Suppose you have a friend who screws up and gets fired from menial jobs, spends his money on booze and gambling, and ends up in heavy debt. Now you want to help him out, so you can do one of two things:
1. I'll lend you the money if you get a steady minimum wage job and cut off the spending.
2. Look, I believe in you. I'll lend you a whole bunch of money so that you can go to college, retrain, get a much better job, and then repay me with plenty left over for yourself.
Now I understand that (2.) sounds much better than (1.), but it's just not realistic. He will waste the money again, because he knows he didn't earn it. You have to be tough and force him to get his house in order. Then he can save and borrow to retrain. If Greece is spending its own money on infrastructure and investments, there is at least a chance it will be spent well. If it's spending other people's money - no chance at all.
EDIT: I didn't mean this to sound like I am calling Greeks in general wastrels and boozers. It's more about how other people's money tends to get spent. See the message below.
It would take too much work to transform your hypothesis into something analogous to what's happening with Greece, so I'll just point out the major leak in the abstraction.
In your example my friend and I are two economically independent entities. Yes, I care about him on an emotional level, but not lending him money will not affect my income. This isn't so when you talk about Greece and the EU. Also, as any developed economy, Greece has a large economic capacity - it has advanced industry, technology, tourism, education, etc. In short, it has a lot of assets, so lending money to it would be more like lending money to my gambling friend who just happens to be an immortal Stu Ungar - yes, he's wildly dysfunctional, but the potential ROI is almost always worth it.
OK, and I think I was exaggerating and being unfair to the Greeks - they are not gambling drunks, although I am annoyed at many of them throwing a tantrum because they have to repay money that was spent by their government in their country, and not in some foreign adventure.
The main point I was trying to make, though, is that other people's money doesn't get spent efficiently. I've been involved in some EU-financed programs, and the productivity of those compared to private sector or even regular government contracts is in the pits. Taxpayer money doesn't always get spent efficiently, either, but at least there is some kind of accountability of the government to the citizens. The idea that Greece would take money that comes from other countries, and spend it on these really great stimulus programs, doesn't pass the skepticism barrier for me.
I wildly disagree with the way my country is borrowing and spending money. Do I not get to complain about that because the money is being spent by my government in my country?
Few people even understand the issues associated with economics at that level, much less what is right or wrong. It is also pretty safe that, around the world, nobody cares until it affects their wallets directly, which is when e Greeks started complaining.
Expecting decades of mismanagement to get sucked up overnight and not have anybody complain probably isn't reasonable.
Point taken. I agree that there is a lot of waste of EU funds. I could tell you stories about my native Bulgaria that would surely make you very angry.
I still think this is a separate problem. I think right now it would be more efficient to stimulate the Greek economy than it would be to just bail it out with austerity provisions. The analogy would be to finance your friend to go to school for a year or two and earn a degree to get a better job and pay you back - he wins (gets money in both the short and long-term) and you win (get your money back and a functional friend).
the Bulgarian state nearly went bankrupt in 78 as a result of stupid state-planned 'investment'. The debts which were repaid with the strategic gold reserve which were basically the savings tucked away for about a hundred years.
The Communist government continued to spend unsustainably in IT (it was unsustainable because it was based on non-marked agreements with COMECON countries) and other sectors. Salaries were raised, people bought more Lada cars, times were good.. for a while. The USSR which gave us petrol to resell collapsed and we were unable to find markets for our goods (which apart from weapons were greatly inferior on the open market).
So we had to pay back the debts with even crueler austerity measures. But it wasn't the worst thing. The economy was unproductive. The living levels collapsed in and they reached 89 levels again in 03. Oh and 1 million mostly young Bulgarians left the country.
So instead of getting its act together the government just ignored the problems, made things comfortable for the populace and even worse problems came.
Had the Communists liberalized the economy and be sure to pay debts in the 80s it wouldn't happen.
But we didn't learn the lessons of fiscal responsibility. The Socialist government of Jean Videnov undid the austerity measures and got into an even huger mess (never mind that enterprises continued to fail). Yes, he also yet huge money printing to begin which, the Greeks don't have to deal with, so we can leave this out.
Our governments have more or less learned their lesson, even the former Communist, but the temptation is huge.
The Greeks don't have such recent history and if they don't restructure only a much bigger mess will come.
What if you've been lending the money to him that he's spent on booze and gambling? And what if you're very well paid to make good decisions about lending money?
Shouldn't you then be forced to take a very serious, if not complete, loss on the money you lent to him? It's your own fault you lent it to a wastrel. Why should you be bailed out, exactly?
