The US is again hitting its debt ceiling.

Greek Austerity Facts

by Elaine Schwartz    •    Feb 10, 2012    •    1077 Views

With a March 20 deadline approaching, new European bailout negotiations continue to emphasize austerity. Curious about what austerity specifically meant, I looked at a Greek newspaper.

In the sports section, they discussed the plight of Greece and the Olympics.  Athens Olympic Park, home of the 2004 games, is in a state of decay. Greek gymnasts, weightlifters and the water polo and sailing teams have not been able to afford the trip to qualifying competitions. Half the size of its 2008 Beijing counterpart, the Greek Olympic team is coping with funding that has diminished “to a trickle.”

Articles focusing on labor describe a 20% unemployment rate that is close to 50% for people under 25.  Mandating a 22% decline in the minimum wage, a new bailout package would initiate a ripple of wage decreases. Social security contributions would be less and unemployment benefits would have to sink below the new minimum wage to preserve the incentive to work.  At state-owned firms, long-term employment would no longer be guaranteed.

Meanwhile, consumers, businesses and banks have been affected by the effort to increase tax revenue and diminish tax evasion.  Yes, property tax revenue did triple when the obligation was included on electricity bills. However, the attempt to collect unpaid taxes has had a 1% success rate. To generate more revenue, other bailout proposals suggest eliminating the special tax status of people living in the eastern Aegean Islands and those who live on islands with fewer than 3100 residents. Also, a single value added tax (VAT) rate of approximately 20% might be imposed that would result in higher prices for such items as food, drugs, electricity and taxi rides. As for the impact on the banking system, more taxes have meant lower bank deposits as the money travels to state coffers.

I did discover that the Greek government is actually expanding hiring in one area by doubling the number of tax auditors to a total of 2,000.

The Economic Lesson

Governments borrow money by selling bonds. Called sovereign debt, government bonds can be purchased by national and local governments, by businesses (including banks) and by individuals.

An Economic Question: If Greece cannot repay its bonds (loans) that are due on March 20, how might banks be affected?

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