More news overnight that Greece’s problems just can’t stop getting worse. As I mentioned yesterday the economy continues to veer off track in terms of meeting Troika targets and what the IMF considers to be a sustainable path.
You may be aware that the plan for Greece has been based the premise of “expansionary fiscal contraction” and the idea that internal devaluation would lead to an export-led recovery due to increased productivity. I have been explaining the folly of this plan for over two years, here it what I had to say back in March 2011.
Greece was always going to be in trouble as soon as there was an economic downturn in Europe because they are trapped between the domestic policies of Germany and the inflexibility of the monetary system they signed up to when they joined the Euro. The austerity package is failing, but it is only failing to fix the symptoms. Without currency deflation the only possible outcome is lower wages for the Greeks, which will inevitably lead to default on loans, the exact thing the Germans and French are attempting to stop happening.
What makes the situation even more concerning is that even without the key issue of unaddressed debts, according to the “experts” the plan should still have delivered increased industrial production in tradable goods as Greece slowly morphed into an export driven economy. Last night’s manufacturing PMI once again tells the story of what actually happened.
October data showed another steep decrease in the level of manufacturing output in Greece, which reflected not only lower demand in the domestic economy but also a further marked drop in export orders. Employment meanwhile fell at a faster rate, with firms possessing an increasing degree of spare capacity. Developments on the prices front were also unfavourable for firms in the sector, with a further rise in input prices contrasting with lower charges.
So with industrial production falling, unemployment rising and the government slowly tightening the fiscal screws, as the demands of the Troika ratched up against the failing outcomes, it was inevitable that the economy would slowly retrench and, as I explained 2 years ago, no one would ever get their money back.
In the face of continued failure the Troika has continually revised the recovery path for the country which, as you can see from the chart below , has become near-comical in comparison to the original assumptions.
It should be noted that the top two lines are projections after the Greek government has already written off €100bn through the PSI.
The IMF, initially through Christine Lagarde, has recently expressed concern that the demand of fiscal tightening are too great and Greece should be granted more time, but that hasn’t stopped the Troika demanding another €11.5bn cuts in the government budget. Under these circumstances the extra time does nothing to change my initial conclusions of what will happen to Greece and its creditors, whether the government can stick it out is other question.
What happens next ? We’ll possibly find out on November 12th
Euro zone finance ministers expect a deal on restarting emergency lending to Greece on November 12 if Athens agrees to necessary reforms and takes action on them before then, the head of the ministers said on Wednesday.
In a statement issued after a teleconference of the Eurogroup of euro zone finance ministers, the group’s president, Jean-Claude Juncker, called on Greece to swiftly finalize talks with international lenders on the reforms.
“The Eurogroup expects to further discuss the Greek adjustment programme at its next regular meeting on November 12 on the basis of the relevant programme documentation and seek to conclude on the programme, subject to the completion of prior actions by the Greek authorities and of national procedures in member states, in line with the established practice,” he said.
As I said yesterday for political reasons I suspect Greece will be granted more time and some more money so that it can continue to implement that same failing plan which will inevitability lead to the same failing outcome. That in itself is a major problem, but what is probably a bigger one is that the “Greece plan” is the one they have lined up for Spain.
Full Greek PMI report below.