The debt trap of the Greek economy and the way out

Abstract

In this paper it is argued that, in an economy with heavy loans such as Greece, structural reforms are not enough to lead the country out of the crisis. Only a Grexit with deep cuts and restructuring of debts, together with efficient state management and development policies may lead to growth. Greece has fallen in a huge debt trap which is perpetually growing by new loans.

A little less than half of these loans have been created during the euro zone period and particularly after the 2008 crisis. In accordance with the Eurogroup agreements, Greece is obliged to pay every year to its lenders 15% of its GDP (27 billion euro) up to the year of 2023 and 20% of its GDP (36 billion), between the years 2023 and 2060. No country in the world can survive under such a heavy burden of debt obligations. It is argued that, even a country with heavy loans such as Greece, can succeed growth by imposing structural reforms such as sweeping impediments of labour, goods and service markets, breaking business and union monopoly power, make it easy to fire unwanted employees, removing regulations, red tape and licensing fees, privatizing state assets, increasing taxes and suppressing pensions etc.

This is nothing but a totally false hypothesis. It has been illustrated in research that, structural reforms may provide in the long run a yearly growth of a little over 1%. It is also found that, they do not increase output during a crisis and they might have negative effects in the medium run. Thus, in the case of Greece, only deep cuts and restructuring of the debt (as with the German debt in the London 1953 agreement), accompanied with Grexit, development policies, efficient state management and reasonable structural reforms, may lead to the way out of the crisis and to growth.