February 16, 2012

Greece's economic bailout a failure

POLITICS - We predicted it a long time ago. The bailout of Greece's economy would only fail because they're not fixing the real problem: Lack of manufacturing.

We're not alone in our predictions.

Many European countries have strong doubts over whether a second massive bailout can actually save Greece. A second bailout which even now politicians in Athens are rushing to meet tough conditions to qualify for the €130 billion ($170 billion) 2nd bailout.

But that 2nd bailout money isn't going to save Greece and we're going to explain why.

Greece's problem isn't an issue of money. Its a problem of work. Not enough Greeks have work and unemployment in the country is sky high.

Even if Greece gets the 2nd batch of bailout money, how is that extra money supposed to help the average Greek? The bailout money will go towards paying for government employees already on the payroll. It isn't going to help the unemployed whatsoever.

For the last 2 years politicians have been wrangling and borrowing money to help Greece save their government from bankruptcy and defaulting on their loans.

Greece got the Eurozone to agree on the first €110 billion rescue for Greece in May 2010. But what did they do with that money? Spent it all on government workers already employed by the government. Teachers, police officers, the military, etc.

Several politicians in Germany, the Netherlands and Finland have grown tired of Greece repeatedly missing budget targets and failing to implement promised cuts, reforms and sales of state assets. Which frankly who can blame them? State assets help the government and selling off state assets to foreign investors is only going to reduce the government's control over their own economy and put that control in the hands of greedy overseas investors.

Such measures would only serve to harm Greece's economy over the longer term for a short term payoff.

Other countries have been forced in the past to do the same thing and their countries are now economic wreaks because of it. Any smart politician who truly loves his country sees what has happened in other countries which have sold off state assets and now know the true price of such backwards thinking.

Meanwhile Greece is in a steep recession, with its economy shrinking 7% in the final quarter of 2011 from a year earlier. Some economists believe it may even be a depression, the problem is that there is no technical definition for a depression and how to define one. The closest approximation is when the situation is so bad that people start selling everything they can at cut rate prices (deflation of commodities).

Other politicians are saying that the Eurozone should just let Greece default on their loans and that the Eurozone is strong enough to take the hit. But that isn't going to solve Greece's problems either. It will just reduce the pressure on paying the interest for its loans.

Since Greece is responsible for only 2% of Europe's economic output its believed the effects of a default would be minor. Some naysayers think it could effect global financial markets and might encourage other countries to also default on their loans.

The problem is how Europe / Greece is trying to solve their problems. Throwing money at the problem isn't going to make it go away.

#1. Greece needs to lower income taxes on manufacturing jobs. Make it more appealing for manufacturers to build things in Greece.

#2. Greece needs to lower corporate taxes on manufacturers and raise taxes on services.

#3. Greece needs to lower taxes (or completely remove taxes) on farmers. Basically anyone who is producing an actual "product" instead of a service needs a break.

#4. Greece needs to cut executive payouts by half until the economy recovers. Politicians and executives working for government owned institutions need to take a huge temporary pay cut. If they don't like it they can quit.

#5. Greece needs to increase income taxes on the rich and decrease the amount the wealthy get back for deductions.

Too much taxes on the poor and manufacturing hampers an economy. Using the above model and other measures to increase manufacturing jobs in Greece the problem of Greece's economy can be solved. The increases on taxes for the wealthy will counterbalance the budget changes.

Once the economy is back on the right footing then incremental changes can be made in an effort to pay off Greece's debts.

The problem therefore in the meantime is Greece's creditors, who want their money back and are insisting on changes that would ultimately bankrupt Greece down the road. Greece's leaders are wise to resist such calls to sell of government assets.

Given time Greece's economic reform will lead to recovery (especially if more drastic steps are taken to encourage manufacturing jobs), but creditors need to be patient.

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