Greece has 4-6weeks, which will implode first? The public sector or the private sector?

Forget about the bail outs, forget about Greece’s next tranche of bail out cash from the Troika. Even if the government gets the next tranche the private sector is going to collapse anyway. At this stage it is just a matter of which will implode first, the private sector or the public sector.

Let us just clarify the effect of the “bail out”. The troika bailout does not help the Greek private sector in anyway shape or form, the bail out money goes to the banks and what’s left goes to the public sector employees present and past.

The Troika have now announced that Greece must cut between 20,000 and 150,000 public sector jobs. This is not new, Greece has had 3 years to do this, the whole point of the initial Greek bail out was to allow a smooth transition while public sector employees were laid of. Rather that the sudden of shock of tens of thousands of people being laid of at the same time.

Obviously the bail out has been squandered because Greece has yet to sack a permanent government employee up to this point. The bail out has been used to keep people in jobs which the country cannot afford rather than cushioning the country against the shock of the government cuts.

Going back to the mass sacking required in the public sector, there is a major major flaw with the plan which nobody seems to be highlighting.

The private sector is laying of jobs at an alarming rate. Unemployment is up by 40% in 2011 compared to 2010, the unemployment rate is now over 16%

So the major flaw is where and how are these ex public sector workers going to find work? Of course they are not going to be able to, which means they are simply going to have to claim social security payments.

Of course it is cheaper for the government to pay someone unemployment benefit rather than a wage but nobody can call that a long term solution.

As I have written before, the PASOK government have made the fatal mistake of asking the private sector to pay for the excesses of the public sector. The error of this strategy is now obvious to anyone who is not a PASOK politician.

But that is not the whole story, there is worse news than this. It is well publicized that despite the Greek government increasing taxes, tax revnues have gone down, which many would argue is to be expected.

However, despite having 3 years of data to look at, the PASOK government still refuses to believe that increasing taxes has reduced revenues.

Their latest tax on businesses of around 500Euro simply for being in business and their property tax shows that they believe that the increasing of the tax burden is completely unrelated to the reduction in tax revenues. Some would say they, the PASOK government, are completely unqualified to manage their economy and maybe they are correct, their finance minister has no economic qualifications. None.

So if you agree with me that the increase of taxes has lead to a deeper recession and job losses these further tax increases which lead to more unemployment and more people claiming unemplyment benefit.

Without wanting to sound redundant the PASOK government should be doing everything in its power to not increase unemployment because not only do they loose the tax revenue of the worker they also have to start paying that worker, a double whammy which would go some way to explaining the widening government deficit even with increased taxes.

Going back to the point I made about paying unemployment benfit to ex-public sector workers being cheaper than paying them a full wage. This may be true but there is one critical point I failed to mention.

1. The private sector taxes are being increased while…

2. Public sector pay is being decreased or eliminated.

This exposes a serious flaw in the PASOK strategy. These 2 points together mean vast sums of money will be extracted from the Greek economy guaranteeing a reduction in the Greek GDP. Which will inevitably lead to businesses failing, increasing unemployment, reduction in tax revenues and increase in social security payments. A debt death spiral if ever there was one.

Looking at the new “emergency business tax” in more detail along with the new “emergency property tax”

At this stage it is not a matter of the taxes hurting the Greek economy and the Greek private sector, it has now reached a point where many businesses simply do not have the money to pay these taxes. Greece has been in a severe recession for 3 years now, the money the government is asking for simply does not exist.

The majority of these new taxes are due by the 30th September. My sources in Greece tell me that many business people will simply be unable to pay.

While it may be the smaller businesses which are forced to close because of these taxes, there will be a domino effect which will put  the bigger companies that supply these small businesses in jeopardy which in turn will have a domino effect onto even larger businesses.

Which takes me back to the title of this article. These 2 new extra taxes could well be the taxes that turn a snow ball effect into an avalanche.

I believe there must be a point where the loss of jobs in the private sector reaches a critical mass at which point the rate of job losses becomes exponential. This point could well occur in the next 4-6weeks.

And if small businesses simply do not have the money to pay these taxes the government deficit is also going to increase and if the rate of business closures n Greece becomes exponential then so will the growth in the government deficit.

The Troika bail out was specifically for one thing and that was to give Greece time to get its books in order. Instead the bail out was used to appease voters for the next election, this is the exact, exact, behaviour that has led to Greece to this point.

It is clear to me that the only way Greece will change is if it is forced to, and that means an all out default. Then the government will be forced to cut becuase they simply will not have the money.

Time will tell if any politician in Europe has the stomach to let that happen.

So in summary

I title this article “Greece, which will implode first? The public sector or the private sector”

The reasons for this headline are as follows

1. New taxes will lead to greater unemplyment

2. Greater unemployment will lead to worsening of government deficit

3. Government reducing spending and increasing taxes leading to definite reducton of GDP

4. New emergency taxes will not gather revenue predicted, the money requested simply does not exist

5. Massive increase in number of businesses closing will lead to reduction in tax revenues and increase in social security payments

6. Small businesses closing will lead to larger business closing and so on in a snow ball effect

7. Fired government employees will not be able to find work

8. Government will either get next tranche and continue as is,  or government will not receive tranche and will have to cut immediately

9. Private sector will likely collapse whether government gets tranche or not

10. All the above points will come to a head within the next 4-6weeks,

11. What will collapse first, the private sector or the public sector?

The race is on and one things is certain the result is not going to be good either for Greece because of a default or for Europe because of inflation due to bail out.

Please comment on this article and link to this article if you think it is worthy, thank you for reading

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