Saturday, January 23, 2010

Greece on the road to an economic meltdown

In 2002 the Argentine economy broke down. For years their coin had been pegged to the dollar, but as the inflation in Argentine was higher than in the US this let to an increasing trade deficit for Argentine. Yet the Argentine government couldn't muster the political courage for the painful reforms that were needed to correct this. And so, finally, in 2002 the country had to let its currency float. As a result the economy shrunk that year with 10%. But in the following years it regained healthy growth.

It looks like Greece is going the same road. But it is doubtful whether it will have such a speedy recovery: the problems look to serious. The budget deficit is 12%, it imports three times as much as it exports (29 vs 93 billion US$) and tourism fills only a small part of that gap.

Yet the Greek government can't be bothered with economic reform. They have promised the EU to reform their budget in 2012. But given their lacking sense of urgency they most probably will resort to new bookkeeping tricks rather than apply real reform. The inevitable conclusion has to be a serious economic meltdown.

When the credit crisis hit the Baltics demanded a speedy entry into the eurozone with the claim that that would save their economy. The example of Greece seems to indicate that it only delays the problems by a few years.

As Greece is a member of the eurozone no one knows what form such a meltdown will take. Will the Greek state go broke and stop payments? Will it exit the eurozone? The eurocrats are afraid and go out of their way to pamper the Greek government in order to delay the inevitable. However, this will only have as effect that the final crisis will be worse.

It may take a few more years before the meltdown happens. But the later it happens the worse it may be. For the Balkan countries such a meltdown will be bad news. Greece is an important investor in many countries and it employs many migrant workers from Albania.


Anonymous said...

" it imports three times as much as it exports (29 vs 93 billion US$)"

Is this a problem, as long as Greece is paying for what it imports?

Wim Roffel said...

Sure it is. Sooner or later they will run out of money. And then it becomes a very big problem in a very short time.