Early this morning the Euro countries headed by Germany came up with what they hope will be a solution to the Greek problem. They will give Greece another 130 billion euros at a very attractive interest rate. According to German finance minister Wolfgang Schäuble this should help get Greece on financial track by 2020.
I don’t believe this will help. In six months Greece will still have the same problems as they have right now. How could this be you may ask?
The problem is Germany. Life in the German speaking countries has predominantly been dictated by a mentality of saving. Germany itself is an industrialized country where outputs are maximized and people worked till late in life. This morality of saving dictates how the Germans believe the whole mess started. They believe that Greece was simply wasting money and wants them to save save save. This is much like the Republicans in the USA pushing for ever more spending cuts. However, the issue is not just Greeks saving. In fact the cuts they’ve made have actually been more detrimental to the country. Since the start of the crisis GDP has fallen 9.5% and unemployment has risen to 14.8% (doubling since 2008).
Greece’s biggest problem, like that of many countries is that it’s income is not high enough. The EU and especially Germany should have got off their high horse of fiscal discipline and looked at the real causes of the fiscal anarchy in Greece.
The right way forward would be to understand why Greece has traditionally operated subpar on an economical level. The country needs an industry that goes beyond tourism. Why is the country producing less agriculturally than it did 7 years ago? Why is Greece not producing anything of real economic value for the rest of the world? Until Greece solves that problem it will not solve its real economic problems. Like many other countries, Greece is contending with a lost generation of educated but unemployed young people. These are people who would rather be working than protesting. However, similar to what happened in Scotland in the 19th century the well educated will immigrate to other countries in search of stability and opportunity and put the country into a further tailspin as it will not be able to innovate.
Back to balancing the budget at the utter hypocrisy of the Germans and the French, the Greek military has also just received a budget increase of 0.05% of GDP. It doesn’t sound like a lot, but that’s 4.7 billion euros. In comparison, the budget cuts its been forced to make this year should save the country 3.1 billion euros according to the European Commission. While France and Germany can plan to profit from the military budget by supplying Greece with military equipment, the people of Greece will have even less money and services to help get them out of the fiscal mess they are in. Cutting military spending and asking the EU to act as a protector of Greece should Turkey ever try to attack would have been a better idea.
The European Central Bank and the German government would be well advised to talk with Mr Krugman on what works and what doesn’t when you try to grow your economies. Unfortunately strict financial morals will not gain investor confidence. Investors want to see growth and profits before they invest again.
Until Greece’s main economic problems are solved — making the country a productive member of the EU and creating a viable industry, no amount of money can save it.