Monday, May 14, 2012

Greece - Why they're such a wreck



Recently Greece has gotten itself into a bit of a pickle. With it's economic crisis not getting better, Greece is facing mounting pressure from the Eurozone, especially Germany, to take control of it's economy, as well as it's political environment. As these pressures mount from the outside, they also increase from the inside as well.
But there's much more to it. There is a big difference between how Greece is being discussed as compared to the other members of the EU. Of course some of it is due to Greece needing the biggest chunk, but the main reason is the causes for their issues.
Ireland had a housing bubble and an over-leveraged banking sector that blew up during the 2008 financial crisis. Before that, they had an exemplary budget policy, with low debt and surpluses, and their economy is strong and structurally healthy. They're in a temporary tight spot, but they do whatever they can to get out of it and it's really just a matter of time.
Portugal does have structural problems and some that resemble Greece's, but on a much smaller scale. They had overlooked the necessity to increase competitiveness when low wages and an educated work force alone didn't cut it anymore after the Eastern Expansion, and Poland, the Czech Republic and so on were eating their cake. They need to reform, but they're working on it and they'll get there eventually with a little help.
          Both needed some bailouts, they've got them; they're working on it, no problem. The notorious anti-EU crowd aside, no one is complaining about those bailouts, and there even is a relatively broad support for giving them a stimulus.
          Italy has had a high debt since forever. They were permitted into the Eurozone because of a clause that said entering with high debt levels was OK if a country was seen as working on reducing them, which they had been until they took a break from reforms after they had been let in, and, well, they were still on that break when the crisis hit.
          But they're working on it now and are going through structural reforms. They have a very strong industrial base in the North, and there's really no reason why their (Northern) economy wouldn't be just as strong as its Austrian neighbors. Give 'em a bit of time to enact reforms, and if markets stay calm they'll have some very impressive growth coming their way. If markets act up, however, there's a problem. Italy is the third largest economy in the Eurozone. There is very little room for error here.
          Spain had similar surpluses and low debt as Ireland, and a giant housing bubble as well. They were over-reliant on construction, which due to said housing bubble lead to wages increasing above of what their productivity would have normally permitted far too quickly, and they have nothing to replace it with.
          They've started out on very low debt levels, but their deficit is huge, their unemployment is scarily high and causes those deficits, and there are no credible plans that could fix it. Not because they don't try, they do, but because there simply doesn't seem to be an obvious solution.
They're the fourth largest economy in the Eurozone and sustaining them for the long term would be extremely expensive. That's a problem, a big one, but at least they're doing what they can and haven't needed any bailouts (yet).

          Now, Greece is a very special case. They combine an enormous debt and deficits with too low productivity. They do have qualified workers, but what little economy there is to work with is uncompetitive and tied up in red tape. They didn't have a housing bubble or a similar trigger, they got there over a long time in a slow motion train wreck, and it was allowed to escalate to this point because the fact that it was happening had been veiled by their corrupt bureaucracy -- which is seen as them having undermined the common currency. They lack the governance that is necessary to even begin to clean up this mess, and their electorate is about to vote a party into power that outright states that they don't have to because the Eurozone simply can't afford to let them descend into chaos. That there is some truth to that in case of a country that is responsible for a mere 2% of GDP is a big part of the problem.
            This all happened right after tax payers had to bail out banks that had made risky bets for high profits, and they don't distinguish between speculation and supposedly secure government bonds that hardly beat inflation -- Greek bonds yielded only very little more than German ones when banks bought them.
   Greeks see what they had to endure and compare their situation to how things were before the crisis. People in the core focus on what hasn't been done, and it's difficult to explain to them why they have to pay while some rich Greeks don't. In the case of Germany, that they had to go through unpopular reforms that Greeks reject fuels self-righteousness, and people pay way more attention to burning German flags and Nazi cartoons than to people cueing up in breadlines.

If you want to see more news about current Greek affairs, check out some of these links, there some interesting debate over some newly elected members of parliament which align themselves with a neo-Nazi party.

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