Thursday, June 16, 2011

Greece Descends Into Economic, Political Chaos –

Just What Exactly Did You Expect?

To the surprise of only the European Economic policy makers, Greece continued its economic, social and political decline to the point of where near anarchy reigns in the market place and in the government.  Here is a short background.

After joining the Euro Greece embarked upon a long period of fiscal profligacy and when the Great Recession hit the Greek government found that it would be unable to pay its debts as they came due and unable to borrow funds in the private sector.  Because defaulting on its debt would have been economically catastrophic not only for the Greek economy, but for the rest of Europe as well, particularly German banks that had loaned Greece a whole lot of money, the European Community, the European Central Bank and the IMF stepped in to provide Greece with emergency loans.

The plan was for Greece to reform itself, massively cut government spending and government employment, raise tax rates,  and even collect the taxes and that this action would bring the Greek economy back to growth, high employment, a budget under control and the ability to borrow funds in 2012 with which to pay back the emergency debts.

Now as any person who has ever passed Econ 101 with a C or better knew, this was a plan for disaster.  The policy described above produces a contraction in the economy, not an expansion, and The Dismal Political Economist called it Europe’s Non Lethal Suicide policy.   The results are exactly as Economics has predicted, an economy that is floundering, no chance that Greece can return to private debt markets, growing rather than shrinking defficits and the need for more and more European bailout money.

In return for that money the European leaders want even more Greek austerity, hence the story and picture in the WSJ today


ATHENS—Greece shook global markets, intensifying fears of a default, as tens of thousands of demonstrators protested a new round of budget-cutting plans and its prime minister offered to step down to try to preserve them.

Protests across the capital sometimes turned violent as Prime Minister George Papandreou sought an agreement with opposition parties on austerity measures demanded as the price of a new bailout by euro-zone nations and the International Monetary Fund.

When his offer to step down in favor of a unity government failed, he instead announced in a late-night televised address that he would reorganize his cabinet Thursday and then call for a vote of confidence in Parliament.

It is clear that the Greek populace will not tolerate more austerity, that the European community is clueless as to what to do, and that Murphy’s law is in force here (If things can go wrong, they will go wrong).  The Dismal Political Economist could be mistaken, but he does not think re-organizing the cabinet will be the solution here.

The Dismal Political Economist can only return to his previous recommendation that Germany buy Greece.  That does not look quite as far fetched now as it did then.

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