The Greeks are having a hard time right now. Yes, in the past their governments have made some fairly poor decisions, and from what one gathers, the wealthy Greeks made an art form of tax avoidance. However, their main problem arose on entering the Euro zone, when their economic problems were significantly massaged by major US banks, which put the problems off balance sheet for the moment. Now the government at the time was clearly at fault, but the banks that did the massaging must hold equal or more blame, and the European community was not blameless either, because they should have checked things for themselves. If the Brussels bureaucrats could not work out the true financial status of Greece, why were they getting those high salaries?
In 2010 and 2012, Greece accepted hundreds of billions of euros from European creditors. This was not the gift you might imagine, as its major purpose was to pay back the major northern European banks that held the debt. Greece got very little, but the banks had their hides saved. My question is, why did the banks make such loans in the first place? Nevertheless, the banks were protected, and the money used was added to the Greek debt. The economic wizards within the IMF and in northern Europe presumably predicted that austerity would lead to substantial growth, and the debts would be repaid, despite interest rates approaching 10% when the same economic organizations were seeing central banks issuing loans approaching 0% interest.
What eventuated was a tragedy for Greece. According to Time magazine, Greece lost 26% of its GDP through austerity, child poverty rate is over 40%, about 20% of Greeks cannot afford proper food, while their attempts at improving their situation through austerity has led to spending cuts and tax increases of 30%. Pension qualification has risen to 67. Yet thanks to the very high interest rates and the collapse of the Greek economy, the debt problem has risen by 75% or thereabouts since 2008. That austerity simply has not worked.
So, what now? Had Greece received the 7.2 billion euros, that money will be added to Greece’s debt, and almost all of it would have been used to repay the IMF in June, and the ECB paynments due in July and August, at which time the same problem will re-emerge, but 7.2 billion euros bigger.
So, what could Greece do? They proposed some reforms that included raising taxes on the rich. Brussels rejected that immediately. You can’t tax the rich! Why not? The official answer is, it would suppress growth, but there is no evidence of any growth arising from investments by the rich, so that hardly counts. I suppose there is an argument that it would not do much good anyway, because the rich probably don’t pay taxes in Greece. If they are really rich, no doubt they are registered in the Caymans, or somewhere else.
But for me, I am still of the opinion that Greece should default and leave the euro zone. It does not export all that much to Europe anyway, and its major industries are shipping and tourism, neither of which is likely to be affected. Agriculture is only about 3% of its economy, and this is probably largely consumed internally. There is no doubt there would be acute problems for Greece then, but right now they have severe problems. I support the first law of holes: if in a deep one, quit digging. If the problem is nearly twice as bad after 6 years of austerity, how is more austerity going to help? Any move made must lead to an improvement in the longer term. And it is not as if the rest of Europe will invest in Greece and start new business. Nope, they go to Asia, for cheaper labour and no Brussels imposed regulations.
If they do this, there is no doubt it will go badly for Greece. The real question is, if they don’t, will it be better or worse? The mathematics are quite clear. The debt is growing exponentially, and it is almost certainly past the point of possible repayment. Greece has not got the capacity to support such loans, so the only question is, what medicine will it take, and when.
Having written that, I have just seen an article written by the Nobel laureate in economics, Joseph Stiglitz. You may say, what do I know about economics, but you cannot say that about him. Three quotes from the article follow:
(1) “The Greek economy has been undergoing unconscionable torture at the hands of its European creditors.”
(2) “The economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and has had such catastrophic consequences.
(3) “It’s not about money. It’s about using “deadlines” to fore Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies.”
I rest my case. At least for a week.