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Global Economic Intersection article of the week
Editor's Note: We all know the story: Greece has been living beyond its means for more than a decade. As a consequence, it is running out of money. And as Econintersect's Dr. Elliott R. Morss has documented in an earlier piece, Greece has entered into an unemployment-generating program in return for IMF/EU financial support. The program is not popular in Greece: the government barely got the IMF/EU austerity package though the Greek parliament. There have been riots, and there will be more riots.
One might ask whether this austerity program is the best policy for Greece? Dr. Morss examines this question below in the form of a letter to President Papoulias.
Things are not going well in your country. GDP fell 2.0% in 2009, 4.5% in 2010, and the IMF estimates it will fall another 3.0% in 2011. The unemployment rate is just below 15% and will go higher as the teeth of the EU/IMF imposed austerity plan take hold. Greece has been living beyond its means for some time. It is now in a desperate situation, and there are no easy solutions.
In 2009, the government deficit was 15.4%. It was reduced to 9.6% in 2010. And if Greece sticks to the austerity program targets, it should fall to 6.2% in 2012. The IMF estimates that 2009-2012 government deficit reduction will increase unemployment by 2.8 percentage points.
Why is the country in such trouble? There are three key problems:
• the government deficit;
• the country's balance of payments deficit, and
• the government debt.
It is important to understand that without its own central bank, Greece has no option other than borrowing to cover its deficits. And with the government debt level now at 150% of its GDP, there are few lenders out there.