The New Euro Stimulus Won't Save the Greek EconomyTags Monetary PolicyTaxes and SpendingWorld History
With fear of the coronavirus continuing to wreak havoc on every country in the West, almost all governments have taken radical measures for containment of the virus: mandatory quarantines for many, the closing of businesses, and the prohibition of many economic and social activities. I am not going to pretend that I am a medical expert and share my thoughts about how serious the virus really is. I will, however, focus on its economic consequences.
(Two very informative articles on healthcare policies for the virus are "Government Is No Match for the Coronavirus" and "The 'Bootleggers and Baptists' of the Coronavirus Crisis.")
The New Stimulus and QE for the Greek Economy
On Thursday, the European Central Bank (ECB) announced massive new stimulus programs, saying that it could buy up to €750 billion ($820 billion) in state and corporate bonds. This news comes just a week after it announced the last stimulus package. The aim is clearly to keep borrowing costs low and to provide money for European countries to deal with the current crisis. This is the first time that Greece has been included in an ECB QE program in a long time.
Shortly after the announcement, the Greek prime minister said that the Greek economy will receive a €10 billion stimulus package. This will be followed with other interventionist policies, the most notable of which provides an €800 subsidy to private workers, entrepreneurs affected by the current crisis, and every worker fired after March 1. But the madness doesn’t end there. There will also be new welfare benefits for almost every Greek, and a 40 percent discount on all rent payments has been enacted for the months of March, April, and May. The government has also made it illegal to fire employees during the crisis.
Why Will It Fail?
There is an old saying that you’ve got to save for a bad day. This means that you need to save some money so that you have the proper funds to get through a tough time. The problem that Greece and the EU face is that they don’t have any savings. Instead the Greek economy—and most European economies—are dependent on debt and on people spending money that they don’t have.
In a healthy economy people would be able to afford not working for a few weeks during such an emergency, because they would have savings, something that mainstream economists hate and have waged a huge war against. The Fed the ECB have artificially pushed down interest rates, prompting government, corporations, and consumers to borrow unsustainable amounts of money. Their response is more spending and “showering” the economy with money.
Bailing out one or two specific industries, although definitely bad economically, is at least feasible, because there are others to pay for it. But bailing out everyone is another matter. Where will the money come from for that? And where will it come from when the government decides to suspend tax payments because of the virus? There is no free lunch. If you cut taxes, you have to cut spending, and if you want to increase spending, you have to tax more. In the end, the deficit will have to be paid by future taxpayers. The money won't come from lenders. After all, the bond market is crashing, since every country is facing the same crisis.
The only source for all this free money that remains is the ECB, which just like its American counterpart creates money “out of thin air.” But this won’t solve supply shortages in the market, which are sure to result from so few people working.
An Economy That Never Recovered
In Greece things are worse than in most of Europe. The country's two biggest industries are tourism and sailing, which provide almost half of GDP. These have been hit hard as virus fears have mounted.
And Greece is facing this from an already weak position. According to the Heritage Foundation's economic freedom index, government spending already amounts to 48 percent of GDP, layered over the still massive public debt, equivalent to 183 percent of GDP. The economy never really recovered from the recession. Labor laws make hiring very expensive and risky. Public union cartels are the ones that really control the country, and they undermine production and entrepreneurship given any chance. The agricultural sector is heavily subsidized, and the the service industry is subjected to many price controls. Even during the years of the “austerity” government surpluses were minimal and were overtaken by deficits from future years. Indeed, the governments failed to cut spending and taxes, and in fact the massive debt has only increased.
Basically, the Greek economy is just a huge bubble of debt and spending. This was situation was sustained by endless bailouts from European taxpayers and low interest rates (even though they were some of the highest in the EU). If it had not been for that, Greece might have been more rational and less likely to be fooled by cheap credit, or it would have had to deal with consequences alone, becoming Europe’s Argentina. After all, if other Europeans were lending them money, the Greeks would have to print the money themselves. Or just stop spending. But the Greeks never saved or produced enough to justify their high standard of living compared to other countries. In other words, we are living beyond our means. Its not that Greeks are lazy; once again, it's the state that is undermining production and fuels Greece’s famous anticapitalist mentality.
But the ECB’s repeated bouts of QE really do make things worse. It’s foolish to think that businesses that aren't sustainable at 1.5 percent interest rate will suddenly become productive at 0 percent. If the economy runs on a 0 percent interest rate and doesn’t recover, what will happen when interest rates rise to 0.5 percent? Panic will ensue, making another European debt crisis likely. An economy in which business can’t pay for debts and expenses even with 0 percent interest is an economy ready to collapse.
The Greek state needs to stop its unsustainable policies involving ever growing handouts. Government spending always undermines the private sector's production, which is made possible by saving. Instead, government policies should be encouraging saving. In order for Greece to survive the economic fallout of the coronavirus it needs to realize that it needs to let the bubble pop.
This means that there will be even harder years ahead for Greeks. But in the long term, it makes more sense. With unsustainable bubble businesses evicted from the market, resources and capital can be used less wastefully. Greece needs more production of goods and services. That’s what makes a nation and its citizens wealthy. Paper money isn’t wealth. If Greece doesn’t do this, then, yes, in the short term it will be less painful. But this means more pain in the long run.