The Dismal Political Economist has commented earlier on Europe’s hell bent intention to act against its own best interests in dealing with Greece, Ireland, Portugal and maybe soon to be Spain.
Now the latest plan is for the Europeans to force
to sell off its state owned assets and use the proceeds to pay down debt. This seems reasonable, until you examine the proposal in detail. Then it looks like pure idiocy. Greece
To illustrate, let’s assume that
has $50 billion saleable state assets. Now the reason that these assets, various state owned businesses, would be worth $50 billion is that they earn a rate of return. If private interests value them at $50 billion, then the pre-tax rate of return is probably in the 16% range or above. This means these state owned companies throw off at least $8 billion in pre-tax income. Greece
If they are sold, and
uses the money to pay down European Community debt, they may save about 6% a year. This is savings of $3 billion on a $50 billion pay down. So at the end of the day Greece gives up $8 billion of annual income in return for savings of $3 billion. Immediately the country is $5 billion in the red, this year, next year, and each year forever. So Greece ’s ability to pay off future debt and reduce its budget deficit takes a huge hit. Greece
It’s nice to see
Europe has their best minds at work on the problem.