A Total Economic Collapse in Greece May Hurt Rescues

The Hellenic Statistical Authority reported today that GDP in the country fell by 6.9% in the second quarter. It is another sign that no rescue package by the EU and IMF can cut deficits and begin to bring down the debt of the southern European nation. The information may be what finally drives Germany to abandon its central role in the Greek rescue.

The agreement that was struck just last month calls for Greece to receive 109 billion euros from European governments and the IMF. Another contribution from the private sector was controversial. Bond holders consented to refinance 49.6 billion euros in Greek paper. The major credit rating agencies labeled the private action as a default. That may not have mattered. The second installment of Greek aid seems firmly in place.

The detente among EU nations about safety nets for the weakest economies in the region may not last long. The drop in Greek GDP is a reminder that financial aid will not revive moribund economies. The argument can be made that the austerity put in place in the most troubled nations in exchange for bailout funds actually makes GDP growth more difficult. The dynamics that apply to Greece also do to Portugal and Ireland. There are fears that negative GDP activity could also spread to Spain, where unemployment is above 20%, and France, which just announced 0% GDP growth in the second quarter.

Nothing is as likely to undermine the rescue of weak EU economies as new evidence that troubled nations are becoming rapidly more troubled. At some point, the IMF and Germany will decide that they are throwing good money after bad. The core problem of Europe’s financial problems will not go away. The national economies of many nations there are crumbling too quickly.

Douglas A. McIntyre