Tuesday, October 30, 2012

The Euro Is Going Nowhere Fast

Greek President Antonis Samaras has ironically become a salesman for austerity, since he wants to avoid his coalition partners starting to chip away at individual provisions of the austerity and reform packages, limiting access to cash.  Reform of labor market practices, which is fundamental for improving Greek productivity and competitiveness, has already been vetoed by  coalition partners New Democracy and  Pasok.

The original goal for Greece to achieve a primary budget surplus (excluding interest payments on debt) equal to 4.5% of GDP by 2014 was, and is, absolutely ludicrous and unattainable.  The current backup plan is to give Greece another two years to achieve the target, but Spiegel estimates that this will require an additional 20 billion financing over the two year extension.  

The fundamental reason is the ongoing shrinking of the Greek economy.  Austerity and the global slowdown have caused the Greek economy to shrink by 20 percent over the past five years. This is why the world has witnessed genuine anger and anguish in the streets, as opposed to the usual gentrified student and government worker protests.  

According to Taggespiegel, lack of progress towards the budget surplus can't be blamed on "...any lack of austerity by the Government in Athens."  They point out nine months to-date in 2012, Greek government expenditures have been €2 billion less than required by the austerity budget. The problem has been the collapse of tax revenues, driven primarily by the contraction of output and income, as well as by capital flight and a collapse in tax collections.  The "Lagarde list" of wealthy Greeks with Swiss bank accounts is a national scandal, but nothing can be done about it.  Those who can fly have done so.  

It's hard to see a scenario continuing where the Greek government keeps wearing sackcloth and ashes, begging for more relief.  They can never achieve the 4.5% GDP target even in 2016.  What is the point of this two year long multinational charade? 

IMF Chief Economist Olivier Blanchard, whose organization has never met a consensus forecast it didn't like, now has a dire outlook on the Bernanke rescue.  To paraphrase what he says, we're in for a lost decade before recovery. 

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