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.