Case Study: GDP, Debt & Europe (Part 1)
Anyone who is even remotely familiar with basic economics will tell you that the German economy was more robust than the Spanish, Greek, Italian and other economies in Europe. However, that is about common sense and as we already know from previous articles, common sense is very different from GDP sense.
Hence, if we were to look at the GDP numbers, for five years preceding the economic crisis, the numbers would tell you a very different story. The Greek economy was one of the fastest growing economies in Europe during that time (as per the GDP system). The Greek growth rate had surpassed the German growth rate multiple times during that 5 year period.
Hence, if the GDP system was to be believed, Greece was doing exceedingly well during those years. Yet, all of a sudden the Greek economy collapsed with unimaginable debt. There were no warning signs signaling an impending doom. Instead the GDP system deceptively made up believe that all was going well in Greece and other European economies.
When the crisis began, many analysts started questioning what was wrong with the current system and how a catastrophe of this magnitude could slip under the radar and suddenly appear when least expected. Most of the answers found link directly to the GDP system.
We will discuss them in detail in this article:
European Crisis: Example of what’s wrong ?
It is important to understand that the European crisis may have appeared in the media overnight however, the underlying economic fundamentals did not change overnight. The seeds of the European crisis were sown many years before its appearance. Let’s consider Greece as an example. What happened in the other European countries is more or less the same. However, it happened on a massive scale in Greece making it an interesting case study.
✓ Election Promises
It started with the elections in Greece. Both the political parties in Greece were making absurd election promises. Promising goodies and government jobs in exchange for votes was the norm and both political parties wanted to outshine the other when it came to offering freebies.
The Greek population was also interested in these freebies and would vote whoever offered the maximum benefits to power. And if the politician wanted to stay in power, they had to make good their promises.
That is what happened in Greece. Around 35% of the Greek working age population was employed in government jobs during the time before the Greek crisis. Government jobs provided pay and benefits which the private sector could not compete with. The most interesting thing was that a large number of these jobs were not required in the first place. They were created merely to fulfill the election promises made by the government. Needless to say that the freebies distributed during the election process and the jobs created strained the treasury to a large extent.
Now the government making extravagant promises and fulfilling them with wasteful expenditure is not the problem of the GDP system. However, the GDP system did not show any red flags when this was happening. In fact all those salaries paid out by borrowing money to jobs that were not required in the first place showed up as an increase in GDP i.e. a good thing further reinforcing the cycle of wastage!
✓ Wasteful Infrastructure
The Greek government also borrowed humungous amounts of money to create a public infrastructure. Metro rails and freeways came across all over the country. The problem is that in many of these places, this infrastructure was not required and the projects were simply unviable. However, once again the government refused to acknowledge this and went ahead with the creation of these projects with borrowed money.
Today, many of these projects are functioning. However, most of the projects do not generate enough cash flow to even pay off the loans that were taken for their creation. Hence, these projects are today a drain on the taxpayer’s money and still adding up to the European crisis.
Once again the GDP system does not take wrong decisions on the government’s behalf. However, when a government does make a wrong decision, the GDP system ends up incentivizing it. All these projects were part of the remarkable growth rate that Greece exhibited for five years prior to the crisis.
✓ The Olympics
The Greek government went on a really massive spending binge when it hosted the 2004 Olympics. Olympics had originated in Greece and therefore were very close to the hearts of the Greek people. However, the Greek government took this too far.
Extensively large sums were spent on creating sporting infrastructure. There were race tracks and swimming pools that were built especially for this event. The overburdened Greek treasury did not have the money for this event. Once again, they borrowed massive amounts and spent them on hosting the Olympics.
Any search on the internet will today show this very same infrastructure lying in ruins. This depicts the wasteful nature of the expenditure. Greece neither required Olympic size swimming pools nor did it have the money to pay for them. However, as and when the Greek government was borrowing these large sums of money, all of it reflected positively in the GDP creating the illusion that all was going well at a time when it wasn’t.
The whole point of this article is to demonstrate that GDP is nowhere close to a reliable metric. When the GDP states that all is going well with the economy, there is a major chance that it isn’t. The Greek and the larger European crisis are testimony to this fact.
In the next article, we will see the consequences that the people of Greece and Europe had to bear thanks to following the goal of maximizing GDP.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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- Common Sense vs. GDP Sense
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- Case Study: GDP, Debt & Europe (Part 2)
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