Is Greece entering a Death Spiral?

http://www.spiegel.de/international/europe/0,1518,712511,00.html

by cwan • 16 years ago

54 52 16 years ago

spiegel.de

rick8883• 16 years ago

Greece is a good example of what happens with an over-reaching government, high taxes, and expensive social programs.

If things continue, the US won't be far behind.

duairc• 16 years ago

What? How is that the cause of the situation in Greece?

trevelyan2• 16 years ago

Respectfully, this is a classic liquidity trap. Falling government spending is exacerbating the collapse of demand in the private sector. If this were simply an issue of inefficient government activity "crowding out" the private sector, austerity cuts would have stimulated an increase, not collapse in private sector economic activity.

The problem is that Greece has very few policy options given its existing debt burden, and inflating out of the crisis is not an option given its need to support the Euro. As with the US government, what Greece can afford to spend on social programs in equilibrium depends largely on what it spends elsewhere.

SamAtt3• 16 years ago

I disagree. Nothing was going to create immediate improvement in Greece so they were going to be in this mess no matter what they did. No one is going to invest in Greece right now regardless of how much the Government spends. So I don't see how the austerity cuts are "causing" this.

They are clearly not helping yet either but keep in mind the current cuts were only enacted in May of this year.

What the government is trying to do is send a message to the world that they'll be prudent with their finances from this point on. That's why they've gone above and beyond what was required of them as far as austerity cuts go. It's a long term strategy that will hopefully draw private investment back to Greece in the future.

frossie2• 16 years ago

Greece is a good example of what happens with an over-reaching government, high taxes, and expensive social programs.

You are joking, right? Greece is a good example of what happens when the state fails in two of its most important functions: efficient tax collection and an incorruptible civil service.

d2viant2• 16 years ago

I haven't heard this before. How was their tax collection inefficient? Are you referring to tax evasion?

_delirium• 16 years ago

Indeed, if it were merely an issue of the size of the public sector, Greece is totally middle-of-the-road: http://www.americanprogress.org/issues/2010/05/img/greece_gr...

If anything, it's a bit more free-market than most of Europe, because what regulations exist are not enforced nearly as vigorously as they are in places like Scandinavia or Germany. In Germany, it's pretty hard to ignore building codes and zoning and just build a house, but in Greece people do it all the time, especially outside the major cities--- you just run your own electric line from a neighbor to avoid having to get an official hookup (you settle charges with them privately), hire a local architect and contractor, and you're good to go. Between that and all the small businessmen, it's a surprisingly DIY sort of place, where the government exists but is often ignored.

okaramian• 16 years ago

Also mass tax evasion, which is ignored for obvious reasons.

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704...

http://www.nytimes.com/2010/05/02/world/europe/02evasion.htm...

die_sekte2• 16 years ago

Not exactly. Sure, Greece has all those things, but also: extremely shoddy regulations and high levels of tax evasion.

High taxes and expensive social programs seem to work in Germany, Denmark, Sweden, ...

rick8883• 16 years ago

"High taxes and expensive social programs seem to work in Germany, Denmark, Sweden, ..."

Give them time. Talk to people in those countries. It's very difficult to find a job right now in any of those countries.

Not to mention the fact that 70%+ of our monthly income goes to the government (which means less freedom and choices for you).

seanalltogether• 16 years ago

I disagree. American culture still idolizes the self made man & entrepreneur more then any other country in the world. Countries like Greece tend to have decades of influence telling them that the community will provide you a job, and the government will help with your problems.

StavrosK2• 16 years ago

Ugh, that's really frustrating. There's a prevailing mentality that the best sort of job you can find is a government job. That's not far from the truth, really, since people who work in companies tend to work 12-14 hours a day for a bit over minimum wage, but most Greeks don't even know how easy it is to start your own business.

I was chatting with someone on a flight once, and I mentioned that I have my own company, and he said "yeah, but it was, like... your dad's, right?" I said no, "I founded it". He couldn't believe that someone under 40 could start a company...

oiuytghyuj• 16 years ago

Yes they admire the flinty eyed self reliant cowboy - while he collects his farm subsidy check and writes his humvee off as a work truck.

barredo• 16 years ago

Sweden is a good example of what happens with an over-reaching government, high taxes, and expensive social programs.

Denmark is a good example of what happens with an over-reaching government, high taxes, and expensive social programs.

zeteo• 16 years ago

It's somewhat unfair to limelight the situation of a one-industry town (Perama). Greek shipbuilding was probably on its way to China anyways (just like US steel making, and uncounted other industries), and the crisis merely sped up the process.

