Why Greece Is The Precursor To The Next Global Debt Crisis

The Greek Economy Is Small and Imbalanced

Here are the basics of Greece’s economy, via the CIA’s World Factbook:

Greece’s population is 10.8 million and its GDP (gross domestic product) is about $200 billion (This source states the GDP is 182 billion euros or about $200 billion). Note that the euro fell sharply from $1.40 in 2014 to $1.10 currently, so any Eurozone GDP data stated in dollars has to be downsized accordingly. Many sources state Greek GDP was $240 billion in 2013; adjusted for the 20% decline in the euro, this is about $200 billion at today’s exchange rate.

Los Angeles County, with slightly more than 10 million residents, has a GDP of $554 billion, more than double that of Greece.

The European Union has over 500 million residents. Greece’s population represents 2.2% of the EU populace.

External debt (public and private debt owed to lenders outside Greece):

$568.7 billion (30 September 2013 est.)

National debt:

339 billion euros, $375 billion

Public debt:

174.5% of GDP (2014 est.)

What can we conclude from this data?

  1. Greece’s central government is roughly half of its GDP (by some measures, it’s 59%), meaning that the national economy is heavily dependent on state revenues and spending.  For context, U.S. government spending is about 20% of U.S. GDP. As a rule of thumb, the private sector must generate the wealth that pays taxes and supports state spending. This leaves a relatively small private sector with the task of generating enough wealth to support state spending, pay interest on the national debt and pay down the principal.
  2. Greece runs a trade deficit, i.e. a current account deficit of almost $30 billion annually.  In the 14 years that Greece has been an EU member, this adds up to roughly $400 billion—a staggering sum for a nation with a GDP of around $200 billion.
  3. Austerity and a reduction in borrowing/spending have devastated the Greek economy, as GDP has shrunk 26% while unemployment has soared to 26%.
  4. While public debt is pegged at 175% of GDP, external debt is roughly 285% of GDP—a much larger sum. By all accounts, a significant portion of the Greek economy is off-the-books (cash); even if this is counted, the debt load on the private sector is extremely high.
  5. Foreign exchange reserves and gold holdings are a tiny percentage of government spending and GDP.

This data reflects an imbalanced, heavily indebted, heavily state-centric economy with major systemic headwinds.

The Problem with Not Having a National Currency

The problem with not having a national currency is that there is no mechanism to rebalance trade (current account) imbalances.

Nations with their own currencies can simply create the money out of thin air. This is in essence how the U.S. supports its massive trade deficits: the U.S. imports goods and services and exports U.S. dollars in exchange for the goods and services.

This works as long as the country running trade deficits doesn’t print its currency with abandon.  If a nation prints its currency in excess, the currency loses value, and imports become more costly to residents.  As imports rise in cost (priced in the local currency), people can’t afford as many imports as they once could, and imports decline, reducing the trade deficit.

With no currency mechanism left, nations borrow money to fund their trade deficit.  This is the engine of Greek debt since that nation adopted the euro in 2001.

If Greece had kept its national currency, trade deficits would have declined as the Greek currency depreciated and the cost of imports soared. Lenders would not have based their loans on the illusory guarantee of Eurozone membership.

For nations running large structural trade deficits, membership in the Eurozone was a guarantee of financial disaster, as the way to fund the deficit within the Eurozone was to borrow more money.

There is no way for Greece to fix its debt problem if it keeps the euro as its currency.  Every purported solution that doesn’t address the core cause of the debt is mere theater.

Full article: Why Greece Is The Precursor To The Next Global Debt Crisis (Peak Prosperity)

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