It looks like there is a deal in Greece, and it will get the next tranche of aid needed to avoid a default March 20th when it has 13 billion Euros worth of debt coming due. To get it Greece agreed to yet more austerity measures. We don’t have all the details but reportedly it will include a cut in the Greek minimum wage of over 20%, and further major cuts to government spending. The problem is that the austerity measures taken so far have not made the situation any better, and arguable, have made the situation worse.
This year is expected to be the fifth straight year of recession there. I don’t just mean a depressed economy, the way that some people here feel like we are still in the recession, even though it officially ended in June 2009. I’m talking about continuing actual declines in real GDP, and by magnitudes that are as bad as anything we went through in the Great Recession. Our worst quarter was the first quarter of 2009, when the year over year decline was 5.0%, and by the fourth quarter of 2009, that had improved to just down 0.5%, and turning positive, up 2.2% in the first quarter of 2010. The IMF is looking for Real GDP to fall by between 4 and 5% in 2012, on top of all the declines that have already occurred. That is before the new austerity measure take effect.
The problem is that tax revenues are not only highly correlated to GDP growth, but they have a higher “beta”. Generally a 1% fall in GDP will cause about a 2% decline in tax revenues. In January, the Greek government had planned on tax revenues being up 8.9% year over year, due to various tax increases and stepped up (but still very poor) tax collection initiatives. Instead they were down 7.1%.
The latest Greek unemployment numbers are for November, and they are at 20.9%, up from 13.9% in November 2010. Youth (under 25) unemployment is a staggering 48.0% up from 35.6% a year ago (and 27.9% in November 2009). Given the tax data, one has to assume that the rate has risen substantially since November.
Quite simply the people of Greece are being crucified on a cross of Euros. From a inter-European point of view, being on the common currency looks a lot like being on the gold standard. All borrowing is done in a “foreign” currency, and the country has no control over the money supply. The Greek situation should be a loud warning to those who want to abolish the Fed and see the U.S. go back on the gold standard.
How bad does it have to get there? This has already gone on longer than and the economic decline so far is already worse than the Great Depression in Greece.
I can not for the life of me figure out why the Greek people would want to put up with this just to stay in the Euro common currency and keep German and French banks happy. For them, the costs of staying far exceed the costs of leaving. Yes if they went back to the Drachma, it would be a very weak currency, and the price of imported goods would skyrocket. On the other hand, that would make Greek exports hyper competitive. Europeans take a lot of vacations, and with a weak Drachma, the hotel rooms in Corfu and Crete would be booked solid, and that would put a lot of Greeks back to work.
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