The Greece crisis refers to the economic problems of the Greek government from 2008 until the time of writing this article.
How did the Greece crisis start?
The Greek government took out more debt than it could service. In 2008 the Greek government could no longer make the interest payments on its debt.
So what happened?
When it became clear the Greek government was on the verge of defaulting on its debt, the Troika (the EU,ECB and IMF) stepped in and lent the Greek government money for it to make the interest payments. This is what is referred to as the Greek bailouts and they have been ongoing since 2008.
The Troika attached conditions to these bailouts which entailed the Greek government reducing its deficit ie reducing the difference between the amount it spends and the amount is takes in.
Why did things get worse?
Unfortunately instead of the Greek government cutting spending their first moves were to increase taxes. VAT was increased, the price of fuel doubled, VAT was applied to private property sales, emergency taxes were levied on businesses and pensions and benefits were cut. This led to the massive depression that the country is experiencing today. The government took this course of action rather than reducing it’s overheads.
When will the Greece crisis finish?
Unfortunately there is no sign of a recovery within the next 7 years.
As parts of the conditions of the Troika bailouts the Greek government committed itself to paying back around 180 billion Euros in debt while at the same time increasing taxes and reducing spending.
The Greek economy is currency valued at around 200 billion Euros a year so it is unclear where the 180 billion Euros to repay the debt is going to come from.
The money would have to come from bank lending but there is no sign that Greek banks are going to start lending to the public in the future let alone on the scale required to fill in the 180 billion Euro black hole that the government debt repayments will create.
What is the solution to the Greek crisis?
The simple fact of the matter is that Greece does not have the money to pay back the debt it owes. The priority should be to get the Greek government debt load down to a level that the government can service.
For this to happen the Greek government must default on a large portion of its debt.
Why is a Greek government default a bad thing?
In the short-term it is possible that large portions of the population will stop receiving benefits from the government. However the medium and long-term benefits of a default are much larger. To give a few examples.
After a default the Greek government will not be able to borrow money. This will force it to not spend more than it takes in.
The government will no longer have the money to pay for inefficient or expensive services. The government will be forced to cut down and focus on providing essential services.
What are the dangers of a default?
It is possible that the government does not adapt to the new conditions. ie the Greek government does not accept that is must spend less because it cannot borrow and instead further increases the taxation on the population to make up the shortfall. This leads to less tax revenue leading the government to increase taxes further creating a downward spiral.
The government may also impose currency controls as it did with the Drachma and it may also impose price controls as Argentina is doing now.
How will the Greek crisis end?
On the current course the only possible answer is that Greece loses its sovereignty to Europe and becomes dependent on aid from other countries within the EU.
This situation will allow the government to continue to run the country inefficiently as there is no motivation or reason to change.
There is no sign that the Greek government is serious about cutting back it’s spending and there is no sign that the Troika will stop giving money to the Greek government.
The current course is a downward decline in the Greek economy, only when the Greek government cuts taxes and regulations while laying off tens of thousands of government workers can there be real progress.
Where the decline ends is the big question, where is the bottom?