Greece’s challenges are structural, not financial. Fiscal signs are symptoms. More money won’t solve Greece’s major structural challenges.
Greece has been here before. It was bailed out in 2010. In fact, the accompanying austerity measures has contributed to the current financial strain. Undoubtedly, a difficult journey lies ahead. But let’s be clear. The current crisis can’t be solved by loans with conditions to make further cuts.
The real choice in the recent referendum was between accepting loans with known austerity measures, or receiving loans later with conditions unknown. Indeed, the referendum means future lenders will impose worse requirements than those existing when the referendum was called. Already, Greece defaulted on 1.6 billion euros owing to the International Monetary Fund (IMF). Do Greeks accept that despite the “no” victory, significant lifestyle adjustments lie ahead? This is a significant issue today.
Greece’s Challenges Show up in it’s Economic Performance
Let’s look at the Greek economy and some structural challenges:
- Government debt-to-gross domestic product (GDP) is about 170%—Canada’s ratio is 86%.
- The yield on Greece’s 10-year government bonds (cost of government borrowing), is around 20% and is one of the highest in the world—Canada’s is 1.6%.
- There is pervasive tax evasion—over 50% of taxes due goes uncollected.
- Public sector pensions are among the highest in the Organization for Economic Cooperation and Development (OECD). Under the present arrangement, a 20-year old person starting today and working until age 65 would get a pension of around 96% of previous gross earnings—the average OECD is 59%.
- The economy declined from 2009 to 2014 by over 25%, despite the 2010 bail out.
- Unemployment is around 25% (youth unemployment is 50%).
Being part of the eurozone (countries using the euro), Greece does not control its currency and therefore, cannot implement its own monetary policies. That’s why I think, in the long run, it will exit the eurozone. Today, it needs solutions to grow the economy. Severe cutbacks without the ability to expand the economy will fail, as before.
Greece must privatize state enterprises and encourage the private sector to spend and create jobs. It must provide hope for the large unemployed workforce. Will current negotiations lead to this outcome? Probably not. Still, whatever the result of loan discussions, Greece must tackle its unaffordable government pension plan, and endemic tax evasion culture.
Greece is bankrupt and cannot repay it’s debts under current conditions. It spent too much for too long. It is responsible for, and must own the present situation. Will lenders provide debt relief along with new funding? Will the socialist government privatize selected public enterprises? Will that government create the environment for private businesses to invest? Will it accept that the level of public pensions is unsustainable? What will it take for the population to move away from a culture of tax evasion? These are important questions that Greece must tackle as it journeys through this huge challenge.
Meanwhile, several countries continue to tax, borrow, and spend excessively and have not learnt from the Greek experience.
© 2015 Michel A. Bell