Starting back in 2011 I posted rather frequently about the macroeconomic situation in Europe. My basic premise for what we would see in its future was best summed up with the following sentence.
Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking.
Given recent history that seems to have been a fair observation, and certainly the latest episode in Greece has again shown the on-going macroeconomic imbalances in the Eurozone and social and political outcomes of this ongoing folly.
Back in 2012 on the eve of the previous Greek bailout that eventually led to this latest one I said the following:
The world is on a knife edge about whether or not Greece will default on its sovereign debt. Let me help the world out…it will because it has no choice. Let me example why.
There are a number of reasons Greece is in the position it is currently in. I am not going to lay blame here, or over-analyse these points. I am simply going to explain what has happened so that I can explain why under the current economic environment it must default on its debt at some point.
The main points are:
- Germany continues to pursue a policy of aggressive wage restraint.
- Austerity is lowering industrial output in Greece.
- The common currency binds European countries of differing productive capacity, leaving labour markets as the single point of economic response flexibility
- Financial liberalisation and centralised monetary policy means there is no national credit control mechanisms.
- Weak taxation collection and foreign-friendly fiscal policy did not allow Greece to effectively re-capture recycled trade surpluses from foreign nations.
Nothing has really changed since then. We have been informed that other non-core Euro nations are doing better, but much of that is to do with the ECB’s monetary programs more than any address of underlying issues. Both Portugal’s and Spain’s debt to GDP continue to rise even though they are technically looking better. Portugal’s government sector debt has now risen to over 130% and unemployment, although down from its peak is on the rise again, as is Spain’s sovereign debt.
Those points aside, as long term reader of MacroBusiness may remember I consider most of these countries a bit of a side show for the EU end game. The real problem was, and still is, Italy. A country with the 8th largest economy in the world, far beyond the limits of the rest of Europe to save in a crisis, and slowly but surely sinking into disaster. As I discussed back in 2012 Italy is the real issue and, as shown with the tiny economy of Greece, the EU has no real answers:
The real problem in Italy is that its economy has been stagnate for nearly the entire decade. According to the IMF between in 2000-2010 among all countries of the world Italy only grew faster than Haiti and Zimbabwe. In 2010, Italian GDP was only 2.5% higher than in 2000. This problem is actually made worse by the fact that this is such a long term trend. Italy’s per-capita GDP growth was 5.4% in the 1950s, 5.1% in the 1960s, 3.1% in the 1970s, 2.2% in the 1980s and 1.4% in the 1990s. Since the new millennium the country has hardly moved forward and if we extrapolate out that trend Italy will spend the next decade in contraction.
On top of stalling growth, Italy has a demographics issue. With a debt to GDP ratio at 120% along with a population with a median age of approximately 45 Italy really does look like the Japan of Europe.
And as time goes on Italy’s issues continue to simmer in the background:
Italy’s public debt has risen to a new record of 2.2 trillion euros ($2.4 trillion), up by 23.4 billion euros in May.
The figure published by the central bank on Tuesday brought recriminations by opposition politicians against Finance Minister Pier Carlo Padoan for not bringing down the debt load, which had even at lower levels threatened a sovereign debt crisis. Italy’s economy is only now showing signs of sustained growth.
Italy’s debt-to-GDP ratio is above 132 percent, up from 130 percent in 2013 and 120 percent in 2010.
And this brings us back to Greece’s newest bailout. It would appear, although strained yet again, that the EU is going to piece together yet another deal. Yes there are rumbling in the Bundestag and snarling about bridging finance, but a deal looks fairly firm at this point. Greek banks are about to re-open and, although there are still lingering capital controls, this is a sign that the ECB has been signalled to remove its foot from Greece’s neck. I have no doubt this will inevitably destroy yet another Greek Parliament, maybe not today, but it will come. The major issue, however, as I explained above is that nothing has actually been fixed.
As H&H showed last week the latest bailout is yet another cycle of funds back to the same creditors who argue about implementing it. Very little, if any, of the money will actually go to Greece while they are once again forced into deflationary policies, restructuring and confiscation of assets. I’m not saying, as I never have, that Greeks weren’t at fault in this, they were, but that doesn’t change the fact that there is nothing new here and the outcome will be the same as it always inevitably was. Yes there are once again rumours of a debt moratorium after “commitment” has been shown, but this certainly isn’t new either. Unfortunately it’s still politically and economically impossible. If Greece gets let off , why didn’t Ireland , Spain, Portugal, Lithuania …. and obviously Italy.
So on we plod into a sixth year of depression in Greece and although the term Grexit may disappear from the lexicon for a few months there is no doubt it will return. As I mentioned the other day, one of our fellow bloggers used to say “money is just rules” and I don’t disagree. Money is a social construct held together with a belief in fairness and aspiration and a giant stick, not always in equal measure. In Greece whatever was left of the first two has now been shattered by the last 5 years and the recent humiliation of Tsipras. Only the stick remains.
The Greek people have reached to the far left and failed, with the big stick now hanging over them and bleaker future already written, one wonders how long it will be before they reach for the far right and Europe will have come full circle.