Exactly. I will put a little more PF (political fiction) to make it a little bit more interesting:
How about if your "friend" is a drinker and gambler, but happens to have a big fortune, say islands, nature, ancient temples. So you find his girlfriend and start lending her drinking money out of your heart's "goodness" without managing your loan when it is small, just let it grow... Of course your friend gets drinking money and thanks his lucky stars and all his friends for lending him just to have the pleasure of his charm.... Of course you politely ask him to spend half of that money to buy submarines and fighter aircrafts from your shop. Then one day you go and tell him, "you know your debt is so big, me and everybody else were so surprised by the size of your debt, and really you have been only drinking and womanizing, haven't you... So we decided we will not lend you anymore. From now on you are not allowed to drink, but neither to eat, unless of course you sell to us your telecommunication industry at the amount of the next round of drinks, so what do you say?"
It works like a charm, your friend starts getting depressed, and gives in...
But then maybe he says, "Look I am grateful for all these drinks and all but you can't in your good sense expect me to sell my property so cheaply just because you were giving gifts to my girlfriend right. I will stop drinking, please stop giving gifts to my girlfriend and wait for a while I will give them back to you. Also I noticed you borrow money for 1% and you lend it to me for 5.2%, that is too much for "friends" isn't it, please be a sport and let me repay it to you with 1.5%."
What then?
[EDIT] Disclaimer, I am Greek, I have no illusions about the management abilities of my country (sometimes I think we are born without the part of brain responsible for financial planning ;-), but I have strong opinions about the economy of debt, the way it is manipulated by the "market" and it's implications on the life of people. My opinion is biased, of course.
No market "manipulated" Greek dept. The Greek government took more money than they could pay back and mostly spend it on creating fake jobs in the government. The submarine deal is only 1 billion euros, this is not the reason for the hundred of billions of dept. To my knowledge this has not been payed yet. The F-16 deal is 1,5 billion euros, also not the reason for the billions of dept. Especially not"half the money."
It's plain simple, the Greek people voted for a government that took more money than they could pay back and lived great with this. I know it's easier to explain the Greek guilt away in this than face reality.
Thanks for the reply. To be honest I am not sure about the exact amounts that went to weapons(, nor "Siemens", nor the companies participating in the "Olympic miracle") but I am sure, like you say that they only account for only one part of the debt.
I also do not have the slightest intend to justify or excuse us one bit, we get what we deserve. At the very end, people are responsible for what their governments do, if they are not, they do not deserve to be called citizens and nobody will ever treat them as such.
On the other hand, I see debt used as a way to extort resources all around the world, and they look strikingly similar. Look what happened in Brazil, in Argentine, in Hungary, in Turkey, in Indonesia...
For sure there are reckless governments, but I believe there are institutions that capitalize on their recklessness.
You make a good point, and if it wasn't for the panic that's been gripping everyone for the last 3 years any time there is any kind of talk of bad debt, I'd say "stand back and let whoever lent money to them do due diligence next time." Get it over with, get the bad paper out of the system. It's not enough money to cause collapse, it's a small fraction of, say, the US housing crisis. The problem is that the panics in the market make this into a very expensive proposition.
Ok, but what doesn't work? It seems kind of reasonable to use such analogies. Most people would understand how transactions work between themselves and others, just from experience, but view of us here were in government, in position to borrows, spend and repay back from another government.
It seems that basic things like "you need to pay back money we lent you" are still the same? Sure details are different, well, I don't know how different, that is why I am asking ...
A household is an open system. It is possible for a household to increase its net revenue without incurring costs. For example, if I get a new job with higher pay, the amount of money in my household has increased.
Countries (even countries in economically integrated Europe) are closed systems. Increasing the revenue to one sector results in losses to another. In this case, the Greek government can increase its revenue by increasing enforcement and raising the tax rate. However, that results in a cost to the private sector. People paying more in taxes have less to spend on other things, which lower economic activity and lengthens the recession.
As an aside, this is why I get very irritated when politicians use household/business analogies to model national economies. The two are different in kind, not just in size, and trying to compare an open system to a closed system leads to serious errors of judgement.
I don't think countries are closed systems, since they interact with the rest of the world. Countries can increase revenues without increasing costs. Suppose a country figures out how to get fusion to work: decreases electricity cost, increases revenues from sales of fusion plants. Or they talk to other countries about how to grow more/better crops; assuming they weren't at 1st world yields, there are many things that are cheap to implement that produce more money.
But isn't this a problem exactly because countries are not closed systems. They trade, borrow and lend money to each other. There is an interest rate involved. That seems like an typical debtor-creditor relationship that one might have with someone.
1. I'll lend you the money if you get a steady minimum wage job and cut off the spending. 2. Look, I believe in you. I'll lend you a whole bunch of money so that you can go to college, retrain, get a much better job, and then repay me with plenty left over for yourself.
Now I understand that (2.) sounds much better than (1.), but it's just not realistic. He will waste the money again, because he knows he didn't earn it. You have to be tough and force him to get his house in order. Then he can save and borrow to retrain. If Greece is spending its own money on infrastructure and investments, there is at least a chance it will be spent well. If it's spending other people's money - no chance at all.
EDIT: I didn't mean this to sound like I am calling Greeks in general wastrels and boozers. It's more about how other people's money tends to get spent. See the message below.