Unlocking the Greece Crisis: Is the world tilting towards socialism the wrong way?

grexit
Greek Debt Crises

The Greek crises is interesting, not just because it points to how bad government policies can bring a state on the brink of its own failure but also because it points to a much a deeper crisis within capitalism. Capitalism as a system has its inherent weakness in generation of excess capacity from overproduction of goods and services arising from the two of its own major tenets viz. competition and maximization of self-interest. When market forces fail to match demand with supply, it leads to unemployment and depression. This was the main reason for Great Depression in the free-market US Economy of the 1930s. In the 1930s Keynes gave a new lease of life to Capitalism with the ‘General Theory of Employment ,Output and Money’ wherein Government’s intervention through fiscal policies was advocated to raise aggregate demand and pull an economy out of depression. Hence State assumed a greater importance only after the world realized market forces are only invisible, and they need to be regulated and directed with State’s intervention.  But, isn’t this exactly what the Greeks did? Perhaps they over-did it.

In the years preceeding the US Financial Crises of 2007, the Greek Government had doled out huge pension plans and socialist schemes, the cost of which they could never meet. For years they had been fudging their fiscal accounts and understating their debt inorder to be able to borrow more and more money to finance their excessively costly socialist schemes. With years and years of mounting Debt, Greece ultimately had to be bailed out by the IMF and ECB in 2013 with a package of almost 200 bn$, further adding to their debt. The IMF in return had imposed its usual conditionalities on the borrowing state in the form of fiscal austerity measures. In the years that followed, Greece was pushed to a deeper recession with spending cuts and steep hike in taxes which lowered aggregate demand of the economy and led to deeper unemployment and humanitarian crises in the country.

In the normal course of action, an economy would seek to recover by devaluing its’ currency or lowering its’ interest rates to boost investment. But unfortunately, Greece being part of a Currency Union EU does not have that leverage of pursuing an independent Monetary Policy.  If Greece defaults on its sovereign debt and chooses to exit the EU i.e. a ‘Grexit’ then it may trigger a whiplash effect throughout EU as most of the major banks spread across Germany, Italy, Iceland, Spain, Portugal that are holding Greece debt may go bankrupt, leading to a recession of a wider magnitude. This may eventually threaten the very existence of EU.

Greece is totally stuck, and there seems to be no way it can get out. A ‘Grexit’ will only make things worse. It clearly will never be able to repay all that mountain of debt. It should rather focus on restructuring its fiscal policies and building stronger and transparent institutions to prevent recurrence of such a calamity in the future.

 

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