The notion that a heavily indebted nation burdened by a currency completely unsuited to its economic needs could starve itself into growth is more than a little perverse, so this latest news from Greece (via the WSJ) was only to be expected:
Greece’s challenge in closing its gaping budget deficit is growing deeper. The Greek government said on Friday that the country’s recession is worse than expected. Some Greek officials suggested gross domestic product could fall by more than 5% this year, instead of less than 4% as officially forecast. A deeper-than-expected recession is likely to worsen Greece’s budget shortfall, potentially forcing the country to slash spending and raise taxes by even more than planned . . . Two other senior Greek officials involved in economic planning said the economy could contract by up to 5.2% this year, rather than 3.8% or 3.9% as previously forecast. They said a sharper-than-expected recession could push Greece’s 2011 budget deficit to 8% to 8.5% of GDP, above the official target of 7.6%. Greece might also remain in recession in 2012, the officials said.
Austerity measures have hurt the Greek economy more than expected, while delays in collecting taxes and difficulties in reducing rampant tax evasion are also contributing to higher-than-expected budget shortfalls, the officials said.
All this is a surprise? Really?
And the problems keep coming. The return of something resembling genuine democratic politics to the operation of the struggling single currency zone is piling complication upon complication. Pressed by the rise of the populist, and euroskeptic, True Finns, Finland’s political class has had to take a far tougher stance with regard to the Greek bailout negotiations than would have otherwise been the case. In essence, the Finnish government has insisted that its contribution to the bailout should be adequately collateralized, something that may substantially crimp the net flow of funds from Helsinki to Athens. Now other governments (pressured doubtless by fear of their own increasingly restless voters) are asking why their taxpayers should not have collateral too.
The WSJ quotes an economist who worries what sort of signal this will send about “political solidarity” within the Eurozone.
An entirely accurate one, I would think.