Realist, not conformist analysis of the latest financial, business and political news

That EU Solution For Greece Is Still Failing

Another proof that friends don’t let friends stay within the European Union. That rescue of the Greek economy, as planned by the European Union and the eurozone, is still failing. And it’s doing so for a reason that was identified way back when, right when the first proposals were put before us. The costs to the well being of the Greek people are just too large. Actually, they’re at levels that no democracy will support over the long term. So it’s not just that the costs are too high, it’s that they won’t be carried for the length of time required.

Greece has been urged to cut taxes and increase government spending amid claims years of austerity risk undermining its long-term economic prospects.

In a stark turnaround the debt-laden government in Athens has achieved an unexpectedly large primary budget surplus of 4.2pc in 2017 and is on course for another of 3.5pc this year.

As a result its finances are on a sustainable footing for the years to come.

But the International Monetary Fund said this risks sucking too much money out of the economy, paying down debts at an excessive cost to workers, businesses and those in poverty.

A primary budget surplus is collecting more in taxes than government is spending, disregarding interest and debt repayments. The thing is, running one might be a good idea at times, but there’s a limit to what is either sensible or that people will support. The long term result there being rather lower than the short term. We’ve not in fact seen anywhere run a primary budget surplus of 3 and or 4% of GDP for years on end. Politics just doesn’t allow it, people see too much of everything everyone does going off to pay the capitalists who own that debt. Even if it’s not capitalists they still see it as being their effort they’re not benefiting from.

Hmm, actually, it has been done, by Ceausescu, and they shot him for it.

To repeat the basic problem. Greece borrowed far too much money, to the point where the debt couldn’t be repaid on the original terms. The EU/eurozone stepped in and nationalised that debt. What was owed to – largely – French and German banks was replaced by state to state loans in that rescue package. What was owed to the more general savers and capitalists out there was haircut, people were simply told they’d lost much to most of what they’d lent.

That huge debt burden is now owed to other governments and governmental organisations. Who won’t, for their own political reasons, reduce the headline amount. They don’t want to tell their own voters they’ve lost it. So, the burden remains, the repayment terms stretch out most of a century and the interest rates are spit. But the burden still remains.

To pay that burden requires this sort of primary surplus. 3 and 4% of GDP. And not just for a year or two to get them over a hump, but for decades stretching off into the interminable future. At which point enter some more politics. The IMF has, all along, been saying the debt relief is going to be necessary. Those eurozone governments are going to have to write off some of the capital, admit to their voters they lost all that money. The reason being? That 3 to 4% primary surplus just isn’t sustainable over time. Someone’s going to get elected at some point promising to free the people from that millstone around their necks. And enough people are going to believe them at some point too.

All of which is the background to what is happening here. The basic truth always having been that debts which cannot be repaid will not be repaid. The Greek solution was always default and devaluation – yes, that means leaving the euro – and the varied papering over of cracks hasn’t changed that in the slightest.

It really is possible to have too much austerity and the EU is imposing that too much upon Greece. Bully for the EU, eh?

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5 years ago

If so, there seem to be several implications: (1) Massive government debt (mostly to finance current spending, even if politicians call it “investment”) will never be repaid, because doing so would invite class-warfare demagoguery and politicians would not go through with it. (2) Keynesianism would work fine except for the half of the time in which the state is expected to run a surplus to pay back all that useful deficit spending. (3) What’s ours is ours; what’s yours is — negotiable!

5 years ago

So it’s a primary surplus meaning disregarding interest and debt repayments, and it’s about 3-4% of national income. Let’s look at how that national income is worked out then. Oh look, about 2.5% ( round numbers ) is transfers from the EU, the EU’s highest farm subsidies, convergence funding etc, so not actually a cost to Greeks, apart from the cost of having to remain EU members of course. So really we have a surplus of 0.5-1.5% of national income in terms of trying to measure this as a burden on people living in Greece paying taxes and generating wealth.… Read more »

5 years ago

I assume if the EU channels funding to Greece through other programs it can effectively end up paying off its own debts by freeing up local resources. Just the sort of shady Backdoor method that will appeal to the Brussels crowd

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