Facts of Life – Example 1 – Greece

For months now, Greece and the European Economic Union have been in the news.  In case you haven’t been keeping up, Greek government debt has gotten to the point that they aren’t able to keep up without help.  The EU has agreed to a “bail out” only if the Greeks implement an austerity plan designed to reduce their total debt from to today’s level of about 164% of its GDP to about 120% by 2020.  (120% is still about twice EU’s upper limit).

The Wall Street Journal ran a front page article a few months ago headlined: “For Ordinary Greeks, Big Bailout Adds up to Years of Hardship”.  Greece apparently has a high percentage of the population on the Government payroll and has fairly extensive welfare program including pension and medical programs.  There would need to be a cut in expenses, meaning government employees would lose their jobs and pensioners would get squeezed.  These folks have done everything they have been asked to do, so it’s understandable that from their perspective, this is not fair.  There has been rioting in the streets in protest to the proposed austerity measures.  Life is not fair!

But nothing is as simple as it seems.  From the standpoint of the other EU countries that are having to put up funds to keep Greece from declaring bankruptcy, is it fair to ask those countries that have done better at managing their finances to save Greece?  Should the German people for example, who may have worked and sacrificed to have the best EU debt ratio, be expected to think if fair that they now have to support the Greeks who haven’t?  There are other alternatives, Greece could get off the Euro and go to their own currency.  This is an alternative that some think might be best. One likely result would be devaluation of the Greek money which could help exports and the economy. But this would also mean inflated prices to the Greek people, which would reduce their buying power, leaving them worse off than today.  The fear of the EU countries is that a Greek default might trigger another multi-country financial crises similar to what happened in 2008.  To the other EU countries, asking the Greeks to implement an austerity program no doubt sounds like the simplest and easiest solution.  But if the austerity program, further slows the Greek economy and thereby causes tax revenue to fall, then things could get worse.  Nothing is as simple as it seems!

Greece didn’t get into this situation overnight.  It’s taken years of deficit and was brought to the day of reckoning by the economic downturn of 2008-2009.  In the meantime, the Greek people have no doubt benefited in the past from the things the borrowed money could provide.  More government jobs, higher pension benefits, etc.  But there is no “free lunch”.  Sooner or later these things have to be paid for and generally the longer one puts off payment the higher the cost.  Today the “ordinary Greeks” are likely going to have to pay a high cost one way or another.  There doesn’t seem to be any good alternative.  Some observers fear that the “bail out” is merely putting off the ultimate settlement which will make the cost even higher.

At this point, remembering Campbell’s Law – Nothing is ever easy, but you can make it if you persevere – may be the best advice.  Rioting in the streets is not likely to solve the problem.

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About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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