Greece has got to go!

After much hegemony and posturing Greece has finally been able to secure a bailout! The bad boy of financial economics, Yanis Varoufakis is out as is the Prime Minister Alexis Tsipras. However, is it actually beneficial to Greece to stay in the Eurozone and was all the posturing actually worth it. Let's take a look.

Greece joined the Euro in 1999 and for the two decades prior to that, there was a period of high inflation along with very high interest rates. When Greece joined Euro, the interest rates became on par with the European economy and goods that were considered luxury previously were suddenly affordable to the average person. Goods such as luxury German cars were previously a status symbol of the influential and affluent. Since the advent of the Euro, suddenly these cars became affordable at lower interest rates. This led to people taking on more debt. This also led to more goods being imported into Greece from nations such as Germany and creating a trade imbalance.

The money started flowing out of Greece and into German insitutions. During the decade since 1999, the national debt has increased to 177 percent of GDP, predominantly driven by consumers borrowing. At the same time compared to other European nations, the Greek government actually reduced it's expenditures and became more efficient. However, in 2000s the flow of curency out of Greece happened at a rapid pace, driven primarily by trade imbalance. The financial crisis of 2008 was the tipping point leading to major institutions running low on cash reserves.

This brings us to the bailouts since then and the most recent one in July/August 2015. The average worker in Greece works for 1700 hours/year and the average output is 21 Euros per person. Compared to Gremany, the average hours worked oer year is 712 with an output of 33 Euros per person. The GDP of Germany is 3.8 trillion dollars whereas the GDP of Greece is 237 billion.  These numbers are provided to help indicate the efficiency and productivity of the German economy as compared to Greece.

But why do we need to do this comparison? Given the current high levels of debt and borrowing by Greece,  by the time Greece reduces it's debt from 177 percent of GDP to 140 percent, it is estimated to be 2027. This is because even if Greece imposes austerity measures, it simply cannot compete with other nations in the Euro block that are more efficient and productive. Given that goods produced in Germany and Greece and priced in Euros, the German produced goods will be more attractive for importers. Unfortunately, this means Greece cannot resolve it's trade imbalance.

Typically, countries tend to devalue the currency in order to boost exports, as clearly demonstrated by China. However, Greece cannot devalue the Euro. This is impossible. Instead, Greece will be caught in the rut of trying to impose austerity measures and unable to increase it's GDP i.e. the total value of goods and services produced in a country in a given year. Since Greece is unable to compete on exports with other European nations, notable Germany, there will be a downward pressure for the manufacture of goods leading to reduced investment and thereby consumption.

So what is the solution? Greece has got to leave the Euro! Greece has to go back to Drachma.

This will give Greece more freedom over it's monetary policy as well as the tools required to increase employment and combat inflation. Greece should devalue it's currency and systematically work towards increasing it's exports which will increase investments and expenditure in the economy.
This will be painful and humiliating to the Greeks. However, this is inevitable and any other means is just a stop gap measure.

No comments:

Post a Comment

Honey... show me the money!

Let's talk money.   We all need money to carry out day to day transactions in our lives. Whether it is to visit the grocery store or buy...