24/7 Wall St.

The Greek economy has begun to disappear, or more appropriately, the process has begun to happen more quickly. Greece’s 240 billion euro economy, about 2.5% of the euro zone, contracted 3.7 percent in the three months which ended June 30 compared with a previous -3.5% estimate. The figure is against the number from the same quarter last year.

The news will cause another panic about the chance that Greece will default on its sovereign obligations, and it should cause concern. Some nations in the euro zone have expanded recently–most notably German. That leaves the weaker nations including Spain, Portugal, and Italy with nothing more than austerity budgets to shrink the size of their deficits, one of the things that global capital markets investors expect if they decide to put money into the risky paper issued by these countries.

Greece is an example of the flaw of austerity plans. It cannot continue to cut its budget for national expenditures fast enough to balance the rate at which its economy has contracted and will probably continue to contract in the future.

Several euro zone nations have tried to convince lenders and traders that they can lower national expenditures to skeleton levels. That action is usually coupled with higher taxes. The extent to which these levies are regressive and will shrink GDP more rapidly won’t be known for several quarters. Nor will the effects of austerity on national expenditures which help create jobs.

The Greek economy is likely to continue to shrink, if the last two years are an indication. Tourists, who account for a large portion of the country’s income, may see the instability of the economy and the chance of labor strikes as reasons to stay away. The Greek unemployment rate is more than 12% and without government stimulus, the number will almost certainly grow. There may be good arguments to make for austerity measures in large economies like Germany and the UK which have substantial enough export and consumption activity to cushion the shock. Greece is too small and relies too much on a few sources of income for that to be the case.

–Douglas McIntyre