Bitter Fruit of Austerity

20 August 2018

 
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Cogito Ergo Non Serviam

Greek Bail-Out Sort of Ends

 

Today, the Greek financial nightmare is over, in some senses. The nation has completed a three-year eurozone emergency loan program with about 62 billion eurod. All told, the country got 289 billion euros to fix its accounts. Starting now, Greece can borrow in the international financial markets. That means technically the nation is back on track. However, the economy is 25% smaller than it was in 2010, and unemployment is still 19.5% (down from 28% at peak awfulness). Debt-to-GDP is still 180%, and the government must run a 2.2% surplus (before interest payments) until 2060. Greece is still a mess, and some of those who made it so get off scot-free. 

When the euro replaced the drachma, Greece was able to borrow in the same currency and an about the same rates as Germany and other fiscally disciplined nations. Like a youngster with a first credit card, Greece spent freely thinking it was magically as solid as Germany. One can blame the kid with the card, the Greeks, and blame does belong there, but not all of it. The banks that hand out the credit cards, that lent to Greece so freely, may not have engaged in the necessary due diligence. By 2010, French and German banks had loaned Greece 119 billion euros.

That was not the whole story of course. The so-called PIIGS nations (Portugal, Ireland, Italy, Greece and Spain -- sometimes referred to as the Periphery) were also in hock to the same banks. The entire amount was 900 billion euros. The fear was contagion, that if Greece failed, the rest would go. Losing close to a trillion euros would have crippled the banks and the governments in Paris and Berlin. So, Greece had to be saved, painfully. If the Greeks were just bailed-out at no cost, the problem would recur, or so the power that be in Europe believed. The Greek bail-out scheme existed to buy the French and German banks time to rebuild their balance sheets.

Deutsche Welle wrote on its English language this morning, "It would not have been possible to restore Greece to financial health without imposing very strict constraints. The country had to drastically reduce its excessive expenditures. People had to go without being paid. The economy shrank. All these hardships were unavoidable because things could not have continued as they were: a life lived on credit. With hindsight, however, the cuts should have been structured to be more bearable for society." This journal agrees with the last sentence only.

The people who suffered most (and who still suffer today) are not the same people who ran up the Greek debt. It's easy to pick on the man who retired at 50 on a full pension, and all those like him, but the real culprits were those who borrowed in the millions and stashed the cash off-shore. Those rich enough didn't pay taxes, which always creates financial challenges for a government.

The EU has learned from its experience. As DW also wrote, "A bailout fund has now been contractually established and provided with sufficient capital. Procedures now work more smoothly. The European Union is better equipped to deal with the next crisis. Despite the death knells being rung by those who have an interest in seeing its demise, the European Union will deliver."

That is all to the good. However, Greece paid the heaviest price and will continue to pay it until 2060. Running 2.2% surplus is all well and good when the economy is booming. That's what economics says a government should do. Growth under 3% with one in five out of work is hardly a boom. Greece continues to be denied the correct reflationary policy option.

Tim Worrel wrote in Forbes more than two years ago, "the underlying structure of the Greek economy is such that it just couldn't take advantage of the meagre benefits that austerity did provide." The Greek economy is mostly small firms. Small firms don't export much. Austerity presumes massive exports. Instead, a Greek child born today will be 42 when austerity truly ends, if all goes right.

© Copyright 2018 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.


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