Mises Daily

It’s Not Just Debt: Government Spending and Easy Money Fuel the Greek Crisis


The Greek government continues to negotiate with international creditors following its recent default on its 1.6 billion euro loan repayment to the International Monetary Fund (IMF).

Consequently, Greece runs the risk of losing access to a 1.8 billion euro loan tranche and 10.0 billion euros for recapitalizing banks.

Commentators are of the view that the key factor behind the troubles in Greece is high government debt, which as a percentage of GDP stood at over 177 percent in 2014 against 79.6 percent in 1990.

Greek Government Debt % of GDP

But it is not debt as such that is behind the current crisis in Greece. Large government outlays and strong increases in the money supply are being ignored in most analyzes of the Greek crisis.

Since early 2000, the underlying trend in the growth momentum of government outlays was heading up with the yearly rate of growth closing at 45.5 percent in March 2009. Since then, the trend in the growth momentum has been declining.

Year on year the rate of growth of Greece’s monetary measure AMS stood at 20 percent in July 2004. It stood at a lofty 18 percent in August 2009 before sliding to minus 13.8 percent in April this year.

%chang Greece Government Outlays and AMS

Loose fiscal and monetary policies have been instrumental in the generation of various non-productive activities that have been squandering wealth.

Easy Money Weakens the Wealth-Generation Process

A fall in the growth momentum of both government outlays and the money supply is good for the wealth generation process.

In other words, a decline in the growth momentum of government outlays and money supply (see charts) has arrested the diversion of wealth to non-productive activities from wealth generating activities.

The current crisis is centered around non-productive activities that can no longer divert wealth from wealth generating activities on account of a fall in both government spending and the rate of growth in the money supply.

From this perspective this is good news for the Greek economy, and what is now needed is a tight grip on government outlays and to allow the plunge in the money supply to continue.

Greece’s wealth generating process has been badly damaged as a result of past loose fiscal and monetary policies. Thus, reverting back to loose fiscal and monetary policies, as suggested by various famous economists such as a Nobel Prize Laureate in economics Joseph Stiglitz, is going to make things much worse.

Remember, neither more government outlays nor more monetary pumping can generate real wealth. Only the strengthening of the wealth generating private sector can do that.

The Damage That Has Been Done

Now, since currently non-productive activities are likely to comprise a large portion of total activities, the effect that is generated from their demise appears to be very severe.

After closing at 122 in April 2008, the industrial production index plunged to 91 by March this year — a fall of 25.3 percent. The unemployment rate climbed from 7.3 percent in May 2008 to 25.6 percent in March this year.

Greece Industrial Production and Unemployment Rate

Any threat to the financial systems of other European economies is not due to the Greek default, but instead is a result of loose fiscal and monetary policies that have damaged the savings bases of various European countries.

Rather than continuing to support wealth-squandering activities and thereby making things much worse, a better way is to allow wealth generators to step in and let them restart the wealth generating process. This means that all the loopholes of money creation should be sealed and government outlays should be cut to the bone. Obviously such measures will be painful for various individuals employed in non-wealth generating activities. Failing to reduce non-productive activities however will only prolong the agony — it is not possible to create real wealth out of nothing.

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