As the Greek economic crisis continues, it might be worth pausing to consider another downside, which is the world is not quite as robust economically as some might think. We have now had record low interest rates for quite some time, and only too many have become used to them. In New Zealand, the problem is housing and businesses carrying too much debt. Yes, debt looks very enticing when interest rates are low, but if the person is fully committed and is carrying as much debt as he can afford, then if income drops, or interest rates rise, then they cannot pay. Greece is in this situation now. It had far too much debt in 2008, and by 2010 it was in trouble. The Europeans, and particularly Germany, insisted on austerity. They paid the interest through advances that were added to the debt, which did Greece no good, but the GDP also contracted by something like 25%. Now, as an example of the problem, suppose both your debt and your total income (or GDP) is 100 units, and let us say you repay 5% interest. Now, someone gives you 20 units to repay the 5% over the next four years, at which point you owe 120 units, and at 5%, that requires 6 units per annum. You may notice you are three units short from the initial loan. Now, suppose out of the nation’s 100 units, your tax collects 25 units per annum, where before 20% of your income went on interest, now it is 24%. But, now, thanks to austerity, your GDP has collapsed by 25%, so now your tax collects only 18.75 units, and interest repayments are now 32% of your income. But a large number of your costs are the same. So, how can you get off this death spiral? The figures are very favourable, as the interest being charged on Greece is probably closer to 10% and the debt is a much higher fraction of GDP.
There is another important point behind these figures. As represented, above, the real debt total has not increased, other than through the money offered as “help”. In other words, the “help” coupled with these austerity conditions inevitably lead to economic death. It is just simple mathematics.
But Greece could grow its economy, you say. They should get to work and stop being lazy. Anyone who says that should specify what work they should do. Youth unemployment in Greece is currently running at up to 60%, and that is not because the young are lazy, but nobody can afford to hire them. Productivity is too low, and the reason lies in the nature of the Greek economy. Unfortunately, Greece has few natural resources and it has a relatively poor educational system. The net result is that it lacks technological advances, and with few resources, it has few exports. Even agriculture has its problems because the Greek terrain is not exactly the best. So any exit plan from this crisis has to either write off a lot of debt, or get a number of new industries or means of earning money externally.
Some say, sell assets. Greece still has some islands and ancient monuments. My view on that is, if you have a severe case of typhoid, it does you no good to cut off your legs. If you are ever going to get back on your feet, you need feet to get back on. As for the German case that the Greeks should pay their debts, it should be recalled that Germany has defaulted seven times since 1800. Even if they bleat and say (correctly) that at least some were due to the requirements of the Treaty of Versailles, and was imposed on them by rapacious foreign governments, then they might recall that now as they deal with Greece. They might also recall that in 1950 Greece was one of the countries that let Germany off its latest default. They might also recall that some of Greece’s current debt was incurred to save German banks from the consequences of their follies. But don’t bet on a generous outcome.
Greece has voted to avoid increased austerity. Greece has argued the only way to repay its debt is to increase its GDP. It cannot do any more; it needs help, or it needs to exit the Euro, straight away. In my opinion, the best option is for Greece to exit the Euro, but stay within the EU, and the sooner they get on with it, the better.