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N071010_Sovereign_Debt_Rohit - NOTES Sovereign Debt Crisis...

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NOTES Economic & Political Weekly EPW july 10, 2010 vol xlv No 28 77 Sovereign Debt Crisis in Greece: Is There a Way Forward? Rohit The International Monetary Fund package for Greece is likely to make things worse, not better, for the beleaguered economy. And as other European economies show similar signs of a sovereign debt crisis, the situation does not bode well for Europe and the world economy. W hile Greece reels under a sover- eign debt crisis there are omi- nous signs that there are other countries like Spain and Portugal where public debt is growing at a fast pace. Whether these countries would follow a similar trajectory as Greece is a difficult question to answer at the moment. Hun- gary is now being seen as the next Greece. The Euro sank to a four-year low on 4 June after the news of Hungary reached the fi nancial markets. In this note we argue fi rst, that if the International Monetary Fund ( IMF ) condi- tionalities for Greece of fi scal “consoli- dation” are adhered to, it would further prolong the crisis and make recovery extremely painful, especially for the work- ing class and the poor sections of the popula- tion. Second, if Greece wants a long-term solution, the only option that might be left for it would be to come out of the European Monetary Union ( EMU ). The paradox how- ever is that, in the short run, that itself would fuel the crisis even more both for Greece and Euro. So, Greece fi nds itself in a Catch-22 situation with very l imited options. Acting on the conditionalities of the bail- out package, Greece has recently announced that it has reduced its defi cit faster than expected in the fi rst fi ve months of the year, as a lower than expected increase in reve- nues was offset by higher spending cuts. As we argue below, such spending cuts are going to be counterproductive. Magnitude and Reasons There are different facets of the debt crisis in Greece. It has a fiscal deficit and public debt of 13% and 113% as a percentage of GDP . 1 There are a few reasons for this. First, the share of wages in GDP has been declining in Greece because the real wages of workers have grown at a much lower rate than the growth of productivity. In other words, the benefits of growth in labour productivity have not gone to the workers in the form of increase in real wages, rather some of the benefits have gone in increasing profit margins. This means the share of wages in GDP has been declining. As argued by Kalecki and the underconsumptionist school, this would lead to a decline in the share of consump- tion out of GDP (income multiplier) since workers spend a higher proportion of their income on consumption than the capital- ists or the rentiers. A decline in income multiplier, ceteris paribus , adversely affects investment, and thereby, the GDP in future periods. This coupled with trade deficit severely limits all the sources of demand in an economy. For a given level of govern- ment expenditure and a near stagnant or at best slowly growing GDP and, therefore, tax revenue, means a higher fiscal deficit and growing public debt over time.
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