One major reason why the Greece deal is a bad deal

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It has many bad points. However, I’m going to ignore most of it and focus on a single part to keep the discussion brief.

First, we need to take a quick look at how governments usually operate during recessions.

Most nations have what are called automatic stabilizers. During a downturn, applications for unemployment assistance go up along with food stamps, etc. As a result, the deficit “automatically’ increases in an attempt to stimulate demand. If government were to enact willful cuts to the automatic stabilizers during a downturn, then demand would contract further and the recession would only deepen. 

That being said, let’s look at an interesting part of the agreement:

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What this means is that the Greek government is required by the terms of the agreement to raise more in taxes than it spends. In other words, it must run a surplus. A bad idea to start with. A surplus will only drain much needed Euros from the economy, preventing growth, which will inevitably make it more difficult for Greece to hit the surplus targets. If the economy isn’t strong enough and it misses the primary surplus targets outlined in the deal, the demand is that Greece have a system in place that will automatically cut the stabilizers, further strangling the Greek economy.

With Greece already floundering in a depression, what it needs to do is run deficits for a few years to get the economy moving again, plus debt restructuring. A surplus will not lift Greece out of its depression and cuts to the automatic stabilizers will restrict demand even more, sinking the nation further into depression. The austerity measures guarantee that Greece will be back in the same situation that it already faces not too long from now.

This portion of the deal alone makes it non-viable. It will not result in growth and in the end, only exacerbate Greece’s current problems.

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