May 7, 2010
Here’s some very interesting analysis from The Pragmatic Capitalist in regards to Greek austerity plans:
Speaking of Greece – I have been doing a bit of research on their austerity measures and am increasingly convinced that they should defect and default. I hate to keep beating on this story, but it did cause a market crash yesterday so please bear with me. We have a fairly recent precedent for Greece in Ireland. Ireland implemented harsh austerity measures in 2008 and these programs have done nothing to help matters. In fact, their deficit continues to go backwards. Since the government implemented austerity measures in 2008 their government debt as a % of GDP has actually INCREASED to 64% from 43.9%. Government deficit as a % of GDP has almost doubled. This is exactly what will occur in Greece as tax receipts will fall off a cliff and austerity measures will result in decreased aggregate demand and recession. That means a Greek bailout will likely prove fruitless unless the ECB plans to offer low rates ad infinitum. This is one of the primary reasons why the market is now looking beyond Greece at surrounding nations. A bailout is looking like a waste of money. The only true way to fix Greece is by fixing their currency. The sooner the member nations of the EMU realize this the sooner a workable solution can be formed.
Reading beyond the lines, this not only suggest that a bailout will fail, it really suggests that the EU as a whole will fail, as it implies there’s really no way to fix a country with fiscal policy alone (monetary policy is needed as well).
For now it’s Greece, but then when the math starts failing to add up for Portugal, Spain, Italy (and Ireland for that matter) it will become clear that fixing a debt problem doesn’t work when you don’t have your own central bank.
This article was posted: Friday, May 7, 2010 at 4:56 am