Don’t count on a new aid package to solve Greece’s financial woes. While the European Union appears to have cobbled together a short-term financing package for the debt-ridden country, the assistance looks more like an effort to buy time than to solve the country’s fundamental problems, say Peter Boone of the London School of Economics and Simon Johnson of MIT.
Boone and Johnson estimate that if things remain on their current course Greece’s debt will hit 150% of GDP within the next few years, a level that is not sustainable. But the alternatives look ugly.
To stabilize its debt-to-GDP ratio, Greece would have to move from last year’s primary deficit of 7.7% of GDP to around a 6% surplus. (A country’s primary deficit is its government budget balance excluding interest payments.) That would involve huge cuts to government spending.
So far, Greece appears unwilling to contemplate such drastic action. In fact, the Greek government is counting on a slight increase in wages and pensions for this year. As Boone and Johnson say, “Where is the austerity?”
The two economists believe the financing package is intended to give European banks a chance to get out of Greek debt, before watching as the whole cycle repeats next year when the financing expires and the government in Athens will be forced to take harsh measures.
Freelance business journalist Ian McGugan blogs for the Financial Post.