Date: 2015-02-05
Note on Greek indebtedness and the cure
Greek indebtedness hardly surprises anyone. In fact, the opposite would be a huge surprise, as Greece has almost always been running in heavy debt in much of the modern history. Even to me, the argument for fiscal stimulus has a weak basis, given the past performance of the economy, so there is no surprise when the lender nations refuse to give in to Greece's idea of fiscal stimulus amid its indebtedness. Greek economy has internal-structural problems, and the remedy is hard to swallow. The internal-structural weakness seems to make it impossible for this economy to sustain its balance of payment at a reasonable level. The Euros and the subsequent yield convergence also exacerbated the situation, so far. The newly elected Greek politicians need to build a platform to add a more variety of globally competitive industries, instead of focusing only on growing existing-competitive sectors, if they do not want the country to continue to be trapped in its heavy debt problem. Tourism will not be enough, even if Greece took the path of devaluation and the practical sense of bankruptcy (which is a bad idea, given that it can take a really long time to regain foreign investors' confidence after doing this, looking back at the cases of other defaulted nations), especially in the current macro environment where an eventual global deleveraging is anticipated. (Even though the private sector has already been deleveraging, the system's still been borrowing from the future and that trend is likely to reverse.) Olives, bottling, and shipping can be nurtured better. Education and training more focused on economic productivity can be a long term solution. This will help reduce the youth unemployment as well, as Greek youths (with a reasonable degree of fluency in at least one more language other than Greek, ideally) can work in or out of Greece to make money. Still, it will be very tough to bring the 'nearly lost generation,' those not participating in the workforce for too long, back to work. If some youths can work abroad, hopefully there will be some remittances. I can't think of any good reason why MNCs will particularly favor Greece over other locations, but maybe the government can somehow lure them. Tax break on some internationally competitive Greek businesses needs to be reduced, too. Personal income and property tax probes must be made a lot more thoroughly, although this is very hard to achieve. Greek government is already too big relative to the size of the economy, and it needs to be downsized, but this is also challenging given the active role government needs to take in the near term.
Overall, it is going to be very painful no matter what, because the amount of available resources for an average Greek reduces. It is impressive how much economic pain Greece can endure, but I still do not see any easy way out. Only when Greece manages to grow its producing side of the economy while reducing the consuming side of the economy, this near-perpetual indebtedness can disappear.