Slash and Burn

While Europe insists on deep austerity measures to reduce public debt and budget deficits, Greece falls further and further into a vicious cycle of inescapable debt.  Athens announced a new bill to cut another 15,000 government jobs this week.  The jobless rate in Greece is already 19%.  Creating an underclass of permanently unemployed will not encourage job growth.  The country’s main source of public revenue generation, value-add tax revenues, are dropping 18%.  With such drastic cuts in public expenditures, Greek GDP will fall by at least an estimated 3% this year.  Instead of spurring growth, tax revenues are declining while the amounts that Greece owes creditors continue to rise.  Since austerity measures were officially announced on May 1^st, 2010, Greece finds its debt ratio steadily increasing from 138.8% of GDP to 159.1% over the past year.

Country's Debt as Percentage of GDP
(Click to Enlarge)

The sad truth is that deeply cutting austerity measures will leave Greece even more indebted than it already is. The nation's economy is contracting while its loan payments grow in size.  The false hopes of reducing public debt by shifting the Greek economy toward the public sector become even further undermined by provisions in the new European Bank deal that require the country's private firms to cut salaries by 20%.  Modest amounts of stimulus money can’t help alone in the face of inescapable destruction.  If you think about the situation rationally, would cutting someone's income in exchange for one year’s mortgage payment really help pay off a loan for a house in the long run?  

The market based arguments that austerity would encourage investment fail to hold-up.  Investors did not move their money to Greece after the last round of austerity measures.  Instead, credit ratings institutes further demoted the Greek bonds in junk status.  Greek and European Bank Technocrats predicted privatization to bring in €9.3B. Unfortunately, Greece could only conjure just half of of the predicted amount, €4.7B, far short of what would be needed to compensate from drastic cuts in the public sector.  

Budget deficits will not fall by cutting salaries and further reducing revenue generation for the government.  With leaders showing no signs to stop implementing slash and burn economics, Greece's economy will continue to decline as the country threatens to drag down other fragile nations, the European Union, and the entire world economy.

Slash and Burn