Thursday, 1 November 2012

Poor Greece... (Literally)

At last, the outline for the new austerity measures has been agreed with Troika and presented yesterday... Good news for Troika, horrible news for the Greek people. 

Greece's next economic model. So unfortunately true... Source: Wikimedia Commons
With the announcement of the austerity package came the announcement for a 48-hour general strike next week, when the measures are expected to be voted on the Parliament. The total monetary value of the austerity package is expected to be about €13.5 billion, the majority of which (€9.2 billion to be exact) is expected to be implemented in 2013. The package consists of a two-year increase in retirement age (from a current 65), pension cuts and even greater taxation. Greece is now waiting for the additional installment of €31 billion from the IMF and EU, without which the country will run out of money on November 16th.

As for the latest forecasts for Greece's indicators: unemployment will rise to 22.8%, government debt to 189.1% of GDP, deficit will grow from 4.2% to 5.2%, primary surplus of a mere 0.4% and an economic contraction of 4.5%! One cannot help but wonder what the outcome would have been, had the measures been lighter and Greece received the €31 billion installment. I guess things would have been better wouldn't they?

Now, pessimism will prevail in all issues of the economy, uncertainty will rule everyday life and with this, economic activity will take a larger tumble. One cannot understand the rapidity of movements concerning budget cuts. If the country was not already in a recession, then effects would not have been that great and rapid, harsh reforms could have been pushed through faster and will less implications. Yet, this is not the case.

Greece's lenders want their money back. That makes sense, but why do they need it now? When banks invest in government bonds, they either stick to their investment until maturity or try to sell it through the secondary market. It seems like Greece's lenders do not want either of these! Using the same rationale, banks should be allowed to force a man who has a contract for a 20-year housing loan, to repay them in 5 years! Now that seems to be a bit odd doesn't it? They say that markets know better. Well they do, and when a person goes to a bank and says "I cannot pay the remainder of my housing loan with the monthly installment this high" the bank does not force that person to take severe cuts in his life to repay it. Instead it refinances the loan for a longer period of time, with less monthly installments, making them both happier: the person can pay less per month and live better than before, and the bank receives more cumulative interest. 

Truth or Lies? Your choice. Source: Wikimedia Commons
The same idiotic reasoning holds with Schäuble's proposal for an all-powerful Commissioner to have veto rights over countries' national budgets. Really? Then why not have an all-powerful Commissioner to dictate policy in all matters of the EU? Or why not have that Commissioner draft the budgets himself? (for a great discussion on Schäuble's proposal read Protesilaos's article here)

Let's focus again on Greece: rapid solutions, especially in times of recession, cause extreme trouble. The US, after the collapse of Lehman Brothers in 2008 injected 3 Quantitative Easing packages in the economy. And the economy has only now started to grow. In comparison, Greece has only made budget cuts and reforms. I do not know whether the Troika has a "long-run plan" but the "short-term" consequences are horrid. And any recession which is expected to last for 6 years is not "short-term" any more. Remember Keynes: "In the long-run we are all dead"

A €13.5 billion package could have been easily broken up to fit a 3- or 4-year horizon. That way, the consequences from it would have been much softer. What difference does it make to Troika if a pensioner in Greece earns €600 or €700 a month? None. It only cares whether the country can repay its debt and that its lenders do not lose any money. Thus, why not have a longer horizon? If GDP rises, then it would make sense that income from taxes will rise too. Then, the debt-to-GDP ratio would have been lower and the country would be able to continue paying its interest and even imposing more reforms, tax increases or budget cuts GRADUALLY!

I guess the above plan was too difficult for the IMF, EU and EC "experts" to understand. If they can understand this then I would ask the Troika to let us know whether or not they are interested in destroying just specific economies (e.g. Spain, Cyprus, Greece) or the EU in general. Worst of all, the Germans, usually (supposedly?) people with patience and common sense, agree with them.

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