Bierdeckel Economics vs. Armchair Economics - ... and what it got to do with Greece and Ireland

As most of you know, I am married to a greek woman and life in Ireland. Therefore the current economic crisis is omnipresent in my life.

Now I can't resist anymore: I have to write up my own "Bierdeckel" assessment of where we are (in Germany we say, that if you can't explain it by writing it up on the back of a beermat its not any good. The beermat thing became famous 5 years ago when Friedrich Merz suggested that you should be able to do your Tax Return on the back of a beermat).

The main purpose of the exercise is to come to my own conclusions on, how deep the sh... is we are in and to summarize it in a way that will allow us to grab the essence of the problem on a page. Here we go ...

To start I have to say that I do not share the obsession with the "Budget Deficit as percentage of GDP" as being the biggest problem of all. I agree it is a good early warning indicator that there is (maybe) something about to go wrong, but a budget deficit of more than 3% (the Maastrich-Criteria) is no reason to panic. Just think about it: Because the impact and significants of borrowing a certain amount of money (or increasing your debt) clearly depends on your ability to pay it back (your income), it obviously does not make sense to express budget deficits as absolut numbers, because a budget deficit of EUR 1000M might be a problem for a small country (with less (tax) income), but not problem for a bigger country. Therefore expressing the budget deficit as percentage of GDP (Gross Domestic Product) make sense (Warning: currently some people try to confuse the situation by expressing key indicators as percentages of GNP (Gross National Product). That does not make sense and is dangerous, because the numbers might look better, but the problem is not smaller).

My point is now, that a budget deficit of >3% (e.g. 12% for Greece, Ireland, ...) is not a problem. Just imagine you have a debt free country and in (one) given year you need to borrow some money to get things back to normal and to make some investments and then you pay it back over a period of 10 years. I don't think that this is a problem.

The problem is, what happens if you keep on doing this. Then (over the years) you will accumulate dept and this is a key indicator that is much more interesting. Again it probably does not make sense to look at absolute numbers and it is probably much more telling to look at debt as percentage of GDP. Here are a couple of examples (2009) ...

The reason why this is a problem is interest. Obviously if you borrow money you need to pay it back, but you also need to pay interest on it (sorry, I am obviously teaching cranny how to suck eggs here, but when I see what some politicians do, I start to wonder). And you need to pay this interest from your income (the taxes your citizens pay). If you now accumulate to much debt and/or your credit rating goes down, your interest payments go up and that can become a real problem, because at the end they might eat up a huge amount of your income, leaving you with very little to spend on infrastructure (and other investment) projects. Therefore the next better metric is to look at interest payments as percentage of GDP. Unfortunately I was not able to find any current data, but here are some examples from 2004 (estimated) , which will give us some indication ...

Ireland is different. Ireland got a fighting chance, because Ireland has much less accumulated debt, but the time to act is now. Ireland can spend some money this year, but needs to go back to a budget deficit below 3% within 2 years. And the money spend this year must create sustainable growth.