As the media frenzy of Greece's debt crisis slowly unfolds, all eyes are now looking at how Germany and France will come out of this in ensuring that the Euro will remain a stable currency. There is an obvious fear of a contagion effect affecting the rest of the smaller ecomomies that make up PIIGS which to my mind is quite an acronym to give for Portugal, Ireland, Iceland and Spain. Whilst the figures of the rescue package announced are mind boggling, I have been having a hard time trying to understand why there are angers on both sides of the fence- okay I am just kidding! I can understand why the ordinary Germans are angry. After all their country will have to come out with the biggest share in the bailout and I am sure the money will come out from the taxpayers. This was reminiscent of the amount they spent unifying the two Germans. But that was different. German reunification was somewhat a national issue- to reunify of what was a single sovereign country. The current bailout was nothing of that sort. The two countries are vastly different in terms of politics, identities and are wide apart in terms of economic wealth. They maybe under a union but we all know that politically and economically countries that form the Union are still wide apart. I mean just ask the Brits on why they will never join the Euro Zone. I dont think they are ready to subsidize the poorer members when they have their own economic problems and budget deficit to sort out. I just wish David Cameron a very good luck on how he and his new coalition Government will manage to shrink UK's massive deficits.
That brings me to this issue which is closer to home. We have been brought up in a subsidized culture and If we could have the option, everything in this world should be free. But how many of us do realize this? - in the real world this can never be the case. somehow, someone has to pay for something that we get for free which in our case the Government. But Governments have to earn some money to pay for all these services and obviously tax will form the major bulk to fill up the Government’s coffers. For us, its a good thing we have oil and infact for every dollar that the Government earns 80 cents is actually coming from oil and gas. How many people do realise this? how many people realise that such resource-based income is not sustainable?
Just to give you and idea, for one, oil is not an infinite resource, they do and can run out. for second, what makes us think, with fear of climate change and rush for alternative energy and so on, oil will remain a valuable commodity? I mean just think about it- the world stopped using steam engine not because we ran out of water but we found a better and more efficient energy which was oil. Wont oil suffer the same fate once the world finds a better alternative?
Sometimes thinking the worst case scenario will make us understand the consequences easier. Herewith, I thought why dont we sit down for a moment and think of what would be the worst possible macro economic and financial policies that any Government could adopt to destroy their own countries.
1. Thou shall spend money that thou do not have.
Governments are just like you and me. If you want to go bust you can just simply spend, spend and spend. Now unless you are as big as the USA which can print money almost at will, with a huge economy to back you up and a fiat money that has a life in itself (PetroDollar, Chinese Dollar, Euro Dollar), you can forget of being extravagant without facing the consequences. Greece is a perfect example of this situation.
They need to have an income to support its public sector spending that can include paying the salaries of the public servants, the capital infrastructure spending as well as the many subsidies given. Income can come from the tax in our case the oil tax as well as profits and dividends from our investments at home and abroad. If we spend more than we earn we may have to find other sources of the income. We can either increase the tax or in the case of Greece they actually increase their public sector borrowing from the private banks through the sale of their bonds which are now rated as junk. If your government bonds are backed with some valuable security that will work out just fine. But once you have a bad record of not paying the agreed dividend as promised, you can be sure no creditor will ever buy your bonds.
2.Thou shall have a bloated civil service.
Lets face it- The public sector does not create wealth. It spends it for social programs and public sector infrastructure projects like building roads and hospitals etc. Of course you do need this program to push for your social agenda. after all, thats is why Governments exist. But if you do need to spend on this, be sure you have the money to pay for it. A better option could have been attracting private sector participation as well as foreign direct investments. 3Ps or Public Finance Initiatives or some of the ingenious business models are perfect models that can be exploited.
3. Thou shall have a deficit that hit beyond 10% of GDP
Isn't this obvious? If you earn $1 but you spend $1.40, that spells trouble. Ask Greece.
4. Thou shall have more subsidies and more subsidies
To be continued......
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