Greek tragedy turns to farce

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.

Greece Manufacturing PMI

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  1. This is what eI had to saxplaining the folly of this plan for over two years, here it what I had to say back in March 2011.

    DE, either you have grown a few new thumbs or you are posting from a portable device.

  2. What an absolute shambles. Anyone with half a brain (viz. yours truly – no economist am I) could have figured at the outset that the only way for Greece to get out of this (admittedly self-inflicted) was to leave the Eurozone and go back to the drachma to make its industries competitive again.

    Once again, the “experts” are not really experts at all. Just lapdogs forced to kowtow to their political masters where a stupidly conceived ideology (i.e. Eurozone) trumps the truth.

    • It has never been about helping Greece, but about ensuring the Greek creditors get their money.

      • Helping Greece? Greece has helped itself enough, surely , to lot’s of cheap loans to lavish themselves in generous pensions for one. That they now bemoan there plight because the Debts come home to roost,other nations should rush in and bail them out?

        No. The options are on the table. Take your choice because Greece has made those options available more than any other entity. One is to take your medicine now , get it over and done with and set yourselves up for a future.

        ronfire’s option seems the most commonsense to me and always has. It might make creditors a little more choosy then who they lend to at what rate, knowing they dont have a great big German put under their bonds.

        • I agree with some of this…..the Greeks got themselves into this fix, and they have choices.
          However, exiting the euro would not be an immediate panacea, the likely outcome is even more pain. The debt they owe is in euro, changing to the Drachma will not make the pile of euro they owe any smaller will it? Unless they default…but then who will lend them money?
          So the tie to the euro is hurting, but it’s also a lifeline as some money is being lent to them. Those EU countries lending them euro have a right to see that at least some of the problems with the way the Greek economy is structured are being addressed…e.g. taxes levied and paid, social benefits wound back, productivity lifted.
          If they don’t their own citizens will punish them at the ballot box. I just spent a few weeks visiting German relatives and believe me , there was not a lot of sympathy(rightly or wrongly) for the Greeks among the many Germans I spoke to.
          There is an understanding that ordinary Greeks are suffering, and sympathy for them but there is also a belief that the govt and it’s cronies are doing everything they can to avoid meaningful reforms of the economy.

          • And your choice of solution Russell? For any solution to work, the creditors must suffer as well I should think.

  3. The farce will turn to tragedy when a supposedly western country, Greece, faces a full blown humanitarian crises.

    As an aside, I note with interest that Greece has one of the largest armed forces (relatively speaking) in Europe. Has any consideration been given reducing the drag on expenditure that comes from the military.

    And finally, pethaps Greece needs German bureaucrats to run the country properly (i.e. without rampant corruption) for a generation or two.

    • I haven’t a link but I think that Greece has a traditional fear of Turkey, which has been of great benefit to arms manufacturers – which I believe would be Germany.

      • Cyprus is the boogyman and all that gas offshore.

        Anyway who’s going to suppress the masses when it all turns to custard.

  4. Greece is financial gangrene to the rest of Europe.

    If they had cut off the toes 2 years ago the EU could still walk. Now they are going to have to take off the whole leg and the financial blood poisoning may still kill the EU.

    I can’t see how they can save Greece from itself.

  5. In days passed, to keep the population in line it was a practice to take a wrongdoer out to the village green, disembowel them; cut their torso into 4, ideally whilst the unfortunate being was still alive, and despatch the quarters to 4 part of the realm, as a lesson to those who may be tempted into similar wrongdoing. (It would have kept me in line!) A similar, predetermined, unavoidable fate awaits Greece, and we will forever be reminded of “Remember what happened to Greece….”

  6. I wonder where the Greek and other Euro country’s gold reserves went to around 1939-45??

    Germany seems cashed up…….

  7. Not too sure if people understand that greece is not currently paying any debt? In fact they havent made a net debt payment since 2004 which was the last year they had a primary surplus. And they’re not gonna pay any debt for a veeeery long time. This is not an option or a policy or an agreement or whatever, its just inevitable fact.

    So what’s been happening the last 3 years has nothing to do with the debt, we can forget about the debt. It’s about rescuing the creditors, saving face, making an example, keeping the EZ from unraveling, selling a nice story of crime and punishment to german voters, and most of all keeping the dwindling dream alive: another credit expansion sometime in the future. The only way to growth the planet seems to know the last few decades.

    • I mean it has nothing to do with Greece’s ability to pay down debt, or greek exports or restructuring the greek economy and making it competitive. Nobody cares about any of that, even if everybody has to pretend that they do.

  8. There’s one thing I am in disagreement: the title.

    It seems more appropriate “Greek farce turns to tragedy”.