Greek debt recession and austerity (part 1) A primer of why Greece is in a tough situation (more in future videos)
Greek debt recession and austerity (part 1)
- Greece and the crisis in the European Union has been in the news for some time now,
- so it's long past due that I did a video on it
- and just so we have a time context that you might be watching this video far in the future.
- This video is being done in May, 2012.
- So we really don't know how all this is going to play out,
- but I hope over the next few videos to lay out the potential scenarios and what might be the risks and drawbacks,
- uh, drawbacks of each of them.
- So this right over here, that is Greece.
- And so let's just think about it on a very high level,
- what the situation that they find themselves in.
- So when you look at this chart right over here
- the most obvious thing and it actually pops out from this top line right here,
- their public debt is growing at a dramatic level
- and their debt to GDP...this is actually the more relevant thing
- because you might have a huge amount of debt
- but if your GDP, if the productivity of the country is high,
- that might not be that big of a problem.
- What matters is how much you owe relative to how much that you can actually produce.
- And we see right over here the debt to GDP ratio is a percentage
- so this debt is a percentage of GDP , it's well over 100%.
- It is well over 100% for Greece.
- And you can see a large part of that is because
- the public revenue, the taxes that the Greek government gets
- is consistently lower than their public expenditures.
- So let me write this down.
- So you have taxes. Taxes are less than spending
- which lead to deficits...deficit is how much you couldn't afford,
- or how much, how much spending you have above and beyond your revenues in a given year.
- And so they have deficit spending on a year by year basis which increases their debt.
- The debt is the total amount of money that they owe,
- that's this top line right over here.
- So this leads to increasing debt, increasing debt right over here.
- But that's not the only problem.
- Because as their debt keeps increasing,
- people start to become more and more suspicious of
- whether the government is actually good for their I.O.U.'s,
- whether the government will actually pay back that debt.
- And so as the government's debt becomes riskier and riskier,
- people start demanding higher and higher interest rate.
- So the debt goes up. And as the debt goes up,
- people think that they're not a good borrower.
- So they want higher interest, interest goes up.
- But now that makes things even worse,
- because we were already running deficits,
- we were already spending more than we were bringing in taxes,
- now we have to spend even more on the interest on our debt.
- So if you were spending 10% on your interest in one year,
- so if you had $100 billion dollars, you just spend $10 billion,
- now if the interest rates go to 15%, you have to spend$15 billion on that.
- So that's going to make your spending on interest go up,
- so that's going to make the debt go up even more.
- So Greece finds itself in a situation like this.
- So you might immediately say "well, you know
- there's seems to be a fairly straight forward solution here.
- Why don't they do some combination of increasing taxes?"
- So why don't they increase taxes?
- "And maybe even more importantly, why don't they decrease spending? "
- Why don't they decrease spending?
- Now the first cut is a political situation.
- Because this spending right over here,
- these are for the most part, these are promises to people,
- these might be government obligations, these might be pensions,
- there might be retirees that are dependent on this,
- there could be other types of government programs.
- So if you decrease that spending,
- the people who are losing out on those entitlements,
- they are not going to be too pleased with you.
- So politically that's probably not the best thing to do.
- But there might be a brave Greek leader that say
- "well no, this is what we have to do to save the country,
- we're willing to cut that spending."
- But that by itself, even if someone was willing to do it,
- it still isn't clear whether it's a good idea.
- Because you might have noticed this other line right over here.
- This other line, "Real GDP Growth" .
- Greece right over here is in a fairly severe recession.
- They have a lot of unemployment,
- clearly factories aren't producing at the levels that they could actually produce.
- So if you either do some combination of increasing your taxes,
- increasing the government revenue, and decreasing spending,
- that actually will suck air out of the economy.
- So this combination of things, and you've probably heard this word a lot,
- this combination of things,
- and it tends to focus on the decreasing spending in a very significant way,
- this is referred to as "Austerity."
- The word "Austere" just generally means someone who doesn't have a lot of frills,
- they just deal with the most bare necessities
- they really kind of cut things to the bone.
- And so when a lot of people say "Hey Greece you have to do Austerity measures"
- --and there's actually already been a couple of rounds of austerity measures.
- "you need to decrease your spending in a big way."
- But the problem is Austerity sucks money out of the economy,
- and so Austerity leads to the economy slowing further,
- and if the economy slows further, that actually going to hurt your taxes.
- So the economy slowing makes your taxes, your actual revenue that you're getting, go down,
- and that can actually make your deficits even worse!
- Because now people say "oh my God, their economy is bad,
- they're even less likely to be able to pay."
- Interest rates go up, and since the tax revenue goes down,
- and a lot of the spending isn't tied to the economy,
- a lot of the spending actually goes up with the economy.
- It might be unemployment insurance, it might be people retiring, pensions,
- and so that can actually make things worse.
- And that's actually what has happened over the last few years.
- Because, and we'll talk more about this,
- the Greek's were given some help from the rest of the European Union.
- In exchange, the rest of the European Union said
- "well, if we're going to help you, you gotta take some pain.
- And the pain that you had to take were these Austerity measures right over here."
- But these Austerity measures actually made the economy do even worse,
- which made debt as a percentage of GDP even higher,
- because now the GDP itself was shrinking at a even larger and larger rate.
- So if you think, just all of these aspects, there was no obvious answer here.
- You do Austerity, it's kind of a bad situation because that's going to hurt the economy,
- you're going to become even less productive, at least in the short term.
- And on top of that it's hugely politically unpopular,
- to the point to where we have such high unemployment that it's becoming politically unstable.
- So I'll leave you there, I'll let you mull over this situation,
- and in the next video I'll talk about what a normal, independent country,
- truly independent, both fiscally and monetarily independent country,
- would do in a situation like this, given Greece's situation.
- And then we'll talk about why Greece kind of can't do it in its current context.
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