So much for hanging our hats on that debt/GDP metric:
ATHENS, Feb 12 Reuters – Greece’s economy contracted more than expected in the fourth quarter and downward revisions to the rest of 2009 made its recession the worst since 1987, threatening the government’s plan to set its finances straight.
As bad as the current quarter GDP print was, the downward revisions to previous quarters presents a whole other problem entirely, showing the trajectory of growth/decline in Greece’s economy was more severe than originally believed. As small as the Greek economy is, this makes it look smaller. Reuters included the following chart that shows the impact of the miss and revisions:
So now we see the true depth of the current recession in the sovereign Enron. But it also means the debt reduction program Greece is trying to implement is a moving target. If you can’t figure out what your GDP denominator is, you have to be that much more aggressive in cutting debt. This next chart shows the debt-to-GDP measure of Greece compared to Germany and Japan which I created from data at the OECD:
Germany is illustrative of what is expected of a Euro-zone country: discipline from a fiscal perspective. Because Germany and Greece both use the Euro, neither country can directly influence its monetary policy and is beholden to the decisions made by the ECB. Japan is different because it has a central bank that can directly effect its monetary policy. Plus, my guess is that since Japan has run positive current account balances for years while Greece runs perpetual current account deficits, Japan gets some benefit of the doubt. This chart of current account balances as a percentage of GDP from the OECD illustrates this:
So there’s no confidence Greece can “earn its way out” of its deficits. The only way the Greeks have to get their deficits under control is budget-cutting and austerity.
But to a large degree, it doesn’t matter. The fiscal mismanagement of a few could wreck the economies of Europe just the same because they’re all tied to the Euro.
The old saying about rotten apples spoiling others comes to mind…