Apparently, the Greek government has come out with a very ambitious (understatement) budget for 2011. The budget aims to cut the country’s deficit-to-GDP ratio to 7.8% by the end of the year, significantly below the 8.1% target initially set in the Economic Policy Programme and 6% lower than last year. For 2011, Greece believes that they will be able to trim this number down by another 0.8% to 7%.
The budget took into consideration a 15% decrease in public sector wages, a 10% cut in pensions in BOTH the public and private sectors, and a whopping 4% increase in VAT. In addition to these, taxes on alcohol, tobacco, and gas will all be hiked.
Sure, these plans look magnificent on paper. But will they actually work?
If Greece does decide to take on a fiscal austerity program, they’re facing an uphill climb. I’m not talking about molehills either. I’m talking Mt. Everest, bro. Imagine, just to cut its public debt-to-GDP ratio to 145% of GDP, they’ll have to stomach a 10% of GDP primary adjustment over a span of 10 years. This could very well make matters worse for Greece, possibly sending them on a downward spiral.
Argentina began moving when its fiscal deficit equaled 3% of its GDP. Greece’s is already at 13.6%. Argentina racked up a current account deficit equivalent to 2% of its GDP while Greece’s is five times larger. Lastly, Argentina’s public debt of 50% of GDP was peanuts compared to Greece’s 115%.
For one, Greece can work with the ECB to prevent contagion. Greece should realize that they are not alone in this mess and that it might be better to coordinate with other euro zone nations to come up with a unified solution for their debt woes. Targeting Greek debt alone is like putting a temporary fix on a water leak when the entire house is on the verge of falling apart. What it needs to do is strengthen the financial framework of the whole region first, which would make it easier to tackle the nation-specific problems.
Secondly, Greece can learn from the experience of other nations, such as Uruguay and Pakistan, who suffered sovereign debt crises and underwent fiscal restructuring. It can study the fiscal adjustments that these nations implemented and let its private creditors have a say in deciding which plan is best. From there, it can adopt a similar fiscal adjustment and structural plan for the other euro zone members who are also in danger of a sovereign default (ahem, Portugal and Spain).
Aside from that, the ECB should adopt a loose monetary policy to weaken the euro, which could help keep euro zone products cheap and competitive and the global market. Along with implementing measures to boost domestic demand, this could spur a rebalancing of growth within the region. It’s important for them to get their economy back on its feet in order to ensure that the extra liquidity injected by the EU and IMF keeps flowing.
Well, that’s just my two cents (or two pips, if you will). Even though this Greek debt drama has been going on for almost a year now, not all hope is lost!