The article overall seems a bit on the sensationalistic side, full of cherry-picked alarmist anecdotes. I would take it with a decent dose of salt.

w00pla• 16 years ago

> Greek shipbuilding was probably on its way to China anyways (just like US steel making, and uncounted other

It doesn't have to be that way. Japan has some of the highest labour rates and expensive electricity. It has to import both iron ore and coal. Yet it is home to the very profitable steel mill: http://en.wikipedia.org/wiki/Nippon_Steel

SamAtt3• 16 years ago

I'm sorry but this is shoddy journalism. The article leads with "unemployment has hit an unbelievable 70 percent in some places" but waits 16 more paragraphs before saying the nation wide number is expected to be 12.1% by the end of the year (which incidentally is lower than the state I live in which is California)

The whole article is stuff like that. They go on about the guy who used to work 300 days a year but now can only get 25 or the street where half the shops are closed but gloss over the reality that GDP only dropped 1.5% in the last quarter (2.5% in the last 12 months)

In the end Greece has it a lot better than they could have had it. To me this is like the guy who spent all his money and had to be bailed out by his neighbors complaining that his neighbors aren't doing enough for him.

shaddi• 16 years ago

To me this is like the guy who spent all his money and had to be bailed out by his neighbors complaining that his neighbors aren't doing enough for him.

Arguably it's not merely like that, it is exactly that.

watchandwait2• 16 years ago

Actually, it is worse. Greek politicians cheated foreign bond investors and lied to the EU about their budgets.

phunel• 16 years ago

I second the parent's comments. I'm living in Greece at the moment (am actually on a ferry to the islands typing this right now) and the country, which of course has seen better days, is still humming along strongly. The cafes are packed, the hotels are booked, and people are living, I assure you, a spectacularly fortunate life. One of the primary disconnects is that the economy has traditionally been cash based, and to an extent still is. This means much of the money coming in and out of the country is not declared, making accurate statistics of the country's financial health difficult at best.

People are anxious and have been through a lot, no doubt, but the exaggeration by the media is extraordinary. Though, I have to admit, I don't blame the ship owners for repairing in other ports. The bureaucracy and union strikes are maddening drains on productivity.

jpcx012• 16 years ago

Things need to get worse before it gets better. Seems like the best idea is to ditch the Euro, deflate the currency, and wait for companies to come back when prices are cheap enough where its worth doing work there.

It'd be painful, but at least it'll be over eventually and things will start to grow again.

Right now it looks like they are on the path to perpetual stagnation.

Retric• 16 years ago

The only long term solution is to deal with corruption.

DilipJ• 16 years ago

I think you mean inflate the currency. Deflation would make their debt burdens worse. But I agree, they are going to stagnate. The country owes its success over the last few decades to generous transfer payments from the EU. Now those transfer payments are going to the poorer former Soviet Bloc countries like Romania and Bulgaria. Greece is going to have to learn to rely more on itself, which means stripping down government expenses. Considering the strength the public unions have there, I think that's unlikely to happen.

electromagnetic• 16 years ago

Trade unions are devastating to the people they're supposedly working for. I know here in Ontario, in the middle of a recession the Teacher's Union was fighting like hell to get a strike going in the midst of the government funding reeducation programs for the recently laid off. It was stupid, most of the teachers were worried about supporting themselves because the college and university association wasn't budging.

Unions make themselves relevant by always pushing for a strike. If a union doesn't strike, people stop caring about going union in trades where it isn't mandatory. The careers where unionization is essentially mandatory should be seriously be overhauled (IIRC crane operators is one here where unionization is mandatory).

po• 16 years ago

> Greece is going to have to learn to rely more on itself, which means stripping down government expenses.

I never understand this logic. I'll agree that building an economy on payments from the EU is bad. But now that that damage has been done, how exactly do you then make the jump to the concept that government expenses are an instance of not relying on yourself?

You're right, inflating the currency would help (if they weren't on the euro) but if you have high nationwide unemployment, the private sector isn't employing people, and they need to be employed to have health insurance, then the government should start paying these people to dig holes and fill them in again.

jpcx012• 16 years ago

Oops, yeah. Thats what I meant.

Haha.. actually, maybe you don't want to take my economic advise.

gorog• 16 years ago

They won't ditch the euro, it's what saved them. The drachme would have worthed nothing if it were still Greece's currency. The healthier EU countries created a fund in order to save their own currency, the euro, and had to save Greece in the process. The common currency has created a necessary solidarity between the states.

tomjen32• 16 years ago

Why doesn't Greece default on hits debt if things are really so bad as the article makes it out to be?

SamAtt3• 16 years ago

Because they share a currency with most of the rest of Europe and defaulting on their debt would cause the value of that currency to tank. Which could very well tear apart the European Union entirely.

That's the big reason why the IMF was willing to bail them out.

watchandwait2• 16 years ago

A Greek default has no impact on the Euro. A Greek default will drill the French and German banks that hold their debt. That's the issue.

tomjen32• 16 years ago

No would only happen if they started to print currency (which they can't even do).

Greece debt may be denominated in Euros, but that is the only thing it would have in common with German debt.

bosch• 16 years ago

Startup founders should take away from this how important good financial records are. Also, how important a business model is that provides enough capital to fund current operations without you having to go over your allotted budget.

startuprules• 16 years ago

You also want to make sure you track down deadbeat clients (bad tax collection) and not get a long expensive office lease (offer retirement at age 50)

Is Greece entering a Death Spiral?

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