COLUMN: Kent – Lessons for Greece from the past

- July 8th, 2012

Big fat Greek debt spiral could swallow all of Europe

by Simon Kent

Here is a sage piece of advice that the heavily indebted nations of Europe would do well to emulate.

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, assistance to foreign lands should be curtailed lest our nation becomes bankrupt. People must again learn to work and not depend on government for subsistence.”

That was attributed to Marcus Tullius Cicero, the Roman philosopher, statesman, lawyer and thinker around 55 BC.

Looking at the utter financial carnage in Europe today it’s obvious its rulers have learned nothing from the past.

Greece is the perfect example. It is the eternal European poster child of poor governance, a fact reinforced by raw statistics and heavy borrowing in spite of the fact it has almost no capacity to repay anything — interest included.

The official Greek unemployment rate is 21.9%, and last year 110,000 companies folded. Over the past five years, the economy has shrunk by 17%. Economic output is expected to fall by another 3.5-4.0% this year.

Bailouts account for more than 150% of GDP in a country with virtually no manufacturing industry to speak of and only tourism as a source of hard foreign currency.

What is the solution? Greece is trying to borrow its way out of debt, if you can possibly understand that concept, and the rest of Europe is only too eager to help.

In May 2010, the European Union and IMF provided 110 billion euros of bailout loans to Greece to help the government meet its creditors. It soon became apparent that more would be needed, so a second, 130 billion euro bailout was agreed earlier this year.

On a state-to-state level, the figures are no more reassuring. Greece owes French banks 41.4 billion euros, German banks 15.9 billion euros, UK banks 9.4 billion euros and U.S. banks 6.2 billion euros.

It’s not as if nobody saw this coming. Even before Greece joined the euro the country was living beyond its means. When it dropped the Drachma and adopted the single currency, public spending soared at a rate that would make a drunken sailor blush with envy.

Government wages alone rose a phenomenal 50% between 1999 and 2007, faster than any other country in the euro zone.

Cheap interest rates and willing lenders meant money was flowing into Greece at a prodigious rate and then spread far and wide on public sector wages and pensions.

At the same time the amount being gathered was going in the opposite direction.

Tax evasion is a national sport in Greece. So is early retirement on fully indexed, government-funded pensions that require no input from the beneficiary during the course of his or her working life.

When this over spending met the world economic crisis train crash of 2008, Greece faltered. It couldn’t meet interest rate payments on its loans and started borrowing even more heavily.

The sum of all financial fears in Europe may well happen before the end of 2012. Greece will default on its loans, leave the euro and return to the Drachma — at the same time re-starting the printing presses and flooding the economy with money.

So in less than 12 months time, the big fat Greek debt crisis could well be over — for all the wrong reasons — and that’s when Europe’s problems will really begin.

Categories: Contributor Columns

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