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Dimitris Christoulas was a retired pharmacist living in Greece. One temperate spring night he sat on his balcony, reflecting on current events. The European sovereign debt crisis was ravaging his sun-kissed Mediterranean homeland. He had seen his country face extreme challenges before; Dmitri had lived through World War II, the bitter Greek Civil War, coups, counter-coups, and collapses of entire Greek governments.

Yet this time something was different.

Dimitris' livelihood had been destroyed and his dignity had been shattered by the economic turmoil and the government's response: cut, cut, cut. The Greek government has significantly raised property taxes, income taxes, and excise taxes while closing schools, cutting social security and pensions, raising the retirement age, and laying off huge amounts of state employees. The elder 77-year old suffered from the pension cut the most, which meant he couldn't keep up with payments for his medication.

So on April 4, 2012, Dmitris walked down Logothetidi street to Syntagma Square and, in front of Parliament, leaned on a tree, and shot himself in the head. He left a daughter and a note. The note stated that the possibility "of scavenging through garbage bins for food and becoming a burden to my child," was unbearable.

Antonios Samaras, Greece's current prime minister, once wisely remarked that ""Death isn't just to die; it's also to live in despair, without hope." By this account, Greece is flatlining and austerity is the culprit.

Financially and economically, Greece has been falling apart in the wake of austerity measures that strip Greece of its ability to aggressively spur economic growth. The troika (the European Central Bank, European Commission, and the IMF) are the primary lenders to Greece and have been infusing it with financial aid in turn for the Greece's implementation of austerity measures advocated by the troika. As shown in the following graph, the troika has been unable to understand the true ineffectiveness of the austerity measures it has layered onto Greece.

(click to enlarge)

On November 7, Greece's parliament passed another round of austerity that included the cutting of pensions by as much as a quarter coupled with significant wage cuts. Because of the budgetary noose tightening around its neck, Greece has not been able to stimulate the economy, which has left it in a freefall. The Greek economy is in its sixth year of recession, having contracted 20% since 2009. Greek unemployment stands at 25.4%, having risen for 39 consecutive months. Greece's output is now almost 25 percent lower than it was in 2008.

Moreover, austerity hasn't even been able to accomplish its primary purpose of straightening out Greece's balance sheet! Even after a 74% debt writedown, Greece is projected to reach historic debt-to-GDP levels in the future. According to the Hellenistic Statistical Authority, Greece's debt-to-GDP ratio will reach 200% in 2016. Greece's current debt-to-GDP ratio has actually risen with the implementation of austerity and currently stands at 176%.

Yet, more tragically, austerity has created a society that is falling apart. The death of Dimitris is indicative of a huge spike in suicides across Greece. In the first four months of 2012, the suicide rate for the poor and elderly in Greece increased 33% from 2011. More than 2500 suicides have occurred since 2010 in the country that once had the lowest suicide rate in Europe. Moreover, usage of anti-depressant drugs has skyrocketed: they're up 25% in Athens and 18% across all of Greece. The November 7 austerity measures implemented by the Greek parliament were met with nationwide protests by hundreds of thousands of Greeks that shut down public transportation and closed schools, banks, and local government offices.

The troika's aid-for-austerity approach has not worked because it is a fiscal approach to an economic as well as social situation. On Tuesday, November 27, the troika agreed to release €34.4B ($44.4B) in economic aid to Greece. Yet tax evasion, in part a response to the detrimental effect of austerity on the economy and in part a long-held societal norm, alone costs Greece €28B ($36B) a year! The austerity plans drawn up by the troika and implemented by the Greek government have failed to anticipate a social backlash that has led to a self-perpetuating cycle of misery. As Greece collected less tax revenue due to increased social unrest as a result of austerity measures, it wasn't able to sustain even a heavily reduced budget and thus had to continually rely on the troika for loans, which the troika only provided when attached to more austerity. This austerity has alienated the Greek populace even more, thus repeating the cycle. And moreover, because Greece has no control of its currency (the euro) and thus doesn't have the ability to print money or engage in monetary policy, it continues to be stuck in this bind. Through its aid-for-austerity approach, the troika have misunderstood one pivotal component of any Greek recovery: the Greeks themselves.

So what can we as investors take away from this? Although Greece-linked ETFs such as GREK and EuroZone ETFs such as FXE, IEV, FEU and ULE have been largely positive for the year, their gains will be wiped out and the crisis will worsen as long as the troika continues with its aid-for-austerity approach. There are some signs the troika is learning from its mistakes, such as its slowing of the rate of spending cuts required of Greece by two years. However, this is far from enough and Greece may very well continue down the path toward default and a potential exit from the Eurozone. Thus, ETFs that short Europe, such as EPV and EUO are safe hedges against further deterioration in the Eurozone.

The Greek government recently declared that the round of austerity measures passed on November 7 will be the last round of pain. Let's hope so. As noted by 50-year old retired construction worker Vassilis Dimosthenous, "Someone needs to tell them there's nothing left to cut."

Source: The True Cost Of Austerity