Drastic Economic Measures

Whilst the UK is slowly struggling out of recession – spare a thought for Greece, who are experiencing a real economic crisis – partly of their own making – and exacerbated by the straitjacket that EURO membership entails.

The Greek economy has several significant problems

  • Current account deficit of 14% of GDP – their exports just aren’t competitive – and they can’t devalue, since they are in the EURO
  • Government borrowing has increased sharply – public sector debt is now over 100% of GDP and still increasing.
  • The market fears that the government borrowing is becoming at risk of default. Therefore, it is becoming difficult to sell bonds. The bond yield on Greek bonds reached a peak of over 7.1% last week – compared to 2.3% on German bonds.
  • Economy in recession.

To deal with the Greek Fiscal deficit, the EU are putting pressure on the Greeks to:

  • Cut Nominal Wages in the public sector
  • Cut other areas of government spending.
  • pensions cuts,
  • a rise in the retirement age,
  • a fuel levy and luxury taxes.
  • EU Toughens Measures on Greeks

The Greek premier, Mr Papandreou, has agreed to cut the budget deficit from 12.7pc to 3pc in three years, but it is uncertain whether he will have political will or political capacity to push through such a politically undesirable set of policies.

But, it is not just political difficulties. The Greek economy is already weak, suffering low growth, high unemployment. The latest figures suggest GDP falling by -0.4% Q3/Q2 2009. Inflation is very low at 0.5%.

If the Greeks pursued the policies suggested in the draft EU policy it would lead to a large deflationary effect on the economy. Growth would fall further, and the economy would be very likely to slip into a very dangerous period of deflation.

Furthermore, by strangling the economy through higher taxes, wage cuts and spending cuts, tax receipts will fall and there will be a rise in unemployment benefit spending.

From an economic perspective it looks a very dangerous policy prescription.

If I was Greek I would be desperate to see the economy leave the EURO, devalue the Greek currency and pursue an independent monetary policy.It seems that being in the EURO, the biggest target is reducing government borrowing. But, the biggest problem is the recession, and unemployment. Unless growth is gained, it will be very difficult to tackle the fiscal deficit anyway.

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4 thoughts on “Drastic Economic Measures

  1. Who is paying for capitalism’s worst financial crisis and slump since the Great Depression? The bill for these losses is now being presented to people through increased taxes, reduced public services and rising job losses, whether it is in the large G7 countries like US or the UK, or the smaller capitalist economies like Iceland, Greece or Latvia .

    The people of Iceland were told by their new ’socialist’ government that they would have to pay back about €4 billion (almost 50% of Iceland’s 2009 GDP) to the British and Dutch governments that Iceland’s rapacious banks had lost through investing abroad and betting in credit markets. This would mean a vastly increased tax burden lasting for the next ten years. No wonder Iceland’s small population rebelled and demanded a referendum to reject the deal that the government made on their behalf. On 6 March, Icelanders will tell their government where to stick the agreement.

    The Greek people also face a disastrous situation. Ironically, Greek banks did not get into very serious trouble like the British, Dutch or Icelandic ones did. But because the financial crisis spread across the globe and the Great Recession that followed was so deep and pervasive, Europe’s financial institutions are no longer willing to finance Greek public services, something the European Union has done for more than a decade because Greek capitalism itself is so weak and unproductive that it could not do it alone.

    Successive Greek governments have tried to avoid slashing public sector jobs and wages because they feared the backlash from Greeks trying to preserve their living conditions. But now the jig is up. The centre-right Greek government was heavily defeated in a recent general election and the ’socialist’ PASOK government came into office, only to find that the public sector now ran an annual deficit of spending over income of 15% of GDP and an outstanding debt of over 130% of GDP. In effect, the government was bust.

    The other EU governments, led by the conservative German government, are now saying the Greeks will receive no more gifts. Instead, they must make huge cuts in public spending, raise taxes, sack employees, cut wages and raise the pensionable age. In effect, they are demanding that Greek families take a 25% cut in their living standards over the next five years.

    This is a countdown to the devil for Greeks. The Greek people have done nothing to deserve this and yet they must pay heavily for the failure of capitalism.

  2. I live in Greece. One of the people who commented mentioned that Greek citizens have done nothing to deserve what is happening to the economy. This is half true. The governments lack of responsible fiscal policies have created part of the problem, the other part is the standard of living here. In no other country do people make so little and consume so much. The majority of the country is driving around in Mercedes & Porche, taking exotic vacations, spending lavishly on everything you can imagine. And this fairy tale life has been going on for years. Behind everything there are credit cards and loans, smoke & mirrors. Fairy tale is over, reality is coming !

  3. This is the most moronic article you have written inthis blog and particularly the last part “If I was Greek…”. If Greece left the euro, the next day the markets would lead Greece to bankruptcy. But ofcourse you are so eurosceptic that you can’t see anything beyond that.

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