How Much More Can Greece Take?

It has been said that those who cannot remember the past are condemned to repeat it. It has also been said that someone who repeats the same action over and over, expecting different results, is an idiot.

If so, the EU Commission is a bunch of condemned idiots.

Sorry for the colorful opening, but just when the Commission has started talking about backing off austerity, they are forcing Greece to put to work perhaps the most devastating austerity package to date. Without even a hint of remorse over the past, blaming instead the negative results of previous packages on “mistakes” by the Greek government, the Commission charges ahead with demands that Greece cut away 6.5 percent of its GDP in the next austerity round.

I am not even going to attempt to predict the social, economic and political fallout of this complete fiscal madness, though it might be a good idea to remember that in last year’s Greek election the Nazis returned to the European political scene. I will say this, though: the Germans tried a decade of austerity during the Weimar Republic. Greece is now six years down the same path.

Before we get to the report on more Greek austerity, let us first note a new report from Pew Research Center. It presents some seemingly bizarre data, showing that a majority of Europeans still support austerity:

The countries still backing cuts over spending included Italy and Spain, which are both in the grip of prolonged recessions made worse by their efforts to bring down government borrowing. On average, 59% backed further austerity in the survey, against 29% in favor of more spending to stimulate the economy.

You would expect the victims of austerity to demand something better. But in order to do so the Europeans would have to know of an alternative – and it does not exist in their world view. For a good decade now, the public policy debate in Europe has been almost entirely lopsided in favor of austerity. Everyone from leading economists to political leaders to business leaders have been telling the public for years that the alternative to austerity is Hell on Earth.

When people see no alternatives, then after a while they tend to believe that there are indeed no alternatives.

Besides, the very issue of austerity is technical in nature and not likely to stimulate the average Joe to go off looking for alternative views on his own.

One would think that the hardships suffered in, e.g., Greece and Spain would be enough to make the general public back off from austerity. After all, the benefits they have been promised from austerity never seem to materialize. This is a valid point, but at the same time, history is full of examples of man’s ability to accept and endure hardships in the name of some abstract goal. It will probably take an entire generation before Europeans start questioning the changes for the worse that they are now living through.

With this in mind, it is easier to understand why Greece – ground zero of European austerity – is entering yet another cycle of fiscal torture. From Fox Business:

Greece is on track to meet its budget targets this year and next but may have to make further cuts in 2015 and 2016, the European Commission said in a report that will provide the basis for a decision Monday on whether to release more bailout loans for the country. The report sums up the findings of the three institutions overseeing Greece’s bailout–the Commission, the International Monetary Fund and the European Central Bank–which sent a team of auditors to Athens earlier this spring to review the country’s finances.

As I explain in Austerity: Causes, Consequences and Remedies, a country will always see a reduction of its government deficit the year after an austerity package is implemented.  Then, as the negative multiplier effects of austerity kick in, the budget improvement is reversed. That is why the European Commission is forecasting more austerity in 2015 and 2016. However, you only need to take a quick look at macroeconomic data from Eurostat to realize that the notion of no budget cuts in 2014 is optimistic.

And now, Fox News delivers the big number:

It is the first time in Greece’s three-year-old aid program that the country is deemed to have met its goals. In past years, a deeper-than-expected recession and government missteps led Greece to miss its targets. The draft notes that the Greek government has followed through on most of the austerity measures it promised for 2013 and 2014–also in sharp contrast with previous assessments of Athens’ efforts to ease its crushing debt load. “The very large and highly front-loaded package of fiscal consolidation measures for 2013 and 2014–totalling over 6.5% of gross domestic product–agreed in the previous review has been largely implemented,” the report says.

Six and a half percent of GDP.

Let’s leave the technospeak behind for a moment. An austerity package of 6.5 percent of GDP means that government is going to increase what it takes from the private sector by 6.50 euros for every 100 euros that people earn. Not for every 100 euros it currently takes in – it is 6.50 euros for every 100 euros of GDP.

The 6.5 percent number is a net tax increase on the Greek economy. It does not matter what the combination is of spending cuts and tax increases: the Greek government is telling its taxpayers that it is going to raise the price of whatever it provides them by 6.5 percent of all the money that all taxpayers earn.

If all of the austerity comes in the form of spending cuts, and taxes do not go up, then government is saying “we are going to sell you a 2011 car at 2013 prices”; if all of the austerity comes in the form of tax hikes, and spending is not cut, then government is saying “we are going to sell you a 2013 car at 2015 prices”.

Either way, government will increase its net drainage from the economy by 6.5 percent of GDP, and front load the plan so most of it shows up in one year. All this in a country that has already lost 25 percent of its GDP in five short years, all due to austerity.

I would not want to set my foot in Greece over the next year.

Apparently, the EU Commission has an eerie feeling that something bad might come out of this. According to Fox Business they are quick to add fine print to their optimism:

Beyond 2014, the outlook is uncertain and depends “on the strength of the recovery and improvement in taxpayer capability to service their tax obligations,” the commission says. It estimates the country’s budget gap at around 1.8% and 2.2% of GDP in 2015 and 2016 respectively.

This is B.S., Barbara Streisand. They have made similar predictions in the past, all of which have turned out to be outlandishly optimistic. So long as they believe that austerity somehow will improve the performance for the Greek economy, they will continue to believe that the first-year effect of an austerity program will become permanent.

I would not want to be a Greek politician saddled with implementing this chainsaw massacre of an austerity program. Perhaps some of the elected officials in Athens are on the same page, or why else would they according to Fox Business be so eager to promise that “there will be no more belt-tightening”?

Fox Business does not elaborate on this. Instead they conclude their report with a couple of notable factoids:

The country is in its sixth year of a deep recession made worse by waves of austerity. Unemployment, already over 27%, is expected to continue rising.

