There are two types of haircuts people dread. One involves a barber called Sweeny Todd and pies. The other involves debt. Of the two types of haircuts, the former never seems to be justifiable, the latter can be. And would you believe it, the latter may be back on again for the euro area. It is the story that the powers that be in the euro region want to die. It is the story that won’t die because when it comes to facing up to reality, euro leaders are as clueless as Bruce Willis’s pate is hairless.
Wolfgang Schaeuble, Germany’s finance minister, has owned up to a truth. Hard data tells an even more unpalatable truth, but the great and good in the euro area seem to be unable to spot this truth even when it is starring them in the face
Elections are difficult, and for those at the top in politics they are especially challenging. You can feel sorry for Wolfgang Schaeuble. The German election is but weeks away, and Mr Schaeuble was on the campaign trail. No doubt he was pressed hard; no doubt he would rather have kept quiet, but it spilled out anyway. Greece, admitted Mr Schaeuble, will need more money. But, he added, it won’t have any more of its debt cancelled. It won’t, to use the emotive word that has come to mean debt write-off, experience a haircut.
Meanwhile, Capital Economics has donme some number crunching and drawn conclusions to make the hairs stand up on the most follically challenged person.
Let’s assume that Greece, Spain, Portugal, Ireland and Italy can maintain their future fiscal deficits at their expected 2013 level. Then, according to Capital Economics, in order for each country to reduce government debt to 90 per cent of GDP within 20 years they must average annual growth of 5.4 per cent, 6.5 per cent, 6.0 per cent, 7.5 per cent and 3.0 per cent respectively. If they could somehow find a way of moving their primary fiscal budget into balance (primary in this case means before interest), the required growth would be 5.4 per cent, 2.3 per cent, 4.7 per cent, 4.1 per cent and 3.0 per cent.
In other words, the only way they can realistically bring their debt down is if the economies manage a pretty remarkable 20 years of impressive growth.
What they really need, of course, is one of those haircuts, and investment.
Or do they?
The EU's economic and monetary commissioner Olli Rehn said that what Greece needs is more time. No new money, no haircut, just more time to repay its debts.
Angela Merkel chose to avoid the topic, and just to answer the question: will Greece need more money? she said, again on the campaign trail: “Greece has been making very, very good progress in recent months and we want that progress to be continued.”
Well is it making progress? Most of us had that written about us in our reports when we were at school. “Making good progress,” may be appropriate when applied to a seven year old, but it seems a tad patronising when applied to Greece.
The truth is that the Greek crisis just goes on and on. And it will continue to go on and on, because its targets are impossible. What it needs is a cheaper currency, less debt and more investment. Maybe it can get away without the cheaper currency if there were more money transfers between Germany and Greece. Then again, you only need to look at how some regions of the UK are impoverished to see how even full political union cannot fix the problem of regional economic disparity.
Sorry, to repeat a message that was stated here three years ago. But the euro is very much a part of Greece’s problem, and no matter how many haircuts it receives; no matter how much investment it obtains, without a cheaper currency the recovery may never happen.
© Investment & Business News 2013