Solving the Greek Debt Crisis, I: The Scope of the Problem

It’s déjà vu all over again.  We may have mentioned once or a dozen times the last time the problem was “solved” that it wasn’t actually solved, just swept under the rug until it grew big enough to crawl out again and this time eat the entire house.  For starters.  Then move on to the rest of the European Union for the main course.  We’re not even going to speculate what’s for dessert, at least openly, but if a tasty little morsel like Switzerland thinks it can stay out of it when the rest of Europe is crashing and burning, it might have another think coming.

"Greek debt crisis? Sorry. Been busy."

We don’t need to mention the gory details here.  Anyone who hasn’t been living in a cave or is comatose knows the basic outline.  The fun — if you want to call it that — is in watching the maneuvering between politicians wanting more money without having to repay it (i.e., all politicians everywhere), and politicians wanting people to repay the money they handed out without getting an appropriate favor in return (i.e., all politicians everywhere).

Admittedly, all the politicians are pretty much in the same boat, because each and every one of them knows full well that the only difference between the creditors and debtors at this time is the date.  The Euro is a currency pretty much designed to fail.  It started off as a debt-backed currency consistent with Modern Monetary Theory, and rapidly got worse.

Okay, we’ve settled that things are bad and can only get worse.  The Greeks know that even austerity interpreted to mean that every cent of GDP is used to make debt service payments isn’t going to solve the problem — not with a debt nearly 200% of GDP.  That would mean that nobody has a cent of income in the entire country for two years that isn’t taxed at a rate of 100%.

"You owe 200% of what you made last year."

Let’s get a little less ludicrous.  Assume that the maximum of GDP that can be collected as taxes is 20%.  There’s a study to that effect, somewhere, but we’re not going to bother looking for it.  This is just an example.  The study said it can be increased temporarily, as in a war, to 25%, but as a rule, taxation of more than 20% cannot be sustained.

And that’s the first problem.  The total tax burden in Greece (according to the Wikipedia) is nearly 50% of GDP.  Fif.  Tee.  Per.  Cent.  They tax everything to death . . . and wonder why unemployment is so high and business is on the skids.

Now let’s take a look at GDP.  For some reason the estimate for 2014, the last full year, is given in U.S. Dollars, $238 billion and change.  Converting that to Euros at the current exchange rate of €1 = $U.S. 1.108673 gives us a Greek estimated GDP in Euros for 2014 of €215 billion, more or less.

Performing our simple calculations, we get 20% of 2014 GDP — or the maximum amount that could be collected as taxes in ordinary times — of €43 billion, and let’s not get too picky about rounding here, or around $ U.S. 48 billion.  What they are actually collecting at a little less than 47% of GDP is €101 billion, and still spending more than that.  That kind of honking huge tax rate really, really, really discourages productive behavior, so only expect GDP (and thus tax collections) to decrease over time.  Going by the estimates for the first quarter of 2015, this is, in fact, what is happening — and that's unadjusted for inflation.

Doré's "Government Spendthrifts in Hell" (Okay, "Prodigal Wasters").

Second problem: deficit spending (spending more than you bring in) increases public debt.  Greece’s annual deficit is around €3.5 billion a year.  Greece’s public debt (again estimated) is €317.1 billion, or (using the actual figure from the Wikipedia without calculating from our rounding of estimated calculations of estimates) 177% of GDP.

Bottom line: at an estimated total tax collection of 20% of GDP, and assuming GDP doesn’t continue to decline, you’re looking at “normal” tax collections of €43 billion (see above) and extraordinary, unsustainable total tax collections of 25% of GDP, or €54 billion.  Right now they’re collecting 47% of GDP and having to borrow to cover deficits, or €101 billion, as we saw above.  And they wonder why the economy is imploding.

Let’s assume that 10% of total normal tax collections are used to pay down debt, or €4.3 billion annually, leaving €38.7 billion to meet public expenditures under normal circumstances.  At that rate, and assuming no new debt, Greece will take about 75 years to get out of debt.  Believe it or not, that is do-able — if they start paying down as soon as possible and do not default on any payments.

This leaves us with the “mega question”: how is Greece supposed to go from spending €104.5 billion a year down to €38.7 billion, a reduction of €65.8 billion, or more than 150% of normal tax revenues?  And don’t kid yourself — it has to be done.  A country cannot keep on spending around three times what it should be able to collect in taxes — not for long, anyway.

Austerity simply isn’t going to do it, although it might buy enough time to implement a real solution — and there is a real and viable solution that we’ll get into on Monday.

#30#