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Europe’s Dirty Little Secret

2015. július 27. - Kevin Jackson

The Greek Parliament has just passed two laws that will enact the stringent reforms that its creditors have demanded. This has now paved the way for them to request a three-year bailout package worth up to 86 billion Euros. While Greece previously wanted to avoid any further involvement by the IMF due to their demanding conditions, they now have no other choice but to reach out to them. While it might seem to some that a crisis involving Greece’s exit from the Eurozone has been averted, in reality it is simply masking the real problem and fueling even greater E.U. skepticism from its member states.

It is quite ironic that the IMF regularly speaks of the ill effects of high taxation, yet is insisting on high tax rates at even the lowest income levels. Even worse, the troika (E.U. Commission, E.U. Central Bank, and the IMF) is demanding that Greek businesses pay their taxes in advance at the beginning of the year in order to crackdown on tax evasion. Since Greece is in the Eurozone, it cannot lower interest rates or devalue its currency, these tax measures act to pull capital out of an economy that desperately needs it.

The fact is that Greece’s debt cannot be managed with or without the troika bailout. Its debt to GDP ratio is 177% today and is forecasted to balloon to 200% in the next two years. The IMF actually expects Greece to run a budget surplus of 3.5% of GDP for the next several decades, even though there are only a few examples in history of countries ever achieving this under similar conditions. The sheer notion that Greece under these harsh conditions will be able to evolve from the E.U.’s lowest ranking in productivity and labor force participation to among the highest is totally absurd. So, why is it that the E.U. finds itself in the position to bailout Greece for the third time, if the prospect of success seems so implausible?

The dirty little secret is that there is no way the situation in Greece will end well. Austerity will intensify and the Greek people will continue to support politicians who pledge their opposition against the E.U.’s harsh rule. Greece will not be able to grow its economy under austerity and therefore will once again default on its debt obligations in the future. Other E.U. nations that could face financial struggles down the road (like Portugal, Italy, and Spain) will quickly conclude that they will not want to see their nations undergo a death spiral like Greece. Anti E.U. sentiment is rapidly rising all across Europe as the negative effects of the union outweigh its benefits. Greece is just a symptom of a much larger problem and, unfortunately for the Greek people, their nation will struggle for decades under any scenario that plays out. As for the E.U. itself, it has been proven to be a master of kicking the can down the road as long as it can be kicked.

For more information on the Greece and the E.U. crisis, please refer to the following articles:

Europe’s dirty little secret is Greece will never pay back its debt, Washington Post, Matt O’Brien, July 15th, 2015 http://www.washingtonpost.com/blogs/wonkblog/wp/2015/07/15/europes-dirty-little-secret-is-greece-will-never-pay-back-its-debt/

Greece take step closer to bailout with IMF loan request, France24.com, News Wires, July 24th, 2015, http://www.france24.com/en/20150724-greece-asks-new-imf-loan-step-closer-bailout

Greece, the Sacrificial Lamb, New York Times, Joseph Stiglitz, July 25th, 2015, http://www.nytimes.com/2015/07/26/opinion/greece-the-sacrificial-lamb.html?_r=0

 

For more information about the Corvinus Global Business blogger, go to https://www.linkedin.com/in/kevinmjackson1.

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