Opinion: Greece’s new deal simply won’t work for these two reasons

How fitting that a tourism-driven nation like Greece signs a debt-restructuring deal whose one certainty is that everyone involved will once more book tickets.

The bad news is that the trip sure to be taken isn’t to the Parthenon or the Greek Islands. It will be back to Brussels in a few years, when this deal fails and has to be renegotiated yet again.

Greece has two big problems, and this deal fixes neither — in fact, it makes them both worse. One is that it owes too much money, about 350 billion euros ($385 billion), to be repaid from a shrinking economy. The other is that its economy is indeed shrinking, led, unfortunately, by a tourism sector that is Greece’s only material export and provides about 18% of gross domestic product.

Naturally, then, the solution to Greece’s inability to pay its debt or to halt the decline in its 25.6% unemployment rate is last weekend’s deal to borrow another 86 billion euros and raise taxes on island tourism, all the while insisting that this bankrupt country push its budget surplus to a level higher than Germany’s, adjusted for the two economies’ size, after already cutting spending 30% since 2010 and staying in the red.

Really? Europe has apparently kidnapped John Maynard Keynes and replaced him with Col. Wilhelm Klink. As Klink’s aide-de-camp Sgt. Schultz used to say: “I know nothing.”

At times like this, Europe likes brave talk about “reform.” But think about the numbers behind reforms the International Monetary Fund, European Central Bank and European Commission are touting. Does anyone think slashing diesel-fuel subsidies, selling off Greece’s airports and making it easier to get ferry licenses will generate 400 billion euros?

The guts of the deal are this: We give you even more money now, and you cut spending and raise taxes to grow your way out of the newly expanded debt. But it can’t work. Raise taxes and cut spending as much as Europe wants, and you get even more torpor.

A deal that would at least have a chance is one that would have reduced the principal burden of the debt, given a moratorium on interest payments for at least two years, and provided some help to Greek tourism. At a very minimum, it would lay out a series of carrots : if Greece does X, it gets Y amount of debt reduction.

As it stands, this deal will make vacations in Greece more expensive, lapping away at the one potential spring of export income the country has. It does this through eliminating a reduced rate for value-added taxes in resort islands. The rate will go from as low as 6.5% to 13% for hotels and 23% for meals and other services. So a Greek vacation gets more expensive, and there are fewer reasons to go there, when the opposite needs to be happening.

Greece has no other business generating even $2 billion in export revenue a year. Its list of other exports quickly devolves to niche industries like olive oil and fish. If tourism doesn’t pay Greece’s bills, they won’t get paid.

That’s why principal reduction — the “haircut” Greece’s official creditors are forbidding three years after private lenders wrote down Greek accounts — is a when, not if.

Today, Europe wants Greece to produce a primary surplus (meaning, before interest payments) of 3.5% of gross domestic product by 2018. For Americans, this would be like taking the $257 billion U.S. primary deficit last year and turning it into a $600 billion surplus in three years, mostly by doubling taxes on real estate, which accounts for 13% of our economy. That might be good for the long term, but it would cost hundreds of thousands (maybe millions) of jobs now.

And so it will be in Greece, since the Greek economy this deal creates won’t throw off enough cash to pay the banks, let alone Greeks. You would never know this from the Euro Summit statement, which looks at this uninterrupted jump in Greek unemployment from 7.7% in 2008 and the surge in Greek government debt that began after the first big austerity program was imposed in 2010 and claims, incredibly, that the prior austerity program was working fine until a government that took power in January loosened up and made the debt unsustainable.

They really said that.

At least this plan will make the northern Europeans who run the EC lose even more money. On planes back to Brussels, perhaps they’ll review Keynes’ observation that if you owe a lender 100 pounds you don’t have, you have a problem, but if you owe a million, the bank has a problem.

A bank run by Col. Klink, determined to know nothing.

source:Market watch