same problem around the world.

What is not understood among most people is that bankruptcies (defaults) among borrowers and thus recessions are necessary any time capital can be lent out at interest.

This is simply due to the fact that two exponential (compound) functions, such as growth of output and growth of debt, must always over time run away from one another.  If debt grows faster than output it will always eventually lead to insolvency.

That is a mathematical fact and there is nothing that can be done to prevent it.

Therefore, governments should not, in the main, borrow at all and if they do then lenders must accept the risk that such borrowing is unsecured and from time to time will lead to defaults and losses.

Until this recognition occurs and the price of lent capital reflects this fact — that is, “sovereign debt” stops being considered a preferred investment (preferably by ceasing to exist!) we will not find a solution to the problems that face the world economy.

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