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5 Reasons Why Austerity Failed in Greece

Greek citizens spoke loud and clear during the last election.  They will not tolerate further cuts and skyrocketing joblessness. The conflict over cuts has resulted in Greece’s failure to form a new governance system. Additionally, austerity has hurt the nation, increasing a political polarization that has hurt Greece and the euro.  

As we have watched this economic trainwreck occur, many have chimed in with various insights ranging from Greece’s entitlement system to corruption with their various economic models demonstrating the benefits of austerity, and yet the question remains - why hasn’t this worked?    

Here are the top 5 reasons Greece continues to fall and why austerity worsened its economic situation:

1. Greece is Greece’s largest revenue generator:   

 

40% of Greece’s GDP comes from the public sector – this includes government jobs, entitlements, as well as government contracts Greece businesses have relied on.  Austerity has mandated that Greece pays outside creditors first.  When the largest revenue generator does not/cannot pay their bills to private business, business fails, banks fail, and citizens become outraged as they continue to struggle to put food on the table and a roof over their heads. 

2. The Protests:  

15% of Greece’s GDP comes from tourism.  A politically unstable nation is not a desirable vacation destination and cuts into revenue potential.

3. A History of Corruption:  

As Policy Mic Pundit, Romain Champetier, details in his article, Greece’s political system has been mired in debt and corruption for centuries. This level of corruption has led to ineffective policy, excessive government bloat, numerous governance model changes, and a dependency on the government due to policy instability. 

4. Lack of Economic Diversity:  

 

Outside of the government, tourism, and the shipping industry, Greece has not diversified their private sector economy to better absorb economic shocks and reduce the risk of complete economic implosion we see today.   

5. Excessive and Unstable Taxation and Budgetary Management:  

 

Greece taxes everything.   Since the implementation of austerity, Greece’s tax rates have fluctuated and only increased.  Each tax increase and change has been met with more cuts to aid and more loopholes. Another challenge in stabilizing Greece’s unstable tax structure is the volume of tax evasion that occurs.  The unintended consequence of austerity is reduced resources to combat institutionalized evasion.  Because the tax structure has become completely fluid, their budget management practices become more fluid as Greece tries to fit their national budget into their unstable tax policy. 

Greece has some tough decisions coming up and there are no signs of political stability for the country, or region, much less budgetary and tax stabilization. Their financial sector has completely failed to plan for the worst case scenario by independently rising their capitalization ratio (in layman’s terms – their nest egg) further eroding the Greek citizen’s confidence in their national economic security thus causing a run on banks. 

The first step all European nations in the Eurozone must take is to realize that neither Hayek nor Keynes will be the end-all, cure-all.  Secondly, their citizens need to hire managers, not charismatic ‘leaders’ carrying false hopes.  Third, they must declare a financial sector holiday to fully assess the depth and breadth of the contagion, force the clearing of bad financial practices, and create a plan to emerge on a more solid footing. 

All countries will continue to struggle and be riddled with strife until the macroeconomists come to their senses and realize that cutting to cut works about as well as spending to spend.  They simply must find balance. Until the balance is found, Greece, and other nations, will struggle.

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