2 Reasons Why Greek GDP Is Certain To Decline Forever

The current PASOK government are carrying out 2 main actions to get the Greek government books under control. They are decreasing the amount the government spends and they are increasing taxes. These 2 activities can only lead to one thing…

..less money in the economy and the shrinking of GDP forever, unless strategy is changed.

For a minimum of the next 2 years the government has imposed 2 random taxes which equate to a straight forward seizure of property. Much like the US government made it illegal for people to hold Gold the Greek government is seizing the liquid assets of it’s population. I will leave it up to you with regards if you think the motivation of the Greek government is the same as that of the US government when it seized the people’s Gold.

The first tax is an extra 2% tax on company profits and the second is a tax on property which is worked out by multiplying the total square meter area of your properties and multiplying by a number which is determined by the age of the house.

These 2 taxes guarantee that there will be less money in the economy for the next 2 years at least.

These 2 taxes on their own, in addition to all the other taxes that have been imposed are enough to shrink the GDP of Greece but the PASOK government is going one step further.

The PASOK government is also decreasing the amount of money that it spends. To state the obvious, when the government spends less money, there will be less money in the economy.

To recap, the PASOK government are attacking the Greek people and Greek economy in a pincer movement with the goal of surrounding and isolating the Greek citizens and seizing vast sums of money out of their money.

The PASOK government is increasing taxes and at the same time it is reducing spending the end result of this is obvious, economic decline is an absolute certainty.

Am I being rendundant spelling all this out? I feel I have to say it because nothing is being said in the international media.

Where will this lead Greece?

Before we can say where this will end there needs to be stability. Stability in government spending and stability in taxes. If government spending continues to be reduced and taxes continue to be increaed there is no limit to the depths that Greece will go.

Let us assume for a moment that the current taxes will be left in place for the foreseeable future. And let us assume that the government spending reductions will be frozen at their current levels.

It is clear that Greece still has some way to go to stabilise even at these levels. I say this because the government deficit is continuing to increase and  unemployment continues to increase.

So even if the measures were frozen as they are now I would estimate that Greece will see 20% unemployment at a minimum before it stabilises, GDP will fall by another 5% at a minimum for 2012 and that the government deficit will increase in 2012.

And to reiterate, this is the stability level as I see it if no new taxes are imposed and the governent does not reduce spending anymore.

While it has been claimed by PASOK that no new taxes will be raised (which is almost a gurantee that new taxes will come) government spending will certainly be cut from todays levels.

So my precdctions above are optimistic at best.

There are 2 elephants in the room that everybody is ignoring however and the first is the Greek trade deficit. As it stands at the moment Greece is sending on average around 2 .5billion Euros a month out of the country. This is also contributing to liquid cash being sucked out of the economy although this at least appears to be stable.

The other elephant are the banks and their refusal to lend. Despite claims in the press, people on the ground are saying Greek banks are point blank refusing to lend. Given that the private banks create around 90% of the money in circulation, banks refusing to lend will have massive effects.

So combine the effects of

1. The banks sucking money out of the economy by loans being repaid but no new loans being made,

2. Greek trade deficit sucking around 2.5billion euros a month out of the economy

3. Greek government cutting spending

4. Greek government imposing new taxes

and Greece is in the centre of a perfect storm which only has one outcome, a complete utter default.

What can be done to turn the tables?

Banks restarting lending would be a massive boost and maybe enough in its own to turn around the Greek economy.

Assuming that is not going to happen, after that, the trade deficit needs to be addressed. How to deal with the trade deficit? Reduce taxes. So points 2 and 4 are essentially the same thing.

Greece’s problems are by no means impossible to solve, it just requires a massive change in mindset on the part of the government that they must reduces taxes to reinvigorate businesses and to turn the trade deficit into a surplus.

But while there are still some Greeks who are determined to hold onto their unproductive public sector jobs and while unions continue to put the lively hood of their member’s in jeopardy the country will continue a decline which has no visible bottom.

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