So if they acknowledge that the waves of austerity have made the recession worse, then why doesn’t Fox Business ask the EU Commission why this particular austerity package would do the trick?

In case anyone is still in doubt what this new austerity package will do to the Greek economy and to Greek society, please re-read the statement above about unemployment.

The Greek government is sitting on one side of an open powder keg. On the other side the EU Commissioners are sitting, smoking big fat cigars. The Greek government is holding out an ashtray where the Commissioners are supposed to kill their cigars. It’s dark, so it’s hard to see the ashtray.

There’s the future of Greece for you.

11 comments

  1. anti-sharia

    Whilst I agree that Greece is in a downward loop right now, I cannot accept your casual relationship to the GDP multipliers and how you put state cuts and tax hikes into one and same.

    Its not. Far from it.

    Tax hikes are a push on the breaks. Cuts are (e.g. sacking half of the public administration staff) a double dose of good:

    1. no more loss of productivity by Gov ‘workers’ doing nothing productively.
    2. forcing ’em into the private sector (at lower costs) will expand productivity.

    The states, sweden or greece same-same, has a hugely negatively crowding-out effect as is.

    Anti-sharia

  2. Pingback: Economics and the European Crisis | The Liberty Bullhorn
  3. anti-sharia

    You are in effect arguing for status quo, or worse (more Gov).

    Your position is overlooking that big-Gov can crowd out wven at such screaming rates as the greek unemployment levels.

    – What’s gained by increasing the unproductive sector yet further into debt, waste and disallocation of resources? Aren’t e.g. Greece better of with half its public spending?

    Demand, when from borrowing, is no cure.

    Anti-sharia

    • S R Larson

      “You are in effect arguing for status quo, or worse (more Gov).”
      Give examples.
      The problem that you and other Austrians run into is that you deny the existence of the multiplier. That’s like trying to be a physicist while denying the existence of gravity.

      • anti-sharia

        I don’t deny gravity nor the multiplier.

        But the multiplier only looks at GDP, not wealth creation. You want the cake, and eat it too. Unless you crash and burn Greece’s public sector, you cannot free up resources to productive ends. Your multiplier ignores the elephant in the room which is the waste factor of such spendings.

        Your argument is illogical in my best view because you cant fear a GDP loss (multiplier) and at the same time bring fiscal sanity. Its either or, and the Austrian school is ready to say goodbye to fake GDP graphs, so long waste is reduced. Waste includes the public sector admin, not only direct payments to pensioners of 47yo and overpaid school teachers who’s productivity is like a Soviet era camp’s.

        You are very arrogant towards others’ views I noticed.
        Anti-sharia

  4. S R Larson

    What you consider “arrogance” is a firm conviction that I am right. I take it you are Swedish – that would explain your discomfort with someone challenging your arguments.
    As for the tearing down of the public sector to free up resources, explain to me how the interest rate in the Austrian school determines when Phoenix will rise from the ashes. You might get some help from this article:

    http://libertybullhorn.com/2012/12/05/austrian-economist-applauds-shrinking-gdp/

    • anti-sharia

      happily i am not swedish, what-ever that is going to mean in the not too distant future, a more self-loathing and self-destructive culture hasn’t been seen before in the history of the world. Sweden, as we knew it, is gone, Palme’s cultural marxist soldiers have transformed into a terrible place of raped girls, burning cars and – of course – rapid muslim dominance of all major cities.

      You seem unable to defend wasteful (by default) Gov spending, but to quote GDP effects (your multiplier argument). I say waste is waste, irrespective of multipliers, and of that comes no lasting good, albeit the ‘broken windows model’ tries to twist our brains.

      As for interests, no sure I understand your Phoenix metaphor, but do you seriously subscribe to price fixing? Do you not see how it eithers creates welfare nightmare or(and) crony capitalism?

      Anti-sharia

      • S R Larson

        If you cared to read this blog a bit more, and especially my book Ending the Welfare State, you’d see that no one is more committed to doing away with government than I am. The problem with you Austrian armchair theoreticians is that you do not realize what happens when you terminate government without providing people with a path to self determination.

        Here is one final question for you: Austrian theory says that in the long run the private sector will employ the resources left idle by government. How long is that “long run”? How long are one million unemployed young Spaniards going to have to wait?

  5. anti-sharia

    Your arrogance continues, now you claim I dont read your blog enough…

    Nevermind: I challenge you to explain what good (wealth) comes of wasteful, crowding-out, debt-based, anti-buz government ‘activities’ and the answer is insults? Again: what long-term benefit comes of expanding the doped program?

    I, for one, cannot tell how long it takes to employ all the Spaniards out of work, but isn’t today’s route one to melt-down anyway?

    In my opinion, like nature, capitalism is extremely strong force, and it will, at right price levels, fire off like a rocket, compared to the status quo or OD you argue for.

    But, re-pricings are necessary for this to take place; spain must write off huge debt posts to get a sense of balance back into its economy. Asset prices are heavily inflated, so is the service economy and cost of living. Pop it, and level out at new lows and move forward in a US-post-WWII-manner, where the Gov milk bottle was removed. Why can’t Spain prosper naturall
    !?

    Anti-sharia

    • S R Larson

      Just what I suspected. You have no idea how to put your “theories” to work.

      The only scholarly attempt to estimate the Austrian “restructuring” process that I have seen – and I have been in the economics business for 25 years – concluded that it would take 100 years for an economy to recover if policy followed Austrian theory. IOW your great grandchildren may be back to the standard of living that you have today, while everyone in between would live a poorer, probably much poorer life. Talk about waste of resources…

      As Keynes pointed out, “in the long run we’re all dead”.