Monday, 17 August 2015

Growth will not solve Greece’s problem.

A number of deluded individuals seem to think that the magic potion “growth” will solve Greece’s problems.

The argument is that more GDP will enable the Greek government to collect more tax and thus repay debts. Well unfortunately growth as such will not necessarily solve the problem.

To illustrate, to the extent that growth comes thanks to more demand from Greek consumers, that will simply draw in more imports, which in turn puts Greece further into debt. And if there’s one thing Greece just cannot take on any more of right now it’s debt.

On the other hand if growth comes thanks to increased demand for Greek exports, or more import substituting activity by Greeks, then Greece’s debts decline, and demand from Greek consumers can be bumped up.

So the crucial point is to improve the Greek balance of payments. Thus those wicked, evil EZ authorities who are imposing austerity on Greece with a view to bringing internal devaluation to Greece and hence making Greece more competitive are doing the right thing – or rather the “least worst” thing -  out of a selection of even worse alternatives.

That is, a system under which a country has to undergo years of austerity in order to solve a balance of payments problems is utterly chronic. But that’s common currencies for you.

If I were Greek, I’d be pushing for Greece to leave the EZ and re-adopt the Drachma. And it seems that a majority of those with an interest in economics agree with that idea if the poll at the end of this article is any guide.

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