Thursday, June 09, 2011

Greek austerity - failing more and more

Manfred Ertel et al report in A Fatally Flawed Recovery Plan: Greece Back on the Brink Der Spiegel Online 06/06/2011:

Greece's partners in the euro zone are gradually losing patience with Prime Minister Papandreou and his team. A year after receiving €110 billion in international financial aid commitments, Greece has hopelessly failed to reach the agreed austerity goals. Its lenders are now questioning the government's ability to reform, the economy has declined even further than feared, and important tax revenues have failed to materialize.

The only certainty is that Greece needs more money than it was provided with last year. The goals stipulated in the bailout package can only be reached under highly unrealistic assumptions, the envoys of the EU, IMF and ECB concluded after analyzing the situation in Greece in recent weeks. [my emphasis]
Stefan Schultz reports further in Troika Report: Greece Needs a New Bailout Der Spiegel Online 06/06/2011:

It may be just nine pages long, but the report by the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) packs a punch. According to the keenly awaited report, which has been obtained by SPIEGEL ONLINE, it is unlikely that Greece will be able to return to borrowing money on the capital markets in 2012 as previously foreseen -- meaning European taxpayers will probably have to prop up Greece with billions in payments for much longer than was originally planned.

The troika's prognosis is bleak. Although there is some evidence that "the rebalancing of the economy is ongoing and the quarter of deepest contraction (has) already been passed," the report warns that "a further contraction in real GDP is still expected in the second half of 2011." The real GDP growth rate for 2011 is now protected to be minus 3.8 percent, the authors conclude, adding that positive growth rates are not expected before 2012. Even then, they will only be "moderate."
For those who haven't forgotten the economic experience of the past century or so, it's no surprise that drastic reductions in public expenditures during a bad recession and slow-growth period is dragging down the growth of the Greek economy. But the EU is even more in the grips of Herbert Hoover economics at the moment than the United States is. So the pressure for more self-destructive austerity continues.

Paul Krugman has been comparing Iceland's course of action in response to its financial problems favorably with those of Ireland and other EU countries like Greece targeted by bond vigilantes and caught in the bankers' grip currently being enforced heavy-handedly by the EU, the IMF and the European Central Bank. Regarding Iceland's relatively favorable standing with the bond markets at present, he blogs in the ironically titled The Penalty for Default, the Payoff to Austerity 06/09/2011:

Why, it’s almost as if defaulting on debts run up by runaway bankers and letting your currency depreciate works better — even from the point of view of investors — than socializing private-sector losses and grimly sticking with a fixed exchange rate.
Krugman has been pointing out that the situation of Greece, Ireland, Portugal and Spain is similar to that of Argentina when it had pegged its currency to the dollar. They borrow money on their national credit but they don't control the currency in which it is denominated, the euro, and can't do the national currency devaluation that their relative economic situations would otherwise dictate, devaluation which would help their economies' international competitiveness and avoid economically destructive extreme austerity measures.

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