Greece: Don’t Back Down

While most of the world is cluck-clucking about how Greece needs to play by the rules and do what it’s told, a whole lot of economists are saying something else entirely.

Thomas Piketty et al.:

The never-ending austerity that Europe is force-feeding the Greek people is simply not working. Now Greece has loudly said no more.

As most of the world knew it would, the financial demands made by Europe have crushed the Greek economy, led to mass unemployment, a collapse of the banking system, made the external debt crisis far worse, with the debt problem escalating to an unpayable 175 percent of GDP. The economy now lies broken with tax receipts nose-diving, output and employment depressed, and businesses starved of capital.

The humanitarian impact has been colossal—40 percent of children now live in poverty, infant mortality is sky-rocketing and youth unemployment is close to 50 percent. Corruption, tax evasion and bad accounting by previous Greek governments helped create the debt problem. The Greeks have complied with much of German Chancellor Angela Merkel’s call for austerity—cut salaries, cut government spending, slashed pensions, privatized and deregulated, and raised taxes. But in recent years the series of so-called adjustment programs inflicted on the likes of Greece has served only to make a Great Depression the likes of which have been unseen in Europe since 1929-1933. The medicine prescribed by the German Finance Ministry and Brussels has bled the patient, not cured the disease.

Paul Krugman:

It’s now clear, or should be clear, that the Greek program was doomed to failure without major debt relief; no matter how hard the Greeks tried, austerity would shrink GDP faster than it reduced debt relative to the baseline, so that the debt situation was bound to worsen even as the attempt to balance the budget imposed vast suffering.

And there was no good, or even non-terrible, answer given Greece’s membership in the euro.

But there’s a broader lesson from Greece that is relevant to all of us — and it’s not the usual one about mending our free-spending ways lest we become Greece, Greece I tell you. What we learn, instead, is that fiscal austerity plus hard money is a deeply toxic mix. The fiscal austerity depresses the economy, and pushes it toward deflation; if it’s accompanied by hard money (in Greece’s case the euro, but a fixed exchange rate, a gold standard, or any kind of obsessive fear of inflation would do the trick), the result is not just a depression and deflation, but quite likely a failure even to reduce the debt ratio.

Joseph Stiglitz:

I don’t believe Europe’s leaders were seeking to punish Greece. They were just using bad models — evidenced by the enormous gap between what they thought would happen and what did happen. Europe and the International Monetary Fund predicted a fairly quick turnaround. The reality was deepening recession.

And it wasn’t because Greece didn’t do what it was supposed to; it was because it did. On the all-important macroeconomic front, Greece had the biggest and fastest fiscal consolidation among the advanced European economies in the aftermath of the global financial crisis, ruthlessly cutting back expenditures and raising new revenues. …

…The ball is now in the court of European leaders. The question is, will they stick with a policy that has proved a disaster? Or will they combine a desire to preserve the euro with good economic policies and a respect of democracy? Can they reform the reform package sufficiently?

This is the moment to stand up against unthinking austerity. Four years ago, as the first signs of the failure of this policy emerged, Europe’s leaders recognized that what was needed was a growth strategy. They promised Greece that. They didn’t deliver. There was just more of the same.

(Weirdly, but typically, the lesson Stephen Moore of Fox News draws from the Greece example is that socialism has failed. WTF?)

Exactly what’s to be done to turn the Greek economy around is hard to say, but Piketty et al. lay out a broad outline:

Right now, the Greek government is being asked to put a gun to its head and pull the trigger. Sadly, the bullet will not only kill off Greece’s future in Europe. The collateral damage will kill the Eurozone as a beacon of hope, democracy and prosperity, and could lead to far-reaching economic consequences across the world.

In the 1950s, Europe was founded on the forgiveness of past debts, notably Germany’s, which generated a massive contribution to post-war economic growth and peace. Today we need to restructure and reduce Greek debt, give the economy breathing room to recover, and allow Greece to pay off a reduced burden of debt over a long period of time. Now is the time for a humane rethink of the punitive and failed program of austerity of recent years and to agree to a major reduction of Greece’s debts in conjunction with much needed reforms in Greece.

To Chancellor Merkel our message is clear; we urge you to take this vital action of leadership for Greece and Germany, and also for the world. History will remember you for your actions this week. We expect and count on you to provide the bold and generous steps towards Greece that will serve Europe for generations to come.

We’ll see if they can put aside the Austerity Mystique and do what really needs to be done.

8 thoughts on “Greece: Don’t Back Down

  1. DAMMIT!
    This patient’s anemia keeps getting worse!

    Nurse, bring me more leeches, PRONTO!!!

  2. Germany is practicing ‘forgive and forget.’

    We forgave them after WWII.
    They forgot…

  3. I should have said, “We forgave them their debt after WWII.”

    I don’t mean to say we forgave them for the war and atrocities.
    You could never in a trillion years, forgive what they did then.

  4. If Greece leaves the Eurozone, it may create a domino effect where Ireland, Portugal and any other country who wants out may also take the leap. This will rock the markets. How much damage could be incurred? Not sure, but I doubt many 401ks can afford another hit, which means many may have to hold off retirement for another ten years.

  5. Well Chris, it’s likely there’s a choice here. That is, judging from previous examples like Argentina and Iceland, and Greece or Spain on the other side, you either have an extremely prolonged – years long – and worsening condition, or you bite the bullet and have 6 months to a year of bad followed by a strong recovery. In terms of how it would effect private investments, neither is great in the short term, but the latter – default, Euro exit, etc. – is likely much better in the longer term (and not that long term, like 2-5 years). Of course the Greek people’s needs should be taken more account of than that of banks, investment houses, or even small private investors.

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