EU Now in the State Building BusinessPosted: February 25, 2012
From the FT, an interesting look into what the European Creditor Countries are getting in exchange for their bailout of Greece:
European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country’s government for two years, according to documents obtained by the Financial Times.
“The programme is much, much more ambitious than economic reform,” said Mujtaba Rahman, Europe analyst at the Eurasia Group risk consultancy. “This is state building, as typically understood in traditional low-income contexts.”
Just a brief thought or two. First, it’s clear that austerity in Greece has produced something like a depression there. IMF’s World Economic Outlook shows that output (estimated) dropped 5 percent in 2011, and is expected to drop another 2 percent in 2012. The unemployment rate is around 16-17% for 2011, and they project it to stay above 17% through 2016, the last year of their most recent projections. Maybe there was no choice but to cut spending since they could not borrow. But that doesn’t mean it hasn’t made the situation much worse.
Second, the problems in Greece are debt overhang in the (i) private and (ii) public sectors, (iii) a shortfall in demand as incomes and employment have both fallen sharply, (iv) and a lack of competitiveness vis a vis the rest of the world. The current prescription seems to try to tackle (ii) by slashing government spending and implementing various structural reform programs. In the process, they seem to be trying to tackle (iv) not by having higher inflation in countries like Germany so that Greece’s products seem more attractive, but instead by opening up professions and slow, painful wage deflation. But the austerity and wage deflation have made (iii) much, much worse. Structural reforms seem nice over the long run, but if there’s no money to buy goods and services, and prices are falling by a few percentage points a year, then it’s hard to picture how Greece will return to a point of normalcy. I don’t mean to say that there’s a magical solution that tackles (i), (ii), (iii), and (iv) simultaneously with no cost whatsoever, but it seems like the burden that is being placed on the Greek people may be too much for them to carry.
The New York Times has a piece on “How Greeks Live Now”:
By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed.