Is Greece going to set off the long feared next wave of the Great Recession?

I don't mind being labeled whatever term you see fit, but your babbling about the EU is so out of context that it would be an insurmountable to educate you.

But temporary financial patches will not deal with the real problem: Greece's budget deficit of 13 per cent of gross domestic product. To prevent an exploding ratio of government debt to GDP, Greece needs to cut future annual spending and increase its future taxes in a com bination equivalent to at least 10 per cent of GDP.

Unfortunately, such a fiscal contraction would sharply increase unemployment, already at a painful 10 per cent; and political opposition makes such action impossible.

If Greece still had its own currency, it could, in parallel, devalue the drachma to reduce imports and raise exports, cutting the 15 per cent of GDP trade deficit. The level of Greek GDP and employment might then actually increase if the rise in exports and decline in imports added more to domestic employment and output than was lost through raising taxes and cutting government spending. But since Greece no longer has its own currency, it is not free to follow this strategy.

So what can Greece do? It can simply raise taxes and cut spending, asking its population to suffer many years of high unemployment. Or it can seek a real bail-out from its euro partners, in which they give the Greek government enough money year after year to pay its bills without raising taxes. Even if the small size of the Greek economy made that feasible, it would be rejected because Germany and France would correctly fear that doing so would lead to pressure for similar bail-outs from larger eurozone countries. Another option is for Greece to secede from the eurozone, perhaps starting a process in which other eurozone countries with large fiscal and trade deficits also drop out.

None of the above choices appeals to Greece or its eurozone partners. But there is a better idea that could preserve the single currency while helping the beleaguered country to adjust its twin deficits.

The rest of the eurozone could allow Greece to take a temporary leave of absence with the right and the obligation to return at a more competitive exchange rate.

year.............................2009.........2010..........2011.....2012
GDP GROWTH (%) -2.0 -2.25*** 1.5 1.9
PUBLIC DEBT(% to GDP) 115.1* 120.4 120.6 117.7

European Commission officials said they expected Athens to be able to return to markets for funding in the second half of 2011 once it had won back credibility by implementing tough reforms.

But that remains a big "if," given the grim economic outlook and the scale of public opposition.

SOCIAL COHESION

"These government measures are destroying my life," said Panagiota Katsagani, a 25-year-old part-time school teacher who was marching in Athens on Tuesday. "I was planning my future, now I have to go back and live with my parents."

Participation in demonstrations has so far been limited to a few tens of thousands, smaller than riots that paralyzed Athens in December 2008 following the police killing of a teenager.

But anger is growing, raising questions about whether Prime Minister George Papandreou's socialist government can successfully implement what it has promised.

"Whether Greece can actually adjust, whether their social cohesion will remain -- that's the key thing to watch," said sovereign ratings analyst Tom Byrne of Moody's.

-- Stocks sank Tuesday after European debt problems sent another wave of pessimism through the market.

Stocks have seesawed in the past week as concerns about debt problems in Greece and other European countries overshadowed upbeat domestic economic reports.

European debt is again a worry Tuesday, after European markets fell in response to uneasiness over whether a $144 billion bailout package for Greece will be approved by the 15 European Union members that would shoulder much of the cost.

HighSeas wrote:

This isn't really about your post, Francis, but I wondered about sentiment in France concerning the Greek bailout package - I did read Sarkozy's statement from China, but US observers are for the most part turning pessimistic:

Well, even though I'm currently outside France, my perception is that the French are upset too, as are the Germans, with bailing out Greece....
There's something people rarely take into account and it's called "real-politics". There's an absolute necessity for the EU to stay together and act collectively. .....

http://baselinescenario.com/2010/05/06/it%E2%80%99s-not-about-greece-any-more/

There is still a narrow escape path, without immediate debt default and the chaos that would produce:

1. Talk down the euro " moving towards parity with the US dollar would help lift growth across the eurozone.

2. As the euro falls, bond yields will rise on the eurozone periphery. This will create episodes of panic. Enough short-term financing must be in place to support the rollover of government debt.

3. Once the euro has fallen a great deal, announce the ECB will support the euro at those levels (i.e., prevent appreciation, with G20 tacit agreement), and also support the peripheral eurozone nations viewed as solvent by buying their bonds whenever markets are chaotic.

4. At that stage, but not before, the eurozone leadership needs to push weaker governments to restructure " that will include Greece and perhaps also Portugal? Hopefully, in this scenario Spain can muddle through.

5. European banks should be recapitalized as necessary and have most of their management replaced. This is a massive failure of euro groupthink " including most notably at the political level " but there is no question that bank executives have not behaved responsibly in a long while and should be replaced en masse.

To the extent possible, some of the ensuing losses should be shared with bank creditors. But be careful what you wish for " the bankers are powerful for a reason; they have built vital yet fragile structures at the heart of our economies. Dismantle with care.

somewhere in early 2008, things went wrong. After the Bear Stearns bailout in March (gray band), the gold price started actually declining, meaning that monetary policy was tightening. Bad Fed. By the September 2008 meltdown of Fannie, Freddie, and Lehman Brothers (pink band), the gold price was in free-fall, meaning that monetary policy was bar-tight. Very bad Fed. It took 'til November 2008 before the Fed got a handle on things and got the monetary spigot open again. No wonder President Bush was moved to warn that "If money isn't loosened up, this sucker could go down."

Certainly the recent behavior of the Greek government employees unions doesn't suggest that reason and responsibility will prevail there.

Moral hazard is the proclivity of insureds to decrease their level of care once they have insurance. Unchecked moral hazard can hinder insurance markets and, on occasion, cause loss to third parties affected by and uncompensated for losses. Two traditional methods for control of moral hazard are incomplete insurance and conditioning indemnity on observations about the level of care taken by the insured. This Demonstration simulates the situation of an insured who has an initial wealth of 20 but faces the possibility of a loss of 15. The idea is to assume various levels of σ (the accuracy with which the insurer can measure the care taken by the insured) and try to find the levels of indemnity, premium and care condition that result in the highest level of insured wealth that doesn't result in the insurer's profit becoming negative.

.... the perception of rare events is subjected to severe framing distortions: people are aggressive with risks that hit them "once every thirty years" but not if they are told that the risk happens with a "3% a year" occurrence. Furthermore it appears that risk representations are not neutral: they cause risk taking even when they are known to be unreliable.

Certainly the recent behavior of the Greek government employees unions doesn't suggest that reason and responsibility will prevail there. They, in their public statements, are demanding the complete reversal of all the austerity measures directed at their members. This is truly remarkable coming from the the public employees of the most corrupt, venal, and inept government in the EU.

What is most interesting (to me) is that they and a very large segment of the Greek public appear to have lost the connections between producing and consuming, growing and eating, earning and spending. I suspect this is a central and unhappy consequence of the top-down character of European governments and societies - the tradition and practice of seeking the harmonization of society through the perfection of government programs, all at the hands of a permanent governing political class.

Fears are spreading

The Greek Parliament voted to approve the ECB / IMF rescue package and austerity plan