Thursday, October 13, 2011

Greek bailout

On the breakfast news this morning a young Greek women stated "We don't want your money we want jobs". Excellent, so you're all willing to work for free then are you?

You see a business can't expand and create new jobs unless they're making enough money to accommodate them. Likewise a new company can't start up and create new jobs unless they know that there are enough people out there willing to pay for their products and/or services.

So if the Greek government wants to encourage new jobs it has only a few options available to it. It can lower taxation on businesses thereby allowing them to retain more money and thus expand their business and hire more people.

Another option is to reduce tariffs on export; make it cheaper to buy from Greece and thus encourage more cash flow into the country.

In both cases the downside is that the government itself loses money from tax revenue and is based on the assumption that the businesses will pump the additional money back into the Greek economy.

A counter would be to increase tariffs on imports. This would have the effect of increasing the price of  goods made with imported material; however it could open up new markets within the country itself to provide those goods internally and thus also keep the cash internal too. Due to the low export tariffs such a company may be able to compete more effectively with the external company that used to provide the goods in the first place thus making even more money.

Both of those could work except that Greece is signed up to the Eurozone and thus there is no import duty within the EU. They could create a new tax, but I'd expect them to be reported to the WTO if they tried that.

Instead both these measures could be implemented indirectly by devaluing Greece's currency - as it would no longer be 'worth' as much outside the country imports would be more expensive and exports would be cheaper.

Except it's part of the Euro and thus has no say over its value.

Welcome to the inherent problems of a common currency market.

Oh and before anyone points out that the USA is the same type of system - they have the same problems. Note that Texas received a $1bn agricultural subsidy last year  what is that if not a bailout they don't have to pay back?

Pretend each state is its own country that's signed up to a Common Market, Common Currency with Free Trade and movement across borders. Now look at how much each 'country' pays into the system compared to how much they take out.


Orphi said...

Wouldn't increasing import tax or decreasing export tax count as “making other countries poorer so we can get richer”? And isn't the entire point of the existence of the EU explicitly to prevent any country from doing that?

Yeah, I can see how that might be a problem. ;-)

FlipC said...

"isn't the entire point of the existence of the EU explicitly to prevent any country from doing that?"

Heh nope. Recall that the EU was really the Common Market set up to unify standards and paperwork. This meant a company in one country wouldn't have to make 10 slightly different products for sale in 10 member countries; it would allow the members to act as a trading block against the might of the USA, USSR and Asia.

The EU as it is today is a result of mission creep.

Orphi said...

It's not a bug, it's a feature! :-D