If the current situation playing out in Athens were a melodrama it would be difficult to pick out the protagonists from the antagonists. The Greeks, after all, gave us these theatrical terms and now we are watching the drama of a Parliament giving in to the austerity measures demanded by the international bankers, Athens on fire, and a host of serious questions unanswered. [Bloomberg] Here is a sample:
(1) If we don’t pay down our national debt are we going the way of the Greeks? Quick answer: NO. Longer answer: For starters, Greece has the 41st largest economy in the world, if we measure by GDP. That would put it in the $325 billion range. [CIA] By contrast, the U.S. Department of Commerce estimates that the GDP of California was $1.89 trillion in 2009. [EconPost] Structurally, Greece depends on its public sector (40%?) and tourism, which accounts for about 15% of its total. Again, the contrast between the two economies, one not even enough to put it into a Top Ten List of U.S. state economies, with the total U.S. output of $12.982 billion (December 2011 GDP) and there is obviously no comparison. [BEA]
A second point should be made for all those who are attempting to compare economic apples with ideological oranges. Headlines like “US debt now bigger than (fill in the blank with some year’s GDP)” aren’t really helpful. The point isn’t the size of the debt, it’s the ability to pay it off. The BBC provides this handy graph:
Now, let’s look at another chart from the BBC report:
If the ratio were the sole determinant, what to make of the fact that the probability of repayment is less for Spain than for the United Kingdom which actually has a higher debt ratio? The answer lies in the strength and diversity of the underlying economy allowing it to eventually pay off its obligations.
The “budget deficit” part of the graph doesn’t explain the probabilities in graph One either. Again, Spain has almost the same deficit ratio as the U.K but is above it in terms of probability of payment. Once more, it’s not the ratios that determine the direction, but the likelihood that the underlying economies of Germany, the U.K, and the U.S. can sustain obligations much more capably than the less dynamic and diversified economies of Italy, Greece, Portugal, and Ireland.
(2) Will austerity measures solve the Greek problem? Short answer: Maybe. And, then again maybe not. Longer answer: We need to look at the individual austerity measures, and then ask how productive these initiatives might be. The package calls for (a) a 22% cut in the minimum wage; (b) 150,000 public sector jobs cut by 2015; (c) pension cuts by $370 million this year; and (d) the enaction of laws making it easier to lay off workers, and (e) spending cuts for health care services and defense. [TDJ]
The first question we might want to ask is if the Greek minimum wage was artificially inflated? What we find is that the comparison of the Greek minimum wage to other European countries is difficult because several like Germany, Sweden, Finland, the Czech Republic, and Italy don’t have statutorily mandated minimum wages. What the EuroStats information does tell us is that as of 2009, the Greek minimum wage level was comparable to that in Spain and Portugal, but higher than that in what used to be the Eastern European bloc. [EuroStat pdf]
If the Greek minimum wage isn’t already substantially higher than other members of the Eurozone, then what might the impact be of cutting it by 22%-22%? Here we come to the part where the rubber meets the road and realities diverge from economic ideologies.
For all the glitzy graphs and equally glittering generalities on offer, there is one problem economists cannot solve with their models — there is no way to establish the one, the crucial, and the absolutely necessary, component in scientific research — the control. It isn’t like we can divide nations into a control group with no austerity programs and no wage cuts, and establish a test group with comparable austerity programs, and then statistically compare the two groups. Without a control group there is no scientifically definitive way to control for causality, or even to find rational correlations. And, if we can’t even measure correlations, then we’re left at our starting point — taking economic proposals as articles of faith. [See also: GuardianUK]
One side will propose that creating a more “business friendly environment” with lower wages, lower or no pensions, and more latitude for corporate management will cause economic growth, which will in turn drive increased capacity to meet indebtedness. The other will argue that depressing consumer spending by decreasing wages will simply serve to drive the economy downward, prolonging the hard times. [FalseEconomy] At least one major piece of “meta-research” appears to lend credence to the latter, [IPPR pdf] but without any control we’re still arguing possibilities not statistical probabilities.
(3) Will the Greek problem spread to the U.S? Short answer: Not necessarily. Longer answer: It depends on the problems in the financial sector. To test the waters, we might first observe who’s freaking out about the Greek situation? The answer may be that the more exposure to Greek debt, the greater the possible Freak Out factor.
1. Spanish government debt exposure to Greece is about $502 million, with a total lending exposure of approximately $1.5 billion. 2. The Swiss government’s exposure is about $529 million, with a total lending exposure of $3 billion. 3. The Belgian government has $1.9 billion, with a total lending exposure of $10.5 billion. 4. The U.S. government has an exposure of $1.94 billion, with a total lending exposure (including private sector) of $8.7 billion. 5. The Italian government exposure is $2.4 billion, with a total exposure of $4.5 billion. 6. The British government has an exposure of $3.96 billion with a total lending exposure of $14.7 billion. 7. The French government is exposed to some $13.4 billion, with a total lending exposure of $56.94 billion. 8. German government exposure totals $14.1 billion, while its total lending exposure equals $23.8 billion. [BusInsider] * See charts added below.
A quick and dirty analysis would say that the German government has the most exposure to the Greek indebtedness mess, while French bankers are up to their armpits in it. Banks in the U.S. are much lower in this dubious ranking. Of the eight countries with significant chunks of Greek debt, the U.S. is among the bottom four. We might infer from this that the anguish expressed in the United States will be more a function of how major banks perceive the impact of a Greek default on their bottom lines than how much effect a potential default will actually have on the U.S. economy as a whole.
One effect we might well bet on is that should the Greek’s program fail there will be great gnashing of teeth and rending of cloth on Wall Street. It’s probably safe to predict that the Stock Market would report a drop in stock prices in the event of a Greek failure, as The Herd sees an equally predictable decline in the financial sector’s estimated short term revenues. The problem in the United States may be to engage in deep breathing while The Herd thunders and panics over its “exposure” and possible consequent decline in bonuses and executive compensation?
Just as the banks securitized every U.S. mortgage on which they could lay hands during the Housing Bubble and then sliced diced and traded the portions in unregulated derivatives to their detriment, they decided to lend some $8.7 billion to the Greeks — which may or may not be paid back. Bluntly speaking this is more an example of “reduced lending standards” to be endured than a reason for U.S. citizens to pony up any coin of the realm to further bail out institutions which decry regulation while demonstrating exactly why they need it.
Update: The following charts illustrate the numbers provided in the text –