It has been a bit over four months since the latest bailout of Greece was negotiated. This bailout featured a write-down of most privately held debt in exchange for further austerity measures. It is already clear that Greece will not meet its deficit targets from this bailout, the main reason being that cuts to the budget have led to a much steeper recession than official forecasters had predicted. The Greek government now expects the economy to shrink 7% over the course of the year.
Clearly things are not panning out as the IMF and the rest of the troika – the European Central Bank and the European Union – had planned. Budget cuts and tax increases in the middle of a downturn are having exactly the effect predicted by the old economics textbooks: they are reducing demand, slowing growth and raising unemployment. Furthermore, since lower output means less tax revenue and higher unemployment means more payouts for unemployment benefits and other transfers, the austerity imposed on Greece is doing little to even bring down its deficits.
This is why Greece will almost certainly miss its deficit targets for this year. In principle, this is supposed to trigger a cutoff of funds from the EU. That would lead to a default by Greece and force Greece to leave the euro and bring back the drachma.
The period of transition will cause enormous economic disruption and pain, but once the new currency is in place, Greece’s economy can return to a healthy growth path. As sme economist argued and There are reasons why Greece’s economy can be expected to perform either better or worse than Argentina’s did a decade ago. But I do not think so.
Argentina since 2001 has ridden the historically unprecedented boom in commodities, the prices of grain, corn and soya having roughly tripled since 2001. Argentina has enormous farm wealth thanks to the pampa, a vast area. It’s annual soya harvest reaches 60 million tonnes, and soya is now trading at over 600 USD/tonne. The greek hinterland is dry scrub. It has very limited farm wealth.
Argentina’s growth statistics have also been considerably over-egged by its ONC equivalent, called Indec. If Indec report growth of 8%, Argentina is probably growing at 6% (Indec still insists that inflation is 9%, when everybody knows its around 25%). Incidentally, even Indec are now reporting negative growth, yet its neighbours Chile, Colombia, Mexico and Peru continue to expand. The Argentine economic miracle is more mirage than miracle.
It is also worth remembering that Argentina walked away from its debts and remains frozen out of international credit markets (it has to sell bonds to its own people to raise funds, when not taxing its farming sector into obsolescence, expopriating foreign companies and stealing pension funds).
Greece cannot “do an Argentina” and expect to bounce back, as cheer-leaders on the left seem to think.