May 24, 2010
The new illusion: Greece to become wealthy enough to pay back ever-growing sums of debt
A Tyler Cowen article at the New York Times takes a look at the obvious: if accumulating unmanageable debt was the Greek problem this past decade, how is accumulating even more debt now a solution?
"At this stage, it’s a moot point whether Greece is a poor country masquerading as a wealthy country or vice versa. The announced bailout requires that an ailing Greek economy borrow and repay even greater sums of money. If the old illusion was that Greece was a wealthy country, the new illusion is that Greece will, in short order, become wealthy enough to pay back ever-growing sums of debt. Since the Greek economy accounts for only about 2 percent of the euro zone gross domestic product, in theory it could be made a permanent recipient of largess. Yet that’s hardly an appealing solution, both because Portugal, Spain and others might want the same deal and because Europe doesn’t have much social solidarity across national boundaries.”
Further on, Cowen states another previously verboten idea, that a weaker currency (like the drachma) benefits Greece and it's huge tourism industry, let alone other aspects of international competition:
" Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.
As the World Bank index suggests, government funds are often spent hindering production rather than supporting it. This gives one clue as to why the numbers make Greece appear richer than it really is. Public expenditures are valued at cost when measuring gross domestic product, yet arguably the quality of Greek public services, per dollar spent, is less than that of many wealthy countries. Nonetheless Greece plunged ahead and joined the euro zone in 2001, with some unfortunate consequences.
Greece’s currency, the euro, is stronger than that of its neighbor Turkey, so a holiday in Greece is more expensive. Yet Greece has not built enough luxury hotels, golf clubs and resorts to justify the cost difference. Over all, the greater expense of Greek goods and services, which are paid for in euros, lowers the country’s international competitiveness. Ideally, they should be priced in a weaker currency, which would be appropriate for a poorer country.
...Greece is not the only country that suddenly feels poorer. Britain faces budget deficits at about 12 percent of G.D.P., and Italy has a debt-to-G.D.P. ratio of 110 percent. In the United States, the housing and job markets are recovering only in fits and starts and we face significant future Medicare liabilities. This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren’t as rich as we used to think.
This prompts the next question: Will the three-year IMF/eurozone bailout for Greece turn into a exit package for Athens to leave the euro?
Related:
Crisis reality: Greece moves on tax cheats while world ponders future of euro
The Drachma
Plan B - return to Drachma with Alekos Alavanos - May 2013
Talk of default / Drachma rebirth heats back up - March 7, 2011
Rumors of Drachma return grow - Nov 2, 2011
Could the drachma save Greece? - June 6, 2010
Greece's Golden Visa program
