William K. Wolfrum's picture

    Austerity in Greece leading to Civil War, not a good economy

    Shockingly, turning the population upside down and shaking them to collect loose change isn’t working out as well as the EU or Greece hoped. From Der Spiegel:

    This dire prognosis comes even despite Athens’ massive efforts to sort out the country’s finances. The government’s draconian austerity measures have managed to reduce the country’s budget deficit by an almost unbelievable 39.7 percent, after previous governments had squandered tax money and falsified statistics for years. The measures have reduced government spending by a total of 10 percent, 4.5 percent more than the EU and International Monetary Fund (IMF) had required.

    The problem is that the austerity measures have in the meantime affected every aspect of the country’s economy. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies and unemployed are on the rise. The country’s gross domestic product shrank by 1.5 percent in the second quarter of this year. Tax revenue, desperately needed in order to consolidate the national finances, has dropped off. A mixture of fear, hopelessness and anger is brewing in Greek society. …

    The entire country is in the grip of a depression. Everything seems to be going downhill. The spiral is continuing unabated, and there is no clear way out. The worse part, however, is the fact that hardly anyone still hopes that things will improve one day.

    Unemployment is at 70 percent in some areas of Greece, says the story. Remember this when you hear U.S. politicians talk about “Austerity.” Because it means austerity for everyone but them and their corporate overlords.


    Crossposted at William K. Wolfrum Chronicles


    To me, it's a great mystery why finance ministers and IMF types still push austerity programs during economic depressions. Wasn't this approach thoroughly discredited in the 1930s? If these economists were doctors, they'd treat TB cases with fresh air and leeches.

    I tend to agree about the IMF's kneejerk tough-love prescriptions, but I think Greece is a special case. It's not the recession/depression that's strangling the economy; it's the fact that the recession/depression exposed the country's fiscal house of cards. As I understand it, Greece faces drastic austerity or total default on the national debt, which would see it booted out of the euro and be an even tougher pill for the population to swallow.

    I don't buy that rendition at all. Reneging on what they owe stops the credit flowing yes, but the amount of money being siphoned from the economy to service debt interest is enormous. One could easily argue that their economy is much better off with no capital inflows but also with no debt service. In other words, what is being done in Greece is being done to preserve European solidarity in a quid pro quo. Thi way, the German and French banks don't suffer huge losses on Greek debt, while Greece preserves its place in the EU. Remember, Greece still has huge national and political problems vis-a-vis Turkey, and those problems trump even a huge economic meltdown. Greece would rather preserve its political relationships than go it alone. This means they've agreed to devastate the country economically to preserve their EU status. Otherwise, I'd argue that the massive outflow of money puts a real crimp on the economy. Think of it this way: you have $50,000 in debt at 25% interest on credit cards, you get paid $30,000 a year. If you declared bankruptcy and no longer had access to credit cards or loans, could you better get by on $30k a year even if you no longer had access to more funds?

    Leaving the EU would be wrenching--economically and psychologically. It's a last-resort solution, and I don't blame the Greek leaders for trying to avoid it if they can.

    I don't see how Greece's historic grievances with Turkey can in any way be compared to the impact of a huge economic meltdown. Are there troops massing on the border? Military incursions? No, the two countries are NATO allies. They have even been talking quietly about potential points of friction like Cyprus, and about increasing trade and travel. Turkey is a red herring in this issue.

    I'm not sure what the core difference is here. The IMF and World Bank only demand austerity measures when countries are on the verge of default. In Greece's case, it's the European finance ministers not the IMF, but the main idea is the same--intervention to prevent default on condition of drastic austerity. And it seems equally wrongheaded.

    The difference is that Greece entered voluntarily -- eagerly, in fact -- into a monetary union with the rest of Europe for the perceived advantages it would bring, cooking its books, apparently, to present a rosier resume. Then it failed to meet its budgetary commitments. Even post-crisis, the Greek government agreed to the austerity plan in exchange for billions in French and German bailout funds. Taxpayers in those countries still feel snookered.

    If this were happening 10 years ago, the rest of Europe would look on impassively as Greece defaulted and the drachma collapsed. The IMF would offer to help, but the austerity it would demand in return would be way more draconian. The IMF cares only about keeping global trade functioning. Europe today has the stability of its own currency at stake, so it needs a viable Greek partner/member. That's why Greece is getting off relatively lightly. 

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