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Does the Greek Debt Crisis Pose a Threat to World Economies?

Does the Greek Debt Crisis Pose a Threat to World Economies?

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Published by: bowssen on May 23, 2010
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09/18/2010

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Ludwig von Mises Institute
- Tu Ne Cede Malis
 
Advancing the scholarship of liberty in the tradition of the Austrian School.
Does the Greek Debt Crisis Pose a Threat to WorldEconomies?
Mises Daily:
Wednesday, May 05, 2010 byFrank Shostak  On April 27 the Standard & Poor'srating agency downgraded the Greek government's debt to junk status.Greece has been graded BB+ by theS&P, official "junk" territory. It isnow on a par with Azerbaijan,Colombia, Panama, and Romania.The cost of Greek borrowing on atwo-year bond was about 1.3% lastovember. By April 27 the coststood at 19%. Many commentatorsare of the view that without outsidefinancial help the Greek governmentmay not be able to serve its debt,hich currently stands at around 280billion euros. As a percentage of GDP, the debt stood at 115% at the end of 2009. The default on the debt is likely to prevent the government from securing moremoney to support various projects, thereby paralyzing economic activity, so it is held.Many commentators are of the view that the Greek debt crisis is likely to infect various other economies, thereby setting in motion anew global financial crisis. This in turn, so it is held, poses a threat to real economic activity in the months ahead. Hence fast action,such as bailing out the Greek economy, is called for by various top experts to prevent the Greek economic virus from spreadingaround the globe. On this matter, commentators are of the view that the virus might have already infiltrated countries such as Spainand Portugal. Various experts have estimated that as a percentage of GDP the Spanish government's debt could jump to 74% in 2011from 66% in 2010 and 54% in 2009. The figures for Portugal are estimated to be 91% in 2011 against 85% in 2010 and 77% in 2009.
"Bailing out Greece is not going to reduce the threat of another economic crisis." 
 
Can Government Fund Its Activities Independently of the Private Sector?
It must be realized that government can't fund by itself its activities on account of the fact that government is not a wealth-generatingentity. Government must divert real wealth from wealth producers to support its activities. The following example illustrates this case.In an economy comprised of a baker, a shoemaker, and a tomato grower, another individual enters the scene. This individual is anenforcer who is exercising his demand for goods by means of force. Note that the enforcer produces nothing. Hence whenever heexercises his demand for goods he offers nothing in return. Consequently his demand for goods can only impoverish the producers.The baker, the shoemaker, and the farmer will be forced to part with their product in exchange for nothing. Needless to say that, asime goes by, this weakens the flow of production of final consumer goods. According toMises,There is need to emphasize the truism that a government can spend or invest only what it takes away from its citizensand that its additional spending and investment curtails the citizens' spending and investment to the full extent of itsquantity.
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 It follows that since government doesn't produce real wealth, it requires the support of the wealth creators in the private sector. It alsoollows that an ever-growing government involvement with the economy curtails the ability of the private sector to generate realealth, and this in turn curtails the support for the government to serve its debt.ow, in 2009, Greek government outlays increased by 104% from 1999. Also in Spain government outlays have continued to pushahead, rising by 119% in 2009 from 1999 while in Ireland the rate of increase stood at 157%.The relentless increases in government outlays imply a persistent diversion of real savings from wealth-generating activities tononproductive activities, i.e., consumption of real capital. Obviously, this undermines the process of real-wealth generation. Now, whyshould loose fiscal policy in Greece cause economic havoc in other countries?We suggest that outlays by the Greek government have no effect on the outlays of various governments in the world. Politicians inarious countries determine the pace of their governments' involvements with the economy. This means that the debt crisis in Greece
 
shouldn't have any effect on a particular country's ability to generate real wealth as long as government outlays are well contained.his is however, not the case with most economies, and in particular the United States. We suggest that massive government outlaysave also severely damaged the wealth-generation process there.he US federal debt outstanding stood in March at $12.8 trillion and by year-end could settle at $14 trillion. As a percentage of GDPn March, the debt stood at a lofty 84%.lso note that at the end of last year, government outlays increased by almost 90% against 1999. This of course casts serious doubt onhe present high rating of US government debt.nother major factor that undermines the real-wealth generation process is the reckless monetary policies of central banks.he eurozone central bank policy rate stood at 1% in April against 4.25% in September 2008. The yearly rate of growth of the centralbank balance sheet (the monetary pumping) climbed by November 2008 to a lofty 55%.n response to this, the yearly rate of growth of our monetary measure AMS climbed to 15.8% by August last year. This massivencrease in money supply implies a big increase in the exchange of nothing for something, i.e., a large diversion of real savings fromealth generators to the holders of newly created money. All this amounts to a weakening of the process of real-wealth generation.t must be mentioned here that the members of the eurozone cannot print money independently. This means that they are constrainedn this regard by the European central bank's monetary policy. As we have seen, however, the members are less constrained and haveore freedom with respect to fiscal policy.e suggest that those member countries that pursue relatively more conservative fiscal policy are inflicting lesser damage to theealth-generation process versus those members that have adopted a more reckless stance.he combined effect of loose monetary and fiscal policies is currently manifesting itself in the so-called debt crisis in Greece. We holdthat as time goes by this combined effect is likely to manifest in various other eurozone economies such as Portugal, Spain, andIreland.

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