Thursday, April 29, 2010

Greek debt crisis guide: Q&A to understand Greek situation

Here we talked about different issues of Greek crisis: European and IMF aid, George Papandreou (PM minister of Greece) actions.... but we know how all started? Why is important the downgrade made by S&P? If you're a bit confused, don't panic, here's the Greek Guide:

  • What's wrong with Greek economy?
Greek government owes (officially) €300bn to their investors, and they keep losing money, day by day.

  • Why is the debt so high?
Irresponsible spending actions, mainly. But also, Greek government lied about their debt, with help of Goldman Sachs to mask it . Now, they can't finance the normal administration spending and must correct a debt of 13% of their GDP (Also, an indicator of the economic health of a country) that burdens the, already, weak economy of Greece.

  • When became public this problem?
19 May, when Greek government should paid a €900bn loan. As they were unable to pay it, Greece politicians asked for an international rescue package

  • Rescue package? Who'll lend money to Greece? How much? Why?
Eurozone states members committed to aid Greece with €30bn. Also, IMF is negotiating his part, between €10-15bn. This would give a sense of stability to Greek investors, also is a 'duty' to back other's back for European members.

  • Which are the terms of Greek rescue package?
European union members will lent money to Greek at an interest of 5%, and should be paid in 3 years. Germany, wanting to expel Greece from Eurozone, wants to harden these numbers. Saving Greek economy is save Euro, so all European countries should make and effort and coordinate their steps, if not, all Europe will fall.

  • Will be enough with European-IMF rescue package?
€30 bn...or €40-45 bn if IMF finally helps too, may be not enough, as other voices say that Greece could need a €150 bn bailout

  • What's doing Greece to improve the situation?

New Greek government inherited a hard situation. To improve the situation, Greek government has started a hard line way to reduce spending. Such action as:

  • Increasing some taxes (Gasoline, drinks, Tobacco)
  • Increase retirement to 67 years
  • Harden tax evasion
  • Reduce government administration spending

  • That's enough?
The measures package is not much popular, so trade unions and opposition are attacking the government actions, marching at demonstrations, etc. That isn't helping the situation, so there's not a 'national pact' and every side is working against other, not sticking up.

  • How serious is this situation?

These are the worst time of the Euro since his creation, and is threatening the existence of Euro currency.

  • Could this affect other countries?
Could affect and is affecting them, right now, to other weak economies such as Portugal and Spain (who were downgraded 2 points, by S&P)

Related articles:

Investors snap up Greek T-bills

German parties wants Greece out of the eurozone. Bad times for Greek government

Greek economy rated junk by S&P

Wanna know why is impossible to save Greece?

Greece Crisis. Greece ask for €45 bn in help from EU and IMF

Greek bailout arrives: Are €110 bn enough or would you like some more?

Greece crisis: Further reading


Economy Lesson: Minimum Wage Laws, by Henry Hazlitt

We have already seen some of the harmful results of arbitrary governmental efforts to raise the price of favored commodities. The same sort of harmful results follow efforts to raise wages through minimum wage laws. This ought not to be surprising, for a wage is, in fact, a price. It is unfortunate for clarity of economic thinking that the price of labor’s services should have received an entirely different name from other prices. This has prevented most people from recognizing that the same principles govern both.

Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.

Yet it ought to be clear that a minimum wage law is, at best, a limited weapon for combatting the evil of low wages, and that the possible good to be achieved by such a law can exceed the possible harm only in proportion as its aims are modest. The more ambitious such a law is, the larger the number of workers it attempts to cover, and the more it attempts to raise their wages, the more certain are its harmful effects to exceed any possible good effects.

The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.

The only exception to this occurs when a group of workers is receiving a wage actually below its market worth. This is likely to happen only in rare and special circumstances or localities where competitive forces do not operate freely or adequately; but nearly all these special cases could be remedied just as effectively, more flexibly and with far less potential harm, by unionization.

It may be thought that if the law forces the payment of a higher wage in a given industry, that industry can then charge higher prices for its product, so that the burden of paying the higher wage is merely shifted to consumers. Such shifts, however, are not easily made, nor are the consequences of artificial wage-raising so easily escaped. A higher price for the product may not be possible: it may merely drive consumers to the equivalent imported products or to some substitute. Or, if consumers continue to buy the product of the industry in which wages have been raised, the higher price will cause them to buy less of it. While some workers in the industry may be benefited from the higher wage, therefore, others will be thrown out of employment altogether. On the other hand, if the price of the product is not raised, marginal producers in the industry will be driven out of business; so that reduced production and consequent unemployment will merely be brought about in another way.

When such consequences are pointed out, there are those who reply: “Very well; if it is true that the X industry cannot exist except by paying starvation wages, then it will be just as well if the minimum wage puts it out of existence altogether.” But this brave pronouncement overlooks the realities. It overlooks, first of all, that consumers will suffer the loss of that product. It forgets, in the second place, that it is merely condemning the people who worked in that industry to unemployment. And it ignores, finally, that bad as were the wages paid in the X industry, they were the best among all the alternatives that seemed open to the workers in that industry; otherwise the workers would have gone into another. If, therefore, the X industry is driven out of existence by a minimum wage law, then the workers previously employed in that industry will be forced to turn to alternative courses that seemed less attractive to them in the first place. Their competition for jobs will drive down the pay offered even in these alternative occupations. There is no escape from the conclusion that the minimum wage will increase unemployment.