To justify bailout loans, the underpinning severe austerity structures being imposed by the European Union and the International Monetary Fund on nations with failing abilities to pay what is owed are predicated on the belief that if such debt can be reduced and the continued hemorrhaging of government expenditures stemmed, the offending nations will solidify sufficiently to be able to repay their remaining debt load. The measure of sustainable debt is generally measured by a ratio of the amount of the debt applied against the gross domestic product of the subject nation. Over 100% is bad, but how far over and how long that ratio remains at that level is part of the analysis and the negotiating process. For comparison, the U.S. debt/GDP ratio is about 110%, not particularly good, but at least the U.S. does produce a whole lot of economic value that can sustain growth.
But in Europe, with certain weak unproductive economies, of course, there’s a catch! The February 14th New York Times has a pretty simple analogy that makes this conundrum exceptionally clear: “Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can slash expenses, but with lower earnings it is hard to set aside money to pay off debt.” And the problem with countries like Greece or even much smaller Portugal is that they really don’t have any value-producing economic industries that produce much. Hence, to cut their expenditures to the bone results in pain, but without spending money to stimulate growth, their GDPs actually shrink… so even with lower debt, the ratios of debt to GDP actually get worse.
To a thrifty German (who certainly doesn’t understand why his/her strong economy has to be the guarantor), this is a scenario that “doesn’t compute.” They’ve spent lots of money educating a highly-productive workforce. Their infrastructure is a model for just about everyone else, and their factories are state-of-the-art value-creating machines. Their commitment to bettering the technology of the products they create and sell – through research and quality control – is legendary. Those systems are in place, and as long as there are buyers in the world, the German manufacturing sector will continue to pump out some of the best and most desirable products on earth. Austerity? It’s a way of life for Germans, who will invest for the long term even if it takes years to get there. Why can’t those stupid Greek, Portuguese, Italians, Spaniards, etc. simply do what Germans have always done? It works for Germany!!!
Greece and Portugal are obviously way, way behind Germany in this economic value-creating world. And with huge elements of the Greek economy taking place well outside of Greece – like the shipping industry – Greece is particularly ill-suited to tax their own billionaire barons. Underpaid (officially) revenue agents are also well-paid (bribed) to look the other way, as these magnates ferret away their Euros in Swiss bank accounts far from governmental scrutiny.
But we can get a pretty good feel for the future of Greece by looking at what the same model has wrought for tiny Portugal that has already been through the austerity mill faced by Greece today: “Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the 78 billion euro (about $103 billion) bailout Lisbon received last May… And yet, by the broadest measure of a country’s ability to repay its debts, Portugal is going deeper into the hole… The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.” NY Times. Portugal isn’t borrowing more; its economy is shrinking! As reports are coming out about 2011 Greece, which did go through one round of austerity to qualify for a bailout, it seems too that their economy is contracting faster than most EU economists expected.
What’s worse, the other weak nations (and maybe even France in the near term) are facing shrinking GDPs, and without growth, all the EU austerity measures are just too little too late. “[E]conomists say the same vicious circle could be taking hold elsewhere in Europe… Two other closely watched countries on the debt list, Spain and Italy, now also have rising debt-to-G.D.P. ratios — even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.” NY Times.
If Greece defaults, increasingly probable, the Euro will tank even more. If Greece leaves the Euro in favor of its old drachma currency, it will be instantly broke (or close to it) with little or no ability to pay for the food it needs to feed its people, industrial import to carry its plants and farm or the fuel needed to power its vehicles and generate electrical power. How are the Greek people dealing with this? According to the BBC, there has been a run on bank accounts, with withdrawals totaling somewhere between $20 and $25 billion and estimates that all of this is being horded, in dollars or Euros, in mattresses or equivalent. If Greece were to announce a withdrawal from the Euro entirely, you can expect that the run on Greek banks would indeed collapse the system. Residents are concerned that a government decree could instantaneously convert their Euro accounts into dreaded drachma. For a couple of years, a drachma-based Greece would define a new European hell. There are no good solutions.
Is there a lesson here for an austerity-driven House of Representatives, and a bevy of GOP candidates who want to cut all government spending to the bone … but not touch (with the exception of Ron Paul) “defense”? Clearly, our debt needs to be managed, but as one American economist has argued, you don’t tell a bed-ridden hospital patient that they need to go on a severe diet immediately… you wait for them to get healthy before imposing that diet. Will the American Congress follow a clearly failing European model of severe austerity, or will they figure out how not to throw the baby out with the bath water? We hardly in a strong recovery mode, and it won’t take much to tilt even us back into recession.
I’m Peter Dekom, and I truly think that this Congress couldn’t keep a car on a highway if it required a consensus on the steering wheel!
Posts
No comments:
Post a Comment