Can Greece Cut Its Deficit by 10% of GDP, Part II

As  I noted a few days ago, some nations have managed even larger budget adjustments than the one that Greece faces today.  Several commenters rightly noted, however, that this slim reed of hope becomes even slimmer when you consider other factors such as the pace of adjustment (Greece would have to cut very quickly) and its inability to devalue its currency (unless it leaves the eurozone).

Michael Cembalest of JP Morgan put together a sobering chart that highlights how severe Greece’s challenges are compared to other nations that have accomplished major budget adjustments in the past (hat tip: Paul Kedrosky at Infectious Greed):

Today Greece finds itself high on the vertical (i.e., needing a very rapid fiscal adjustment) with minimal growth prospects and no ability to devalue.

5 thoughts on “Can Greece Cut Its Deficit by 10% of GDP, Part II”

  1. Here is a question to ponder — “what if” the world embarked on an across the board, 100% default on sovereign and private debts…? Yes, banks would collapse. Yes, large companies would fail. Yes, some governments would fall. But, in the end, people would still be alive. In the end, some form of government and order would re-emerge. In the end, the world would go on. The “big losers” would be those who created this mess to begin with from where I sit.

    If the Greek disaster teaches us anything, it seems to say that you cannot put the burden of change on the people this time. For example, I doubt that Californians would accept the “Greek plan” if placed in the same situation. Austerity may not be the best course of action for the world — not this time.

    We should all keep in mind that there are three ways out of the ongoing global economic malaise: do austerity, default, or inflation. Austerity measures are unlikely to be accepted by democratic nations (Greece proves this point). Perhaps it is time to look closer at default and/or inflation measures instead…

    Comments welcome…

  2. “there are three ways out of the ongoing global economic malaise: do austerity, default, or inflation”

    True; but when a nation reduces its debt through inflation or default, who will lend to it again? Put it another way: if a nation cannot sustain its lifestyle without living beyond its means and borrowing accordingly, then defaults and loses the ability to borrow further, does it not bring down upon itself an inescapable austerity just as severe as what the lenders now ask of it?

  3. “100% default on sovereign and private debts…? Yes, banks would collapse. Yes, large companies would fail. Yes, some governments would fall. But, in the end, people would still be alive. In the end, some form of government and order would re-emerge. In the end, the world would go on. The “big losers” would be those who created this mess to begin with from where I sit.”

    You mean that savers “created this mess?” Their savings, at least that part of them that have been invested, would be wiped out. This is the same strategy that gave us Hitler.

    No thank you.

  4. Hi Mike, if you haven’t noticed, “savers” always pay the bills in the end — history proves that — hence, “savers” are incentivized to democratize the problem of fiscal reform nationally and globally. “Savers” have to ensure that “most of the people” are minimally happy in order to maintain legitimacy and order. Otherwise yes, radical change and even anarchy can ensue. Which leads me back to the three options for resolving the global economic crisis: austerity, default, or inflation. In the final analysis, I suspect that Western democracies will resolve toward inflation as austerity and default are the beginning of much worse.

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