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Wednesday, February 22, 2012

Greece is still Doomed

Notwithstanding the almost deal arrived at for a further EU bailout (it still needs approval from bondholders and, due to upcoming elections, the Greek electorate), Greece is doomed. From The Atlantic:
Greece has finally secured a new $170 billion loan from its European landlords, and the terms are just as unrealistic and doomed-to-fail as you expected. The fact that the country requires a second bailout that's practically the size of its economy -- now crashing through $270 billion and still falling* -- tells you what you need to know about the hopelessness of Greece.

* * *

This plan won't work for the same reason that no austerity and loan plan can work for Athens. Greece's private sector is in a free fall. Unemployment is cresting over 20 percent. Ideally, the government should act as the stabilizer of last resort, and the central bank should flood the country with money to avoid deflation and make exports more competitive. Instead, the opposite is happening. Government spending is down a whopping 34%, and Athens doesn't own the keys to the money-flood machine. The result is turning into one of the worst recessions for a developed country in modern history.

* * *

"Greece is totally gone," Desmond Lachman of the American Enterprise Institute once put it to me. "It's just a matter of time until they have a disorderly default." So why this foot-dragging, can-kicking exercise in futility?

Kicking the can down the road is normally considered idle procrastination. This is different. This is deliberate procrastination. If Greece falls today, nobody knows what kind of economic domino effect it will have on other debtors like Portugal, Italy, and Spain, or the rest of the Europe. Europe has selected the muddle-through and draw-random-recovery-lines option. The honest and inevitable choice -- a wild default or even Greece's departure from the EU -- is impossible for euro ministers to imagine suffering through, for today. Meanwhile, Greece suffers.
Check out the graph on unemployment for those under 25 (which is now approaching 50%) and how much the Greek economy must immediately turn around.

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