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Greece Shows Far an Economy Can Fall

March 31, 2014 in Economics

By Richard W. Rahn

Richard W. Rahn

ATHENS — How far can a modern economy sink?

The Greek economy is entering its fifth year of decline. Nominal gross domestic product is about 28 percent lower than it was four years ago. The official unemployment rat is 27.5 percent (as though the decimal point matters, given the poor quality of the data). The unemployment rate for young people is about 60 percent. Nonperforming loans continue to rise. The privatization program continues to fail, in part because of an absence of bidders.

Athens demonstrates how overspending can ruin an economy.”

In a paper posted earlier this month, leading Greek economist Yanis Varoufakis of the University of Athens and the University of Texas at Austin argues Greece is “a failed social economy.” The following are several of his examples:

There are 10 million Greeks living in Greece (and falling fast owing to migration), “organized” in around 2.8 million households that have a “relationship” with the Tax Office. Of those 2.8 million households, 2.3 million have a debt to the Tax Office they cannot service.

One-million households cannot pay their electricity bill in full, forcing the electricity company to “extend and pretend,” thus ensuring that 1 million homes live in fear of darkness at night while the electricity company is insolvent.

Of the 3 million people constituting Greece’s labor force, 1.3 million are jobless.

Contractors who work for the public sector are paid up to 24 months after they provided the service and prepaid sales tax to the Tax Office.

Half of the businesses still in operation throughout the country are seriously in arrears vis-a-vis their compulsory contributions to their employees’ pension and social security fund.

Eventually, the decline will stop. Some argue that Greece is near bottom, while others say no, but no one knows for sure.

Even with gross mismanagement and policy incompetence, no country’s GDP goes to zero, because some food and other essentials are produced no matter what. During the Great Depression, GDP dropped by about a third between 1929 and 1933, which was the worst decline in U.S. history. The other EU members, and particularly the Germans, are providing a partial bailout to the Greeks, to both limit and stretch out their debt payments and provide a very limited social safety net.

Yet knowledgeable observers also realize that despite the previous debt restructuring, the failure to meet targets means another bailout is almost certain for this year. Too many Greeks, including many politicians, blame the EU for …read more

Source: OP-EDS

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