Analysis: Greek Economy Contracts

European Central Bank

Softness in the Greek economy edged out several predictions when it was announced that it had contracted at the alarming rate of 1.8 percent in the second quarter.

That the Greek economy contracted in the second quarter should not come as a surprise to anyone. What should however is the rate at which it contracted- a full percentage point higher than the 0.8 percent contraction recorded in the first quarter. This implies that we still haven’t seen the Greek economy ‘bottom out’ and the situation will be getting worse before it gets better.

Although the EU bailout may have alleviated fears over Greek government insolvency in the short term, these numbers suggest that the crisis is far from over. If the economic tailspin continues unabated, there is a risk of repeating the events of the Greek debt crisis, though this time with a different outcome. It remains to be seen whether or not the German public would have the appetite to once again bailout a country with a seemingly terminally dysfunctional economy.

Several analysts believe that the Greek government should be able to fend off default for at least another two years.

Michael Lewis has written an interesting piece on the Greek economy’s fall from grace in Vanity Fair.

Terence Roth has written an article in the Wall Street Journal that warns of widespread popular blowback from the EU’s latest wave of austerity measures:

“Scenes from France and the U.K. this week are confirmation that Europe’s political elite haven’t sold workers and households on the austerity thing. Brussels and national leaders are nobly pursuing fiscal rehab, but their electorates aren’t going down without a fight.”

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