Tuesday, April 2, 2013

Economy: Apparently like... Jenga!

Since the very beginning of the debt crisis in Europe and the subsequent government spending cuts implemented, everyone- at least from my shallow academic entourage- was arguing, if not shouting, for the vicious circle of austerity. Shortly, beginning from a high debt-to-GDP ratio, public spending cuts affect more intensively the GDP than they do to the deficit and hence more cuts are required (the decrease of the denominator is larger that the one of the numerator) but at the same time GDP has already decreased more steeply. If you wish to argue for the opposite do not even dare; I am living in the center of this vicious circle. Currently, troika is coming back to Greece and from what I read they intend to respond to government revenues shortfall by more cuts...

In other words, they remove another wooden block from the disposable income and they place it on top. That is exactly what happens in Greece over the last 3 years! Eventually, we will run out of wooden blocks and the game will be over when the tower collapses. If you ask  me what the alternative is, I would immediately answer you- I admit without second thoughts- that instead of the continuous shortsighted cuts a structural reform of the government consumption  along with patience and not necessarily more funding would be the appropriate tool combination and I am convinced that we would already had enjoyed the fruits of our efforts. I expect this vicious circle to begin in Cyprus.

Let us take Jenga as an example of reality, once more. Imagine now that the economy of the Eurozone is a tower formed by the national income of its members (the wooden blocks). What would happen if we keep removing one block after another? Sooner or later the tower will collapse! With the US straggling to return to a forceful growth and the GDP of the EMU member-states attenuating more and more there will be no-one left to purchase the services and the goods produced by the strongest economies. Inevitably, all members will experience depression succeeded by the luck of funds necessary to guarantee the other members' debt. We have been digging our our own grave over the last couple of years...

It is an identity equation: GDP equals consumption plus investment plus government spending plus current accounts balance. Κομίζω γλαῦκα ἐς Αθήνας*?

If you wish to expand Jenga to fit to global economy you are welcome!

*Κομίζω γλαῦκα ἐς Αθήνας (kommizo glafka es Athinas); ancient Greek, figuratively means "speeking of widely known things".