Greek Government Will Cut Another $6.5 Billion From Budget And Slashes Its Throat In The Process

The country had little choice. It cannot sell bonds to offset financial obligation because of its deficit which is about 12% or GDP. Moreover, Greece is concerned that eurozone nations will not bail it out. Reuters reports that the plan will cut public sector bonuses by 30%. and freeze public pensions  Greece may also increase its VAT by two points to 21%.

The obvious obstacle to the plans is that employees throughout the country, especially those on government payrolls, will stage crippling protest strikes and bring the Greek economy to a standstill. That, in turn, will damage GDP growth and increase the nation’s deficit further.

The much less obvious problem is that more austerity in Greece will take away capital for stimulus programs to help restart its economy and which should eventually increase receipts to its treasury. Most economists believe that national stimulus packages are the major reason  that GDP growth in the US, EU, and Japan has begun to be positive again. Experts also believe that if these stimulus programs are withdrawn too soon that many major economies will slip back into recession. Stimulus packages may increase sovereign deficits, but they also may be the only path to economic recovery.

Greece, without the capital for a stimulus package and unable to raise money in the global capital markets because of the fragility of its economy, will find that budget cuts for the sake of a bailout are a short-term solution that creates major long-term problems. As many businesses have found across many sectors, cost cuts become counterproductive when they become so deep that they choke off the investments needed for growth.

The $6.5 billion in budget cuts just push Greece’s problems into the future.

Douglas A. McIntyre