The Greek debt problem is extremely easy to solve.
Before it can be explained why, we first need to understand what the problem is.
And please note, as always, when I say Greece I am referring to the Greek government and not the Greek people
The whole financial crisis that Greece is facing is down to one simple fact, Greece cannot pay the interest on its debt. That’s it.
Forget about haircuts, paying debt back, if Merkel likes Greeks, is the EU a dictatorship, it simply comes down to Greece not being able to pay the interest on its debt.
It has nothing to do with the amount of debt Greece has, if Greece was able to pay the interest it could simply take out new loans to repay the debt/bonds that come due. Rolling over the debt as it is called in the media.
But the problem is that Greece is not able to make the interest payments.
So how can Greece put itself in a position where it can make the interest payments?
The solution is simple, the Greek government needs to spend less in order to make the interest payments and in the long-term the Greek government needs to spend less in order to have the money to stop the debt from getting any larger.
While the government balancing its books would eliminate the Greek crisis, Greece needs to take one more step to build a solid foundation for its future.
This one more step is address the Greek trade deficit.
Currently Greece sends around 2 billion Euros a month out of the country in exchange for goods and services. If the GDP is to remain stable without the government and private individuals and businesses going into debt, then thew trade deficit has to be balanced .
If Greece wants to maintain its GDP level, it has to borrow that 2 billion Euros a month, which is obviously a problem.
If the trade deficit were balanced the country would no longer have to borrow 2 billion Euros a month which is obviously desirable.
What does Greece need to do to eliminate its trade deficit?
Again, it is extremely simple. Greece needs to make its economy as competitive as other countries so businesses will want to locate there and therefore make the cost of goods and services cheaper in Greece, reduce the goods and service Greece needs to import and to increase the amount of goods and services Greece exports.
How can Greece make it’s economy competitive with other countries?
The easiest way to find out is to look at the Worlds’s best places to do business. The link spells out what is needed to make a country competitive
The report noted that the highest-ranked countries all have efficient regulatory processes, efficient court systems that protect property and investor rights and credit bureaus and collateral registries that facilitate lending.
Another report on MSNBC also highlights what is required to create a competitive economy
using the following criteria: good government; transport and telecommunications infrastructure; openness to innovation; intellectual property protection, and availability of talent. They also took into account economic output, number of computers and the procedures required to start up a business.
So it would not even cost the Greek government any money to create a competitive economy, it would actually save the Greek government money because to be competitive the government has to be less involved in people’s business.
So to recap..
The Greek financial problems are extremely simple to solve
The Greek government needs to reduce spending and reduce its involvement in business.
Given that the solution is so simple, why is Papandreou and the rest of the EU making it look so difficult?
Ironically Papandreou’s resistance to making meaningful cuts in government spending is down to political maneuvering and attempts to manipulate his popularity amongst the Greek people to attempt to remain in power.
It is ironic because his actions, which are to keep as many people employed by the government as possible are actually the same actions which are causing him the problems, ie not being able to borrow money.
Papandreou thinks that by keeping as many government employees in work as possible that this will help his political future but he is wrong. It would be a much wiser decision for him to have slashed the government workforce at the beginning of his term so the benefits of the cuts will have born fruit will he was still in power.
Instead Papandreou sabotaged the Greek economy by trying to get the private sector to pay for government mistakes which has in turn led to problems with ex government workers being unable to find work in the private sector because of the increase in taxes.
So to summarise
The Greek financial crisis is very easy to solve and to suggest otherwise is misleading. It can be done in 2 steps.
1. The Greek government needs to balance its books
2. The Greek trade deficit needs to be eliminated
With these 2 points addressed, Greece will not only have a sustainable economy it will have a prosperous economy with low taxes and low regulation.
The alternative is what we have in Greece today for the next 30 years.
Sure the process of balancing the government books will not be painless, many people working for the Greek public sector will have to find work in the private sector and public sector workforce will also have to work longer.
But Greeks have to ask themselves, are those sacrifices worth it to build a prosperous and sustainable country in their lifetimes and a country which is in control of it’s own destiny.
Only Greeks can decide.