The Greek people have just voted convincingly to reject the austerity package proposed by the leaders of the European Union. Their logic is that they want to be the ones who decide what spending cuts to make and by how much. On the flip side, the E.U. has been shoveling money and restructuring deals to bail out Greece for the past five years and is tired of indulging a government that is continuously unwilling to honor its commitments. The European Union, powered by the German economy, is now at a critical juncture that is far more significant than the Greek debt crisis itself.
The current unemployment rate in Germany is 4.7% and its youth unemployment rate stands at 7.1%. These are very good numbers by historical standards. Let’s now contrast this situation with Greece that now has an unemployment rate of 25.6% and a youth unemployment rate of 49.7%. These numbers are disastrous by historical standards. Now consider the fact that tax debts in Greece are equal to about 90% of their annual revenue as opposed to Germany that has tax debts equal to about 2.3%. If one looks at these figures, then it is hard to believe that a country like Greece would ever allowed into the European Union in the first place. With clever credit manipulation and lack of credible oversight, countries like Greece have become more like banana republics than European ones.
Despite access to a continuous stream of financial support, Greece is going through one of the worst economic declines in modern history and there has not even been a war that has caused it. Since 2008, the Greek GDP has contracted more than 25% and there is a high probability it will get even worse. Despite the fact that both Germany and Greece use the Euro, German ten-year bonds pay 0.8% while Greek bonds now pay 16%. How can this be? The reason is simple: Germany has a highly competitive economy that pulls in a growing amount of tax receipts needed to cover the country’s operating expenses. Greece has a totally non-competitive country that has resulted in a shrinking GDP, falling tax receipts, and the inability to pay the country’s debt obligations.
I am actually using the current situation in Greece to highlight a much bigger problem. Greece at 2% of the Euro Zone’s GDP is not a big fish. Stagnant GDP rates and rising benefit outflows to aging populations in countries like France, Italy and Spain, however, are an entirely different matter. There is no doubt that Germany as a single country is globally competitive, but how long will it be able to be a part of a union that is full of countries that are not? What is unfolding in front of our eyes with Greece will shape the future path of Europe and no denying there are growing gaps between European nations themselves, not to mention the ones widening with the rest of the world.
For more information on European Competitiveness and the Greek debt crisis, please refer to the following articles:
7 key things to know about Greece’s debt crisis and what happens next, Washington Post, Matt O’Brien, July 5th, 2015 http://www.washingtonpost.com/blogs/wonkblog/wp/2015/07/05/as-greece-votes-heres-everything-you-need-to-know-about-the-nations-crisis/
Greece Struggles to Get Citizens to Pay Their Taxes, WSJ, Mathew Karnitschung and Nektaria Stamouli, February 25th, 2015 http://www.wsj.com/articles/greece-struggles-to-get-citizens-to-pay-their-taxes-1424867495
For more information about the Corvinus Global Business blogger, go to https://www.linkedin.com/in/kevinmjackson1.