Monday, March 22, 2010

Greece’s Economic Crisis

by Richard A. Posner

The Becker-Posner Blog

March 21, 2010

I’ll describe the crisis briefly, then address two questions: whether the nations of the European Union, such as Germany, should try to bail out Greece; and what the Greek crisis tells us about what is in store for the United States.

In the easy-money years of the early 2000s—for which we have Alan Greenspan, other central bankers, and President Bush and his foreign counterparts to thank—the Greek government borrowed a great deal of money from banks, mainly in Europe, to fund its huge public sector. Greece has chronic difficulty in funding its government expenditures out of tax revenues because of rampant tax evasion. And its bureaucracy appears to be either corrupt or incompetent or (probably) both, and as a result its published financial data are inaccurate and misled and continue to mislead lenders. The global downturn, which has driven up unemployment in Greece (to 10 percent) as elsewhere, has weakened the Greek economy further, but what has precipitated the country into de facto bankruptcy is the realization by lenders that Greece, like so many other countries, is dangerously overindebted. Its national debt, most of it owed to foreigners, of some $400 billion is greater than its Gross Domestic Product, and its current annual budget deficit is almost 13 percent of GDP, which means that its indebtedness is growing rapidly. Greece like other borrowers has to roll over its debt continuously. In 2010 it will have to replace some $65 billion in public debt, and fear of default has driven up the interest rate on new Greek government debt to 6 percent.

The Greek government has taken drastic-seeming measures to reduce its deficit. It has imposed new excise taxes and increased existing ones, reduced wages and pensions of government employees and increased their retirement age, and reduced public services. Greece has a huge public sector—40 percent of GDP is generated by the public sector, and 25 percent of Greek workers are public employees—and so the government can effectuate big reductions in public spending virtually by a stroke of the pen, though not without inciting riots.


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