The finance ministers of Europe seem on the verge of giving Greece another bailout—one that will allow the country to stumble on until the end of March before the whole process starts over again. The fact is that Greece will have had an election by the time this discussion starts up again and, if one looks at the polls, the next Greek government will repudiate the current deal and likely refuse to go along with most of the demands. The Greek population is violently opposed to the austerity plan, and there are parties from the radical right and radical left that are exploiting that fury.
At the same time that there is intense debate over the current deal, there is controversy regarding the ultimate goal for the Greek economy. It has become an article of faith that Greece has to reduce its debt to the point that it is 120% of its GDP. The prevailing wisdom is that anything over that figure is wholly unsustainable, while much under is unrealistic. And the Greeks will be very hard pressed to make this goal under the best of economic conditions. It would require Greek growth at a pace that has eluded the country for years and is far higher than the average of the entire EU.
Nations that drag themselves out of this debt or nations that can sustain a high ratio are those with a strong and reactive export sector that is generally based on possession of a key commodity like oil or a strong manufacturing base. Greece has neither of these. The commodities it sells are marginal at best, and there is no industrial sector to speak of. This is a nation that relies on tourism and the activity of the Greek shipping industry.
Analysis: Greece desperately needs the bailout if it wants to keep negotiating a solution to the more fundamental issue. That said, it is not a panacea by any stretch of the imagination. Getting a permanent solution for Greece is a matter of converting Greece into a modern economy that really belongs in the European Union as something other than a permanent ward of the state. To a somewhat lesser degree that is also the issue in Italy, Spain and Portugal. These are nations that have more resources at their disposal than Greece but face much the same problem as far as consistent competitiveness. The question as to whether Greece can sustain a budget that is 120% of its GDP is one thing, but there is a bigger question than that. Can Greece develop something resembling a modern economy that justifies its presence in a European organization at all?
Source: Chris Kuehl, PhD, NACM economist