Sunday, 23 September 2012

Back from Vacation in Greece

Upon returning from holidaying in Greece, Your Neighbourhood Economist typically has gotten a quizzical look from people when the choice of holiday destination comes up in conversation.  “How was it?” would be a standard response with the expectation of tales of squalor coupled with rebellion being rampant amongst the locals.  But except for stories of idyllic islands and endless sunshine, there was nothing much else to tell.

While there are stories of hardship coming out of Greece, for many life goes on.  While 17.7% of the working population are unemployed, there are still 4.1 million workers in jobs who generate GDP worth 215 billion euros giving Greece a per capita income which is higher than Portugal, Croatia, and the Czech Republic.  Much of the hurt that the country is experiencing comes not from absolute poverty which does exist as it does in many other richer countries.  The real pain comes from what has been lost due to the debt crisis and from a future that looks considerably different now than would have been the case five years ago when the entry to the euro had seemingly ushered in a new era of prosperity.

Some readers with a sympathetic disposition toward the people of Greece may consider the stance of Your Neighbourhood Economist to be harsh.  But the trouble that Greece is in will require pain to be inflicted on someone and it is essentially the Greek people that ran up the bill.  Blaming an irresponsible and unrepresentative government only goes so far when considering that the Greeks have left these politicians in power.  Investors who hold Greek debt have endured a portion of the pain in the form of the debt write-off that was part of the previous bailout (see Another Bailout for Greece).  But the Greek people are even now living beyond their means considering the small primary budget deficit in 2011 which means that government spending still exceeds its income even when interest payments on its debt are excluded despite the austerity measures already implemented. 

The cash and the solutions are available to solve the debt problems in Greece and elsewhere but sharing out the pain is the issue that politicians are negotiating.  To let Greece off the hook too easily would create a moral hazard – setting a precedent whereby costs of bad decisions are borne by others.  Despite the rioting and protests, Greeks have shown a willingness to accept a considerable share of the burden after a small majority voted for parties which supported the bailout and the accompanying austerity in elections in June 2012 (which was a bit of a surprise to Your Neighbour Economist - Greece Set to Rebel and Dump the Euro).  And even Angela Merkel has shown some flexibility in allowing the European Union to move toward a banking union whereby funds will be available to prop up the banks in the different countries.  But taxpayers in Germany are still loath to stump up cash for the Greeks who are seen as proliferate when German workers have made do with limited wage increases to maintain competitiveness. 

But these negotiations have dragged on for too long as the leaders in Europe hope that minimal measures will suffice.  The trials and tribulations that Greece is being put through to ensure that it bears its share of the pain are causing the problems to fester such as delays in a possible bailout to Spain as well as sluggish economic growth in the Eurozone acting as a drag on the global economy.  Europe’s leading politicians and its central bank have been more proactive of late (more on that in a future posting) and hopefully the end of austerity is not too far away with the Greek government hoping that cuts to spending in 2013 and 2014 will be the last of it.  If the country pulls through without much more turmoil, it will be the Greeks that will have earned themselves a holiday.  

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