September blues

Implementation of the memorandum agreement over the first quarter has left the Socialist administration and the troika (European Commission, European Central Bank and International Monetary Fund) relatively satisfied. Protests by the populace have eased; the fiscal deficit has been slashed and international bankers have collected their exorbitant interest rates. However, the government should brace for the consequences of its decisions as the Greek economy is a bit like the Titanic heading for an iceberg, turning a blind eye to all conventional economic theory. A first paradox is that, despite the drop in consumption, inflation is at a record high. When the entire world is concerned about deflation, Greece is worried about stagflation. Experienced in the 1970s, at a time of full employment and rising incomes, the phenomenon is atypical within the current context of falling wages and pensions. A second paradox is that, despite the artificial increase in prices due to inflation, gross domestic product (GDP) is in for a precipitous decline (The Economist puts it at 4.8 percent). This will increase public debt as a percentage of GDP from last year’s 115 percent to 130 percent in 2010 and to 150 percent in 2014. This means that even if Greece were to survive the five-year marathon of austerity measures and meet the demands of the memorandum, in the end it would still find itself behind the starting line. A third paradox is that even in conditions of severe recession and diminishing imports, the current-accounts deficit is growing. That means that the so-called «domestic devaluation» at the expense of salaried workers is, in fact, damaging competitiveness rather than boosting it. A fourth paradox is that the brutal austerity measures have failed to restore market confidence in the Greek economy and, according to the credit default swap market, Greece is more likely to default than Argentina, Pakistan and Ukraine. After all, the first month following the signing of the memorandum in June saw a large outflow of foreign capital from Greece. And to think that the government ruled out a default on payments on the grounds that this would drive foreign capital from the country. Taking into account the collapse of state revenues and the drop in tourism, it seems likely that the dog days of August will be succeeded by a rash of autumn storms.