It is time to admit a basic truth: Greece is insolvent. Its national debt is falling, albeit very slightly, but its economy is shrinking even faster. We knew all of this even before it missed its payment to the International Monetary Fund on Friday: the country is stuck in a vicious circle from which the only escape must be a combination of default and withdrawal from the single currency.
Numbers from Standard and Poor’s tell almost the whole story. They reveal that in 2013, the value of Greece’s output in nominal terms was €182bn (£132bn), against €327bn for its gross central government debt, which obviously was unaffordable.
In 2014, the national debt fell back by a relatively trivial €1bn, which was good news of sorts – but unfortunately, the country’s nominal GDP fell even more quickly, slumping by €3bn.
This year, the national debt is expected to drop by another €4bn to €322bn, though whether this decline actually materialises remains to be seen – but Greece’s nominal GDP will fall by €5bn to €174bn.
The result is that Greece’s national debt will reach 185pc of GDP in 2015, up from 182pc last year and 180pc of GDP in 2013. Other measures and forecasts will give slightly different numbers, but the point is that the debt burden is falling less quickly than GDP in cash terms, which is a catastrophe and means that the country is effectively bust.
There are only a few possible solutions, none of which is easy and many of which are utterly impossible within the current institutional constraints. Falling nominal GDP can be rectified either through much faster inflation or by improved real GDP growth, or a combination of the two. Unfortunately, Greece doesn’t control its own monetary policy and is therefore powerless when it comes to prices; and its money supply is being destroyed by the neverending run on its banks, guaranteeing extreme deflationary pressures. Consumer prices are falling by 2.1pc a year, a direct result of there being too little money chasing too many goods and services. This means that the real value of debt is rising.
In addition to its utterly inappropriate monetary policy, Greece remains crippled by a series of idiotic supply-side policies, extreme levels of red tape, insufficient competition and all the other flaws at the heart of the Greek economic model.
What of spending cuts, you might ask? Aren’t they also contributing to depressed demand? Yes, of course, but only because monetary policy isn’t allowed to compensate. A fiscal shock can be cancelled out by looser monetary policy in ordinary circumstances, but this isn’t happening in Greece, which for all intents and purposes is saddled with a foreign currency.
Greek PM Alexis Tsipras
The euro is a one-size-fits-all currency; given that Greece accounts for just 1.7pc of the eurozone’s GDP, and shrinking fast, its local economic conditions have zero impact on the European Central Bank’s decision-making. This is exacerbated by the fact that the rest of the region is undergoing one of its occasional and inevitably short-lived mini-recoveries. Eurozone GDP growth hit a 1.4pc annualised pace in the first quarter. As Bank of America points out, this rate of expansion was faster even than that of the US and Britain for the first time since early 2011.
Greece is diverging in ever more extreme fashion from the rest of the eurozone. Its nominal GDP is back to a level last seen in 2003, and global investors increasingly classify its economy as emerging, rather than developed.
As I have argued repeatedly, there is only one way forward for the Greek economy: it needs to strike a grand bargain with its creditors, default on most of its liabilities and ditch the euro. This would be a huge gamble, but the risks of staying the current course are far greater.
[“source – telegraph.co.uk”]