Simple hypothetical about the Greek 'bailout'

[KarlGauss]

The IMF and European central bank (and others) have repeatedly given money to bailout the Greek economy. If I understand correctly, that money goes primarily, if not exclusively, to pay back the country’s creditors.

Would it not be possible, but more importantly, would it not be desirable, to have some of the bailout money designated to be used expressly to fund ‘public works projects’ in Greece (e.g. restoring highways, cleaning up the environment, etc)? In that way, the economy gets a bit of a kick-start and, downstream (a la Krugman) it eventually would become more robust and self-sustaining?

Thanks!

[silenus]

Yes it would, but I want my money now! (So sayeth the creditors, who are not going to trusf Greece a bit when it comes to getting paid back in the future.)

[KarlGauss]

But, to a large extent, they are the same creditors, no? So, by giving up a small amount now, they’d get a lot more in the future.

[ralph124c]

My question is a bit simple: if you do a simple analysis of the Greek economy (exports vs. imports), you find that Greece consumes more than it produces. So, given this, how do they pay off their debt? Why keep rolling over existing debt? If the creditors will never be repaid, then chalk it up to “foreign aid”.

[Shosy]

While your idea has merit, the EU will never go for it.

The main reason why is that countries like Spain, Portugal, Ireland and Greece have received HUGE amounts of infrastructure aid from the EU, much much more than they paid to the EU. These funds (mostly for highways, high speed rail lines, port infrastructure) were supposed to level the playing field between countries like German and The Netherlands (note I am purposely leaving out France here) and the rest of the EU. They also paid for education, electrification, and most anything you might think of.

Several countries, now that they had highways, had to totally change their driving license laws (like Ireland, where you can’t just have a learner permit for 50 years anymore) or at least modify them (in Spain, cars under a certain engine displacement, motorcycles, etc, don’t need a road test to drive, just a knowledge test).

In much of Europe there are more local airports with major scheduled flights than you can imagine (though many are seasonal), in fact there are several major airports (think maybe something the size of Denver Intl) which were paid for by these funds, and you guessed it, government debt, which never even opened despite being 1-2 years old because there is just no demand (also of course the type of air traffic which they were to cater to fell over the last few years).

Obviously this has not worked out the way it was supposed to, and as one might guess, lead to huge inefficiencies rather than paving the way to greater productivity. As more countries joined the EU from eastern Europe, the formula cut off the cash spigot essentially just before the financial crisis.

Why did I leave France out? Well, France needs no infrastructure aid, i’ts modern and relatively clean, minus a bit of radioactivity. However, the vast majority of EU money goes into agriculture subsidies, of which the major share gores to France, of which the major share goes into sugar production (from beets of course). The result is French beet sugar would be much cheaper in Brazil (if they chose to import it) than Brazilian cane sugar.

Well, that how it goes whenever an entity, be it a national government, a provincial government or a local school board gets to spend money that they aren’t responsible for raising through taxes.

[Askance]

@KarlGauss

The IMF and European central bank (and others) have repeatedly given money to bailout the Greek economy. If I understand correctly, that money goes primarily, if not exclusively, to pay back the country’s creditors.

Would it not be possible, but more importantly, would it not be desirable, to have some of the bailout money designated to be used expressly to fund ‘public works projects’ in Greece (e.g. restoring highways, cleaning up the environment, etc)? In that way, the economy gets a bit of a kick-start and, downstream (a la Krugman) it eventually would become more robust and self-sustaining?

What you’re proposing is stimulus spending, which is entirely different from Greece’s ability to pay back its sovereign debt. It would only help that to the extent that it generated more taxes, but given the notorious reluctance of Greeks to actually pay taxes it would seem a poor strategy. Of Greece’s 5 million taxpayers, just 33 last year declared an income of more than $A1.17 million. Fewer than 300 declared an income between $A623,000 and $A1.17 million.

In fact the new Greek government is going to beg the EU - basically Germany - to allow them to relax the austerity measures, precisely so they can spend more money to do this. The trick will be them spending it in a useful and productive manner, instead of pissing it away on undeserved pensions etc. Given that their entire economy and political system is corrupt and broken from top to bottom, don’t hold your breath.

[hogarth]

@ralph124c

If the creditors will never be repaid, then chalk it up to “foreign aid”.

Forgiving the debt a single time doesn’t really solve the problem. The day after you forgive the debt, the Greek gov’t will still have a bunch of government responsibilities to fund, which will require borrowing money, which they won’t be able to do because their credit rating is so poor.

[Nava]

@Shosy

Several countries, now that they had highways, had to totally change their driving license laws (like Ireland, where you can’t just have a learner permit for 50 years anymore) or at least modify them (in Spain, cars under a certain engine displacement, motorcycles, etc, don’t need a road test to drive, just a knowledge test).

This is inaccurate. Motorized vehicles under 50cc are classed as “motocicletas” regardless of the number of wheels; they can be driven without a license by people over 16 and with a license by people over 14.

Anything else requires a license; any license requires both a multiple choice test and a road test.

[Shosy]

@Nava

This is inaccurate. Motorized vehicles under 50cc are classed as “motocicletas” regardless of the number of wheels; they can be driven without a license by people over 16 and with a license by people over 14.

Anything else requires a license; any license requires both a multiple choice test and a road test.

I stand corrected or at least some details are filled out. I never bothered to get my license in Spain, I always figured I’d hide my residency card and claim I’m a simple tourist.

[md2000]

One of the biggest problems with Greece is that they do not collect anywhere near the taxes they should. Tax evasion is a national sport, and the people are winning. Why provide stimlus that won’t get into the tax coffers anyway?

Another problem is that the Greeks have been overly generous with pensions and other giveaways. Often people retire at with E50,000/yr pensions. Greece has overcommited to this sort of thing; it needs to trim these back. Oddly, there’s limited political will to go to the people whose votes you bought with this money and tell them, “you only get half that.” Why spend money on jobs when a lot of Greeks already have government “jobs” - paid to sit on their butt and do nothing?

Given those two major issues, why would Germany want to give more money to the Greek public rather than use that money to prop up German banks that foolishly financed this stupidity?

This is why the general feeling in the richer euro countries is for austerity plans by the Greeks and others. The gas tank won’t get full until they (a) turn off the engine and (b) start putting more of the gas into the tank. There’s a difference between stimulus, to get over an economic bump in the road, and long term fixes that mean the government actually spends no more than it takes in and gets spending under control.