After years and years of bone-crushing austerity; after having lost 25 percent of its GDP; with six out of ten young and three out of ten of all workers unemployed; you’d think Greece would be out of its crisis, right? That is, if austerity was the right kind of medicine for their crisis.
That is a pretty big “if”, and it grows bigger for every year. As I have reported repeatedly, austerity is not the right medicine for the European crisis in general, and certainly not the right remedy for Greece. It has now been five years since the crisis broke out, and nowhere in Europe has a government been more devoted to spending cuts and tax hikes than in Greece (with the exception, perhaps, of Sweden in the ’90s). Alas, as the English-speaking Greek news site Ekathimerini reports, the result is a still-uncontrollable budget deficit:
Greece will not be able to return to bond markets next year to help plug an estimated 11-billion-euro financing gap that will start to open up, market sources said this week, contrary to earlier suggestions from the government and its European partners.
Greece has not been able to sell its treasury bonds on the open market for a long time. Its bonds were tossed on the financial junk yard more than a year ago when the country de facto – though not formally – went into bankruptcy. The EU-IMF-ECB troika rescued the Greek government with cash loans and demanded a continuation of austerity. They believed that such measures would reassure the bond market enough to let Greece return as a credible borrower.
The problem is that Greece has not accomplished any of the objectives sought by means of austerity:
- GDP growth forecast, adjusted for inflation, for 2013 and 3014 is -1.2 percent and -0.4 percent, respectively;
- Private consumption is expected to decline by the same numbers;
- From 2009 to 2012, government revenue increased as share of GDP from 38 to 45 percent of GDP, yet during the same time government spending has remained at 54-55 percent of GDP;
- In 2012 the Greek budget deficit was at ten percent of GDP for the third year in a row.
The fact that Greece has not seen a decline in government spending as share of GDP is sometimes taken as an indicator that they have not made any serious efforts at cutting spending. But they have, as data for government consumption shows. Here are the changes in percent, adjusted for inflation, in government consumption from 2010, including forecasts for 2013 and 2014:
There are two reasons why, despite these numbers, government spending does not fall as a share of GDP. The first is plain macroeconomics: even though government spending is the most inefficient way to get anything done in our economy, it is an indisputable fact that government-funded hospitals, schools and other services do produce some services. When we cut those services we also cut the number of people on payroll, the purchases of inputs (think medical instruments for hospitals and food for school cafeterias) and spending on other, related items. These cuts are felt, especially by local economies, where small businesses lose some demand and thus have to shrink their activities.
The second and more important reason is that the other part of government spending, namely financial transactions (welfare, unemployment benefits and similar income-security items), actually increases when the economy is in a decline phase. As people lose their jobs they go from being paid for work to being paid not to work. People who are paid for work, whether private or public employees, spend money in their local communities, pay taxes on their consumption and property, etc. Unemployed people spend a lot less (unless unemployment benefits cover 100 percent of your previous income which I don’t think is the case anywhere in the free world) and typically pay no income taxes on the benefits they receive.
In other words, as unemployment goes up government has to spend more money through its cash entitlement programs. This is one big reason why the Greek government is unable to close its budget deficit. It is also a major reason why there is again, as Ekathimerini reports, rising desperation in Europe over the black hole also known as the Greek government budget:
With pressure mounting on eurozone officials to find a solution to the 4.4-billion-euro shortfall the International Monetary Fund projects will kick in from August 2014, and widen by a further 6.5 billion euros in 2015, more debt relief now seems all but inevitable for Athens. “The troika will not likely be able to avoid new bailout discussions before the end of 2014 in order to plug the gaps, and is very likely to decide on an extension,” said Barclays in a research note. “We do not see how Greece could possibly return to the markets next year, even if recent developments have been very positive.”
Again: the troika has failed in achieving any of the objectives behind its relentless austerity policies.
As if to highlight the desperation mounting over the Greek economy:
European Union officials – who believe the size of the gap next year is somewhat smaller at 3.8 billion euros – see the issuance of short-term bonds as an option to make up the shortfall, alongside utilizing unused funds earmarked for the country’s bank recapitalizations and/or new loans. Bankers, however, say the country will struggle to convince investors to buy its bonds, especially given that further restructurings are not out of the question.
By “restructuring” they mean debt write-downs. Or, in plain English: the borrower unilaterally declares that today he owes his creditors less than he did yesterday.
But the threat of a new debt write-down is not the only problem in the way of utilizing the bank recapitalization funds. Many Greek banks are not in a shape to absorb the loss of recapitalization funds, and the reason has to do with the country’s terrible real-estate market. Behold another article at Ekathimerini:
Government and opposition MPs have reacted to suggestions that the coalition is considering lifting the restrictions on the repossession and auctioning of people’s main residence if they are not able to keep up mortgage repayments. Repossessions have been suspended in Greece since 2008. It is thought that the sale of some 200,000 homes has been prevented so far.
That is 200,000 homes that banks have invested money in – money that they in turn borrowed from someone. While the banks have to pay their loans back, mortgage defaulters are not paying them, and when the banks are prevented from selling the defaulters’ houses they lose big money. The banks, which lost enormous amounts on the government debt write-down, are slowly but steadily bleeding to death. Without recapitalization and without access to its assets on the real estate market they will inevitably go the way Titanic did.
As Ekathimerini explains, there seems to be little understanding of the exceptional consequences of a full-scale bank collapse in Greece:
Deputy Development Minister Thanasis Skordas suggested on Thursday that there could be a partial lifting on the ban from next year … New Democracy MP Sofia Voultepsi said there was no way she would discuss the auctioning of reposed [sic] homes. [Social Democrat party] PASOK deputy Paris Koukoulopous said Parliament would never accept such a measure. Opposition parties also raised concerns about the possibility of such a measure being introduced.
Long story short, the situation in Greece is as bad as it has ever been during the current economic crisis. The EU has failed to provide adequate help, the Greek governmetn is on i ts last straw of popular credibility and the banking sector is destined for collapse.
So long as Greece remains in the EU and the euro zone its government will be forced to continue to depress the economy with the same kind of measures that have turned the country into an economic wasteland. So long it continues with its austerity policies, the Greek government is undermining the last few pillars of support among the Greek people for the parliamentary system of government. Last year four in ten voters supported more or less totalitarian parties, which opens a frightening perspective on what may very well happen if the country does not very soon regain its fiscal and monetary freedom.