More news overnight that Greece’s problems just can’t stop getting worse. As I mentioned yesterday the economy continues to veer off track in terms of meeting Troika targets and what the IMF considers to be a sustainable path.
You may be aware that the plan for Greece has been based the premise of “expansionary fiscal contraction” and the idea that internal devaluation would lead to an export-led recovery due to increased productivity. I have been explaining the folly of this plan for over two years, here it what I had to say back in March 2011.
Greece was always going to be in trouble as soon as there was an economic downturn in Europe because they are trapped between the domestic policies of Germany and the inflexibility of the monetary system they signed up to when they joined the Euro. The austerity package is failing, but it is only failing to fix the symptoms. Without currency deflation the only possible outcome is lower wages for the Greeks, which will inevitably lead to default on loans, the exact thing the Germans and French are attempting to stop happening.
What makes the situation even more concerning is that even without the key issue of unaddressed debts, according to the “experts” the plan should still have delivered increased industrial production in tradable goods as Greece slowly morphed into an export driven economy. Last night’s manufacturing PMI once again tells the story of what actually happened.