Though there is no agreed definition of the term depression, several have been proposed. These include:
- A decline in real GDP of at least 10%
- A recession (economic contraction) lasting two or more years
- An unemployment rate that reaches or exceeds 20%
By any of these definitions Greece is now in a depression. The latest figures show that Greece’s GDP contracted by 7% year-on-year in the fourth quarter of 2011, and since its peak in 2008 the Greek economy has shrunk by 12.5%. Greece has now been in recession for four years and unemployment in the country is now at 20.9%, with youth unemployment at a staggering 48%.
The fortunes of the Greek people look unlikely to change anytime soon since its rulers are continuing down the road of harsh austerity and bailouts from the rest of Europe. The truth however, is that there is another way.
Back in 2008, when other nations decided to spend billions bailing out their financial institutions to keep them afloat, Iceland chose not to protect its creditors, instead letting its banks default on $85 billion worth of debt. The ensuing crisis almost sank the country with the krona losing 58% of its value, inflation spiking to 19% and GDP in 2009 contracting by 7%. Today however, having allowed its bad debts to be cleansed, the Icelandic economy is doing very well indeed.
Exports and manufacturing are growing by 20%, tourism is back near all-time highs, real wages are rising, unemployment is declining sharply, interest rates have fallen from 18% to 5.5% and the stock market has rebounded by around 50% from its lows.
Interesting also is the fact that the bond rating agencies have already re-rated Iceland to investment grade.
According to Nobel laureate, Joseph Stiglitz, an economics professor at Columbia University in New York, “Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks.”
I’m quite certain that Greece will eventually follow Iceland’s example and default/ devalue its way back to prosperity. In the meantime however, in order to secure a second €130 billion bailout, the Greek people must suffer the effects of the harsh austerity measures imposed by the Troika.
In truth, this agreement is merely a temporary stop gap which will do nothing to stave off an eventual default of Greece’s debts. I think Jerry Webman, chief economist and senior investment officer for the Oppenheimer Funds, sums up the Greek bailout very well, “Greece is now more of a problem but less of a crisis.”