The ongoing negotiations between Greece’s hard-left leaders and its European creditors (together with the IMF) regarding whether the former will agree to the fiscal and tax reforms demanded by the latter are becoming more farcical by the day. The last five months have brought non-stop drama, melodrama, and posturing, but no resolution. Its creditors see Greece as a potential financial black hole into which ever-larger loans enter but are never repaid. For their part, the Greeks are reluctant to face the fact that cannot both have their cake (the Euro) and eat it too (by continuing to pile up external debt).
What is depressing is that no one seems to understand how the Greeks got here. Perhaps this chart, comparing the Greek and German GDPs per capita for the last three decades, will help. As shown, during the period from 1983 to 2013 (the most recent year available), German GDP has exceeded the Greek figure by a minimum of roughly 50% and a maximum of about 100%. This data should both clarify the nature of the problem, and identify the long term solution.
Germany can afford its generous welfare state because its economy is highly productive, which is to say it creates great wealth. The government can siphon off a portion of these resources to provide pensions, healthcare and education; mandate that its employers grant lengthy paid vacations and parental leave; and so on. Greek politicians have provided similar goodies, but can only do so by means of massive foreign borrowing; hence the current crisis.
The solutions are obvious, but are probably ideologically unacceptable. Greece desperately needs economic growth. This implies lowering taxes to promote capital formation and the return on productive labor, reducing barriers to foreign investment, dramatically shrinking the public sector, and repealing onerous regulations. It also means eliminating government pensions for 55 year-olds and reducing unemployment benefits, both of which discourage workforce participation. However, when belief in the virtues of the state and distrust of free markets have become articles of faith, it will require a miracle to pull this off.
Like Germany, the US has a highly productive economy, but in just the last six and a half years our national debt has risen from $10.6 trillion to $18.2 trillion. We are traveling the same road as the unfortunate Greeks. Are we any wiser? Only time will tell.
