AT NEWSMAX: “Greece: It Ain’t Over Until It’s Over”
The third bailout only postpones the inevitable economic collapse of Greece and its European and global consequences.
At the very last minute, Greece blinked and capitulated to creditor demands for more austerity in exchange for a $94 billion, 3 year bailout. In doing so, the Greek government may have temporarily avoided bankruptcy. But they also defied the will of the people who voted to reject austerity before the bailout deal was reached. Riots in the streets have ensued.
Austerity has helped to close the budget deficit but it is not enough to save the country from bankruptcy. Past austerity efforts have shrunk the budget deficits from almost 25% of GDP to less than 5% of GDP. But until Greece generates budget surpluses, it will continue to add to its accumulated debt of $345 billion, or almost 200% of GDP. Even when it does generate a surplus, those surpluses would be so small, it will take a long long time to pay down the debt to a manageable level.
As a result, the International Monetary Fund is pushing for some kind of debt relief. But forgiving part or all of the loans will be a bitter pill to swallow for the creditors. However, extending the loan period would help lessen the payment burden on Greece.
Austerity and debt relief focus on the cost side but minuscule attention has been put on the revenue side of the equation.
The only revenue solution proposed has been increasing taxes as part of the bailout deal. But expecting tax revenues to increase seems to be a flawed tactic with an economy that has shrunk 30%, has persistently high unemployment and low workforce participation, and rampant tax evasion.
What is needed are solutions that grow the Greek economy. A growing economy generates more business tax revenue and employs more people, which in turn raise income tax revenue.
Structural reforms would include tearing down the high barriers to entry for foreign investment and entrepreneurial competitors, reducing the crushing regulatory burden on business, shrinking the size of government while making it more efficient and less corrupt, and simplifying the tax code while improving enforcement. These problem areas are ingrained in the culture and will take years for solutions to result in a freer and more competitive Greece.
But unless the economic pie increases in size, Greece has no hope of ever getting out of its financial mess. The recent bailout will buy time but will Greece use it wisely? If not, the Greece will end up in the same place again.
Originally posted on newsmax.com
Categorised in: News