“Debts that can’t be paid won’t be paid.”
-Dr. Michael Hudson, Economics Professor at University of Missouri at Kansas City.
I thought I’d lead this post with a quote from one of the few economists who actually predicted the current economic crisis in advance, in a profession of over 5,000.
The recent resignation of Greek Prime Minister Papandreou coincides with the emergence of the news that no referendum for the Greek people to accept or reject economic suicide will be forthcoming after all.
Though this news has been cheered and has led to mild optimism in financial markets and in the rhetoric of the financial and political elites of Europe (German and French banks and their political allies), it actually will only deepen the crisis when Greece inevitably leaves the Euro.
The “rescue” package that would have been voted on in the scrapped referendum, as I laid out in my first Class Conscience post, will only further depress the Greek economy. Not one cent of the “rescue” package goes to the Greek people to fight unemployment and revive their bubble-devastated economy. Every single cent will be transferred to the German and French banks who lent so irresponsibly to Greece even after it was learned that their deficit was larger than was publicly known.
The conditions of the package are harsh and severe, and anyone with an elementary grasp of real-world economics knows that when you cut spending and transfers from the government at a time of weak or collapsing private sector demand, you shrink the economy and make its problems worse: more unemployment, lower wages, lower living standards.
By virtue of this dynamic, it is inevitable that Greece leaves the Euro because it is impossible for them to repay their foreign debts under conditions of foreign-imposed economic depression. Remember, national debt must be looked at as a ratio of output:
national debt / GDP
Therefore, when you gut GDP, as this “rescue” package will do, like every package before it, the burden of the national debt becomes even greater because you are reducing the economic capacity to service that debt.
The riots and social unrest in Greece will only worsen under these conditions.
If this package goes through, without the Greek people’s direct consent, it will be inevitably lead to a subsequent Eurozone withdrawal by a later government.
This withdrawal will be far less orderly and volatile than if a more balanced debt forgiveness package was instead what was on the table: a package that would pay some of Greek’s debts to its creditors now, while still allowing it room to expand its economy.
Collapse of the Eurozone at large has only been delayed. Greece will become the next Argentina, and that will be a good thing.