I understand the moral outrage that Germans, French, and Dutch feel over the financial mess that Greek debt is causing in the EU, but their crisis-management policies have made the situation far worse than it had to be and it will be get even worse the next few years.  I've written in the past how the lack of Data Governance in the EU allowed member states to accumulate national debt without verified reporting for the last decade.  Greece was let into the Euro with only promises to reduce historic debt levels of 13% down to the treaty obligated 3%, but there were no audit controls or verified reporting requirements. 
 
OK, that's the past.

 

This week, the NY Times reported that in 2009 the IMF presented a secret report to EU leaders disclosing that Greece had lied about its deficits for a decade.  Why anyone was surprised by this is a mystery to me.  Did the EU really expect Greece to change decades of post-war economic behavior once they were granted membership in the Euro?  In my experience, behavior only changes when there is transparency and information illustrating deviations and consequences.
 
This was five months before Papendreou disclosed the amount of Greek debt to his nation and the world.  But rather than deal with this issue quickly, EU leaders hid the report and delayed real action on the situation and instead forced Greece to accept crippling budget cuts that are now destroying that nation's economy.

 

Let me explain how this works.  The world is in a serious global recession.  In a recession, unemployment rises and incomes fall.  Tax collection follows income.  A nation needs GDP growth greater than 2% to increase employment beyond the rate of new workers entering the workforce.   When people have less money, they spend less on consumption and the economy suffers.  Normally, governments increase spending during these times to compensate for the lost consumer demand and that stimulus spending in turn increases tax revenues.  But its normal to run a deficit during a recession because it takes a while for consumer demand to increase.

 

The EU is forcing Greece to cut government spending by 20%.  Greece already has a reported unemployment rate of 16.3%.   The Greek government should be deficit spending now to make up the gap and help bring people back to work.  The Debt can be cut when the economy recovers and people are back at work.  The labor market can be liberated, pensions can be reformed, and new audit standards can be enacted in a new EU Treaty to make sure that actual budget deficit numbers are part of the public record.  All of this can be done over a decade when tax collections are rising and the government can ease changes into the economy in a non-destructive manner.  This will save money for Greece and the EU.

The EU enforced budget actions are having the opposite effect, forcing the Greek economy to contract even further.  This will in turn increase unemployment which will reduce tax collections and make the budget deficit worse. 

 

As is normal for EU policy, the policies being enacted make worse the very thing they seek to avoid - Debt.
 
There is no silver lining.  The Unity Government will preside over an historic reduction in living standards for everyone in Greece over the next decade. 
 
This prescription will now be applied to Italy.  Watch how the contagion creeps North.