How far can a modern economy sink? 

The Greek economy is entering its fifth year of decline.  Nominal gross domestic product is about 28 percent lower than it was four years  ago. The official unemployment rate is 27.5 percent (as though the decimal point  matters, given the poor quality of the data). The unemployment rate for young  people is about 60 percent. Nonperforming loans continue to rise. The  privatization program continues to fail, in part because of an absence of  bidders. 

In a paper posted earlier this month, leading Greek  economist Yanis Varoufakis of the University of Athens and the University of Texas at Austin argues  Greece is “a failed social economy.”  The following are several of his examples: 

• There are 10 million Greeks living in   Greece (and falling fast owing to   migration), “organized” in around 2.8 million households that have a    “relationship” with the Tax Office. Of those 2.8 million households, 2.3   million have a debt to the Tax Office they cannot   service.
• One-million households cannot pay their electricity   bill in full, forcing the electricity company to “extend and pretend,” thus   ensuring that 1 million homes live in fear of darkness at night while the   electricity company is insolvent.
• Of the 3 million people constituting   Greece’s labor force, 1.3 million   are jobless.
• Contractors who work for the public sector are paid up   to 24 months after they provided the service and prepaid sales tax to the Tax   Office.
• Half of the businesses still in operation throughout   the country are seriously in arrears vis-a-vis their compulsory contributions   to their employees’ pension and social security fund.

Eventually, the decline will stop. Some argue that  Greece is near bottom, while others  say no, but no one knows for sure. 

Even with gross mismanagement and policy incompetence, no  country’s GDP goes to zero, because some food and other essentials are produced  no matter what. During the Great Depression, GDP dropped by about a third  between 1929 and 1933, which was the worst decline in U.S. history.  The other EU members, and particularly the Germans, are providing a partial  bailout to the Greeks, to both limit and stretch out their debt payments and  provide a very limited social safety net. 

Yet knowledgeable observers also realize that despite the  previous debt restructuring, the failure to meet targets means another bailout  is almost certain for this year. Too many Greeks, including many politicians,  blame the EU for their problems, rather than confront the reality that it has  been their own government that has been overspending for decades — and no other  country or the EU forced it to do this. 

Eventually, the fall in real wages adjusted for the level  of productivity will make Greece competitive again, and foreign  investment will renew along with job growth. Greece  will continue to have a comparative advantage in tourism; after all, the country  is spectacularly beautiful, with an ideal climate. 

Not even corrupt and incompetent politicians have been  able to destroy what God gave the Greeks. Still, tourism and certain other  comparative advantages will not produce a vibrant economy, but they will  establish a floor. 

The greatest danger to an eventual economic turnaround in  democracies is political. Unemployed and underemployed people are frustrated and  unhappy, and they take it out on the politicians who they blame for getting them  into the mess.

 Most politicians have short time horizons; namely, no  further than the next election. Thus, the political incentive is to provide more  government handouts in one form or another, and more “make-work”  jobs.

Both of these activities stifle — rather than enhance —  growth. Whether they are financed by taxation, debt or just printing money, they  suck resources out of the remaining productive people and businesses. Despite  thousands of years of failure of welfare and socialist states, the siren call of  immediate gratification often trumps rationality. 

The current unpleasantness with Russia and Ukraine could further harm Greece, which depends on Russia for more than 75 percent of its natural  gas, and most of it passes through Ukraine. 

Greece also needs a vibrant EU  economy to help pull it out of the current mess. If European growth is hurt by  the effect of its own sanctions on Russia, Russia’s sanctions on Europe, or a disruption in  Russian oil or gas flow, the effect could be catastrophic for  Greece, given the fragility of its  situation. The Greek economy is too small to significantly damage the European  or world economy, but the opposite is not true.