Greece Austerity Measures - An Analysis

For the past one month, there is severe protest happening in Greece against the Austerity Measures. European Central Bank (ECB) and IMF had asked Greece to take essential Austerity Measures before they claim the bail-out package. ECB watched Greece very closely on their decision on austerity measures.

Let us have a look on the Austerity measures. The Austerity measures are mainly classified into 2 parts, one is Tax Increase and other is slash in Public Spending. They are as follows:
Tax increases include

• A solidarity levy: At 1% for those earning between €12,000 (£10,800) and €20,000 a year, 2% for incomes between €20,000 and €50,000, 3% for those on €50,000 to €100,000, and 4% for those earning €100,000 or more. Lawmakers and public office holders will pay a 5% rate.

• A lower tax-free threshold: People will now pay tax on income over €8,000 a year, down from €12,000. This basic rate of tax will be set at 10%, with exemptions for those under 30, over 65, and the disabled.

• Sales tax: The VAT rate for restaurants and bars is being hiked from 13% to the new top rate of 23%. This rate already covers many products in the shops, including clothing, alcohol, electronics goods and some professional services.

Spending cuts include:

• Public sector wages: Salaries will be reduced by 15%.

• The public sector wage bill: The goal is to cut 150,000 public sector jobs, through a hiring freeze and abolition of all temporary contracts. This should cut the total bill by €2bn by 2015.

• Social benefits and pensions: The retirement age is being raised to 65. Increased means testing, and cuts to some benefits, will reduce the total amount spend on benefits by €1.09bn in 2011, then €1.28bn in 2012, €1.03bn in 2013, €1.01bn in 2014 and €700m in 2015.

 (Source: Guardian.co.uk)

 The current Greece crisis raised few questions like, whether the Greece will take the Austerity measures despite of huge protest in the country? whether it will default or will continue with Euro?

Many economists and experts expressed that Greece have only one solution and that is to leave EURO and Default. But, leaving EURO is not easy and unfortunately, not an option for Greece at this point of time. In 1998, the founding members of the euro-area agreed to lock their exchange rates at the then-prevailing levels. Leaving the Euro means breaking its commitment and the very  motivation for leaving would be to change the parity. Leaving Euro will not only allow Greece to deal with sovereign debt crisis, but also it will be in middle of a bank run, while everyone would be trying to avoid ending up with devalued drachma (Greece currency before joining EURO).

If Greece leaves, then the other countries like Ireland, Portugal and may be even Spain might also follow on the same line (because they are also looking for the bail-out package since their economy is also in tussle to pay off their debts). This will lead to banking crisis in all these countries, by holding their debts which might lead to banking crisis in UK and German (because they are the major creditors for these countries), which will put entire Europe in crisis. These are the some major constraints and problems why Greece cannot leave EURO.

But, the economist who expressed their views that Greece should leave EURO have their own reasons. If the Greece does not leave EURO at the this time, when the economy is already very weak, then there is a risk that the economy will spiral down further in the crisis. It's hard decision which Greece had made for Austerity measures, since they did not have any other better option.

I remember a famous line of Ludwig Von Mises in his book Human Action, which is as follows:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

How True it is, a voluntary abandonment or later as a Final and Total Catastrophe of Currency System, even though he said this for credit expansion, this line is perfectly suitable for Greece.