Greek Economics: A Lesson for America

Greek Riots - New York Times 6/30/2011

Greece is the poster child of national economics gone wrong.

Though the 27th largest country by GDP, Greece has become a foundering member of the European Economic Union threatening to bring down the entire EU itself.

People are rioting in the streets rather than accept the austerity measures imposed on it as a condition of an EU bailout of over 100 billion Euros that is the only thing keeping that country afloat right now.

Its ugly and getting uglier.

The Calm Before the Storm

Until just two years ago the Greek economy looked great.

Greek/Euro zone GDP Growth

After Greece joined the EU in June 2000 and up through 2008, Greece’s GDP growth was much stronger than the rest of the Euro zone. Coincidental with Greece’s entry into the EU, the GDP of the rest of the Euro zone plummeted while Greece’s GDP continued to have strong growth.

GDP means Gross Domestic Product. GDP is the total amount of economic activity in an entire country in a year. It is all the money there is and there ain’t no more!

From 1995-2005 individual Greek workers averaged more hours per year than any other country in the EU. They had money and they spent it. Everything was hunky-dory.

Until 2009 Greece had experienced 15 consecutive years of strong GDP growth.

Nobody thought big trouble was lurking on the horizon.

What Went Wrong?

As Greece’s economy grew the government’s share of spending grew even faster. Government had higher and higher deficits while at the same time it sucked up a larger and larger percentage of the Greek GDP.

That is a double whammy against the private sector economy. By the end of 2009 Greece had the highest budget deficit-to-GDP ratio in the EU at 15.4%. Its public debt-to-GDP level rose to 127%!

Greek debt-to-GDP - Eurostat Figures

Economists say a country is getting into economic trouble when their deficit-to-GDP ratio is over 2.6% and their debt-to-GDP level exceeds 85% ! Greece was in serious trouble!

It didn’t help that Greece tried to cover up the extent of its massive debt. Unfortunate for them, they were finally found out.

Its government debt credit rating was then reduced, which made the cost of borrowing to pay for all that debt much higher. That triggered its economic crisis.

There was only enough money in the EU bailout to pay for government services and make payments on the Greek public debt, but not enough to stimulate needed economic growth in the private sector.

Industrial production dropped 8% between March of 2010 and March 2011. Retail sales dropped 9%. Building activity plummeted by a whopping 71%. Unemployment skyrocketed from 10.3% in 2009 to 16.2% by March 2011. (Economy of Greece – Wikipedia)

The Calendar of Misery

On April 23, 2010 the Greek government requested an EU/IMF high-interest bailout loan of 45 billion Euros. The first installment was used simply to pay 8.5 billion Euros of Greek government bonds that had come due.

Four days later Standard & Poor decreased Greece’s debt rating to junk bond level fearing a Greek government default.

By the end of the month a series of austerity measures were proposed by the EU. The proposals convinced Germany to sign on to an even bigger 110 billion Euro loan to Greece. ($160 billion in US dollars)

Then just 5 days later on May 5 2010, a nationwide strike was called to protest the proposed spending cuts and tax increases. That strike turned violent, killing three people.

It just got worse from there.

On June 13, 2010 Standard & Poor lowered the Greek debt rating even BELOW junk bond level to the lowest rating in the world!

Yesterday, the austerity measures imposed by the EU were finally passed by the Greek government and rioting against them is now becoming commonplace. More people are dying.

The Root Cause

How could a Greek economy so robust with 15 straight years of strong economic growth and having the most productive workers in the EU suddenly fall into total chaos in just two years?

The Answer: Out of Control Spending by Big Government!

In Greece the public sector sucks up 40% of the nation’s GDP!

There is not enough money left in the whole country after government takes its cut to drive a thriving private sector economy necessary to create enough jobs to support big government. It’s a vicious circle.

Greece needed to address their deficit spending and debt much, much earlier when it was more manageable. They didn’t.

Once critical mass was reached the only choice became unpopular austerity measures that will take years to produce any results or out-and-out default.

Greece appears headed for default.

The Lesson For The United States

The United States is not as bad off as Greece… yet!

However, our major economic indicators are deteriorating. Already Standard & Poor is warning it is about to lower our credit rating.

Our debt-to-GDP ratio is right at about 100%. Total federal spending accounts for about 24% of the GDP. Federal government budget deficit-to-GDP is well over 10%. Our current unemployment rate sits at 9.1% and steady.

Economists may evolve a new economic term to describe our current economic predicament: “Pre-Greek!”.

If left unchecked in a stagnant economy, federal spending will continue to suck up a higher and higher percentage of GDP and take more money out of the private sector where jobs are created… just like what happened to Greece.

Big government spending at current levels is inching our economic indicators inexorably toward Greek 2009 levels.

The Bottom Line

Ominous for the United States, though, is that there isn’t another bigger economy left in the world that can bail us out.

In other words, our only option will be default.

Should that happen then the heated argument we are having now over raising the debt ceiling today will sound trivial in a few short years. Today will seem like the good old days.

And life as we know it will end for generations to come.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Jun 30, 2011, in Deficit, Economy, Greece, National Debt, Politics. Bookmark the permalink. 2 Comments.

  1. Here is an interesting tid bit. Not only are we Americans paying for a significant part of the Greek bailouts theough our contributions to the IMF, many of our big banks have sold “credit default swaps to the EU banks that are holding Greek bonds. When Greece defaults, the EU banks will come tho the US banks to collect on their insurance. it is very possible that our TBTF banks will be looking for another bailout from the Fed. Isn’t that nice?

  2. There are provisions in the Dodd–Frank Wall Street Reform and Consumer Protection Act requiring TBTF banks to set up and fund their own TARP-like loan program for any future bailouts they may need.

    Dodd-Frank is still a lousy law because it did not reform Fanny and Freddie, but it does obviate the need for another federal bailout loan program like TARP.

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