The new Greek government has set a target of restructuring Greek sovereign debt so as to require only a 1.5% primary surplus for debt servicing, into infinity, plus a growth linked parameter. Various calculations are being made for what kind of interest rates and maturities are required in order to not call this a write off but a restructuring. One of these calculations estimates 70 years repayment with near 0% interest rates, inflation at 2% and growth at 2.5-3%.
These calculations fail to include some very important facts that need addressing:
1a. The need for a downward adjustment to the greek price level and hence nominal GDP to make up for lost competitiveness. The inflation differential between Greece and Germany/France is 20% and 17% respectively between 2001 and 2013. Otherwise every effort to reverse the long depression of the greek economy will only result into an external imbalance, the kind of imbalance that pauperization resolved from 2009 to 2014. It was internal real devaluation that the first troika programme requested, as an obvious way of restoring competitiveness, without a 30% drop in GDP, yet this failed as indirect tax hikes and high borrowing costs brought inflation instead of deflation. Going into growth results therefore that the current debt level is viewed as being 220%+ of GDP, not 180%.
1b. The 2% inflation rate on a European level is not on the horizon. It is closer to 0% and not likely to change soon as Europe has entered into a Japan 1990s mentality of only printing money but not truly reforming or improving competitiveness. But then there is the exchange rate...
2. Growth is not something that comes automatically nor can government spending bring growth when you want to keep a 1.5% surplus. Hence, how can growth be restored? This is where the program has suffered, it has been properly identified as a problem all over Europe and by the troika, yet no-one seems to have a clear answer. Nor can EU/EIB funds do it if the fundamentals for investing or working in Greece remain catastrophic; the result would be only white elephants, as one can see in Thrace. Attracting businesses by low taxes, the classic right wing recipee, works when this is done at the expense of the worker, only if you have a closed economy. In a country where emigration has been its main source of foreign exchange for 2 centuries and with completely open borders, if you do not tax the enterprise, you will need to tax the worker who will then emigrate. If you tax the business, it will also leave, except for anything land related. If you tax both business and worker beyond what the state offers back in return, then you have 2010-2014 Greece with high business and people emigration. Adding in an uncertain macro environment, corruption costs, and an uncertain blackmailing-friendly tax system without practical recourse to justice, growth cannot be restored. Addressing these fundamental issues shall be a precondition to growth, but these are not yet on the political horizon. And
3. Growth based on agriculture and tourism; these cannot be the only axes of development, as is the current plan. These are low tech low remuneration activities, and the brain drain shall continue if these remain the main axes, and nominal GDP/living standards will continue shrinking, despite, for technical reasons, real GDP appearing to grow. And so will taxes then...
Ultimately, it is the success on the internal front that shall determine to what extent a 50% or a 100% effective real debt forgiveness is required (hence a growth linked repayment is sensible). And it is independent of what other EU nations are willing to accept, it is more dependent on what will be done internally, as a declining economy* will inevitably lead to default.
*Note: 2014 is a one off stabilization of the Greek economy due to an increase of 20% in tourist arrivals, the rest of the economy continued its decline at a likely -3%; this is not possible to go on forever, just as demand for wheat eventually declined for post WW2 Argentina.
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