Can It Get Any Worse for Greece – Well Yes, Europe Could Give Them Even More Help

A Bailout is Supposed to Save the Boat, Not Sink It

Here is a chart that in one tragic picture shows the result of the European Union’s program of austerity to bailout out Greece and put its economy on a sustainable footing.

And here is a description of what has happened as a result of the policy forced on Greece by Europe’s stronger countries.

Greece was promised a heap of debt relief at this week's summit of European leaders. But there is little that looks like salvation. The debt crisis has spurred searing austerity measures that will continue for years, and are likely to prolong the country's recession. Bit by bit, Greek society is being stretched, and it is popping at the seams.

How bad is it?  This pretty much sums things up.

The small businesses that form the core of the Greek economy—and the bedrock of the Greek middle class—are closing. The poor are becoming poorer. The fiery street protests are turning nastier. Friday, demonstrators in Thessaloniki, Greece's second city, blocked an annual military parade and jeered the Greek president, who left the scene.

And what is the purpose of all of this?  It is to reduce and ultimately eliminate the Greek government’s budget deficit, so that the existing debt owed by Greece to Europe’s banks can be repaid.  This goal is fantasy, it cannot be accomplished in the short term, and it cannot be accomplished in the long term if Greece’s economy is not growing.

Greece's debt currently equals 164% of its gross domestic product. Even if things go according to plan, Greece's debt will fall to 120% of GDP in 2020—twice the EU's limit and roughly where troubled Italy is now

 

Do the math.  In order to reduce Greece’s debt as a percentage of GDP, the growth in debt will have to be less than the growth in GDP.  But GDP is shrinking not growing, which means the only way for the ratio of debt to GDP to fall is to have the debt fall.  And the only way to have the debt fall is to run a surplus.  But the only way to run a surplus is to drastically cut government spending and raise taxes, which will cause GDP to fall even more.

The current plan is for banks to take a 50% reduction on the face value of Greek debt.  This will reduce the debt, but will have no impact on the cause of the debt which is a slow growth or shrinking economy that produces a budget deficit. 

It is one thing for Greece to suffer in order to have a long term viable economy.  But at this point there seems to be no way for that to happen.  And a society with close to 50% youth unemployment is never, ever going to be able to repay its debts.