Greece Defaults on IMF

Flag_of_Greece.svgThis story in the WSJ is fairly ironic because not only is Greece the first of the “developed countries” to default on IMF loan but Greece represents one of the first developed countries of the western world. How is it that a country with such a rich intellectual back ground find itself in such economic dire straights?

Interestingly there is a lesson here for America since we follow similar tax and spend practices. What made things more challenging for Greece was their low GDP (Gross Domestic Product). Having experienced quick economic growth from 2000 – 2007 (average 4% year over year) a blind eye was turned against large budget deficits caused by increased spending in areas such as government jobs, pensions, military and social benefits. Such increase in deficit spending was believed to prime the economic pump.

As the deficit spending continued to increase the country’s GDP was unable to keep pace. In fact it wasn’t even in the race. Without GDP the increase debt to GDP ratio sealed their economic failure. This lead to Greece borrowing money that it could never pay back and thus a downward spiral ensued. There are other factors such as a debt crisis, tax evasion indicating a general distrust of government, and etc. The answers for Greece aren’t easy and it will be interesting to see the outcome. But, as a general principle if the GDP drives the economy then the country ought to focus its efforts on growing it as opposed to continue to fund some of the more frivolous entitlement programs.

I’m interested in hearing your thoughts.

 

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