A Submerging Economy

I attended an Emerging Markets conference in London in 2011, and one of the topics was the Greek crisis du jour.  During the presentation, the speaker (whose name I can’t remember to save my life), wondered why Greece was being discussed at an emerging markets conference, since it wasn’t an emerging economy at all, but a submerging economy.

Fast forward 5 years from that conference, and 7 years since the first Greek crisis struck, and we haven’t moved an inch in either direction.
Embed from Getty Images
Countries and multilateral organizations keep pouring money over to Greece in the hope that they might eventually pay back their debt.

Having grown up in South America in the 80s, I am very familiar with debt crises.  And over time, there has only been one solution that has produced the expected results: Austerity measures, currency devaluation, inflation control.  Applying them, makes your products cheaper and therefore more competitive, reduces spending, controls inflation and works for the people, the country, exporters, creditors, etc.  There is, of course, short term hardship; but, in the medium term the crisis is dealt with.  Greece hasn’t tackled one of the main points and 7 years later we see even more hardship coming the Greeks’ way.

Einstein defined insanity as doing the same thing over and over again and expecting different results.  The Greeks have tried austerity, cutting benefits, increasing taxes, extending the working week, extending the working life, and it’s not working.  As recently as this week, the government was passing further austerity measures.  What makes them think it will work this time around?

The definition of insanity is doing the same thing over and over again and expecting a different results.

Albert Einstein

So far the string of austerity measures has failed to address the key issue: the Euro.  The Euro is by far out of Greece’s league.  Their products, services, and workforce can’t compete with the likes of Germany, France, Italy and other Euro-zone members.  They need to leave the Euro, return to a new version of the Drachma, and seriously devaluate.  By doing so, their products and services will become competitive enough to be sold not only across the EU, but also beyond its borders.

Since the creation of the Euro, I have argued that you can’t have monetary policy without fiscal policy, and as it stands now, you have the ECB setting monetary policy, but each country individually is setting their own fiscal policy, and since there is a big disconnect between both, it is unlikely that problems like Greece’s will be resolved any time soon.

Since the time of the crisis, Greece’s GDP growth rate has been negative on average, its debt as a percentage of GDP is currently at 177%  And I don’t expect any new austerity measures on their own will help in the near future.

Advertisements
This entry was posted in Bonds, Currencies, Economy, Emerging Markets and tagged , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s