Greece – Why The Reforms Will Never Happen

It’s been going for 8 years and the Greek government is still no closer no reducing it’s deficit and in turns of GDP, their deficit is actually larger than it was in 2008.

So in simple terms, the bailouts have only made the situation worse.

Now you may be thinking, how can the deficit be worse? The figures published in the media are showing it is declining.

What the figures used by the media do not show is that they are the government deficit figures excluding interest repayments.

TABLE 1

Fiscal Adjustment (percent of GDP)
2009 2010 2011 2012 2013 2014 2015
Revenue 37.9 39.5 40.6 42.8 43.2 43.6 44.0
Primary Expenditure 48.3 44.6 42.9 42.6 40.8 38.7 39.1
Primary Balance -10.4 -5.1 -2.2 0.2 2.4 4.9 5.0
Interest Payments 5.3 5.5 6.8 4.9 6.3 6.4 6.1
Overall Balance -15.7 -10.6 -9.0 -4.7 -3.9 -1.5 -1.0
Change in Expenditure -3.7 -1.7 -0.3 -1.8 -2.1 0.4
Measures -4.6 -4.1 -1.5 -1.5 -1.2 1.6
Growth Effect 0.9 2.4 1.2 -0.3 -0.9 -1.2
Nominal GDP (€ billions) 232 228 216 210 212 217 223
Nominal Growth Rate -1.9 -5.0 -2.8 0.7 2.3 3.1
Source: IMF and Author’s calculations

So Why Are the Reforms Not Happening?

In a word, politics. The ruling political class in Greece, which includes the trade unions, has nothing to lose by not reforming.

The reforms will mean huge cuts to the government workforce and it will also lead to the unions being stripped of their massive power of state-run entities.

In short, the Greek political class has nothing to gain by carrying out the reforms that will help the country. The attitude seems to be that they are quite happy to take the whole country down with them “if we go down then so do you”.

The Troika bailouts are only doing one thing and that is prolonging the status quo.

Greek Reforms – What is the strategy?

Apart from keeping things as is, the long-term aim could be to get the ECB and Germany so dependent on Greece through outstanding loans to the country that they will simply submit to the status quo in Greece and continue to supply the country with money.

The long-term aim could be to turn Greece into a dependent protectorate of the EU.

This way the unions and the politicians can conserve their power without having to pay the financial cost and instead pass the financial cost onto the Greek private sector and the EU.

Greek Reforms – What is the evidence?

The most obvious evidence for this plan to maintain the status quo in return for handing sovereignty over to the EU is the fact that the political leaders in Greece have categorically stated that they will not fire any more government workers, that they will not cut the wages of government workers any more and that they believe the country should be given extra time to implement these changes (which do not involve cutting the workforce).

Unless the political leaders in the country are going to come up with a plan that include completely deregulating the Greek property sector to foreign investors and slashing all taxes related to the tourism industry, their plans are completely cuckoo.

The reality is that there are no plans to deregulate the Greek property market and the only tax plans involve cutting VAT on hotels and tavernas to 13%. This is far too small.

Greek Reforms – Other Issues

I talk about the primary deficit given by the media being a complete fiction because it does not take into consideration interest repayments.

Let me go into that point in more detail.

The forecast given by the ECB says the interest repayments on Greek debt will be around 6.4% of GDP over the next 5 years. I have also seen predictions although I cannot find the source, which says interest repayments on Greek debt will be as much as 10% by the end of the century.

Going back to the 6.4&% figure. Lets look at what interest rate that is based on.

These are the broad stroke figures given by the ECB showing what it believes the interest rate will be on new government debt until 2030 – 3.3 6.0 7.0 7.2 4.2 3.8 2.5 5.5 2.0 6.3 5.7.

These figures are assuming the Greek government does not default in the meantime.

And like everything surrounding the Greek government’s crisis, these figures are completely la-la.

You just have to look at the current bond yield  to know that these interest rates are utter fantasy and given that the predicted interest rate repayments as a percentage of GDP are based on these fantasy figures it is obvious that there is no light at the end of the tunnel for the Greek government.

Unless the EU is prepared to continue to pump billions of Euros into the country every month, the Greek people have only 2 options. Slavery in the form of servicing massive government debt or a default.

I know which one I recommend

I may have linked to this article above but it is worth reading again. It highlights Argentina’s recovery post default. And remember, that Greece is in a far superior position than Argentina because the currency in circulation in Greece post default will still have buying power, unlike Argentina.

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