Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

Austerity Is An Integral Part Of The Greek Tragedy

Simon Wren-Lewis 8th July 2015

Simon Wren-Lewis

Simon Wren-Lewis

Too many people, including many in the Troika, see the Greek struggle as just about transfers from one debtor nation to lots of creditor nations. That is why they perhaps saw the Greek referendum as an unhelpful move, as just inflaming nationalist sentiment. As Dani Rodrik puts it “What the Greeks call democracy comes across in many other – equally democratic – countries as irresponsible unilateralism.”

It is, however, not just about transfers, or what economists call a zero sum game. It is also fundamentally about austerity, as Dani Rodrik, Thomas Picketty, Heiner Flassbeck, Jeffrey Sachs and I say in this letter jointly published in The Guardian, Le Monde, The Nation and Der Tagesspiegel (and thanks to Avaaz for making this happen).

I think many people believe that a debtor country must somehow inevitably suffer large scale unemployment as a result of having to pay back at least some of its debts. But this comes more from a moralistic view than thinking about the macroeconomics. In an open economy, the real exchange rate (competitiveness) will adjust to ensure ‘full employment’ is preserved, whatever primary surplus (taxes less non-interest spending) a government needs to service and pay back its debt.

Under flexible exchange rates this competitiveness adjustment could happen immediately. Things are not quite so simple in a monetary union: competitiveness cannot immediately adjust because of wage and price rigidities. A period of ‘excess unemployment’ will be required to push wages and prices down if the country is uncompetitive in relation to required primary surpluses. However the excess unemployment can be relatively modest. In fact, because of the structure of the standard Phillips curve, it is much more efficient to achieve gains in competitiveness gradually through a measured increase in unemployment than quickly through a rapid rise in unemployment, for reasons I outlined here when talking about Latvia.

To achieve this efficient outcome may well require the government to reduce its primary deficits gradually, because without this fiscal support while competitiveness adjusts output could fall rapidly. This in turn will require more government borrowing, and if the government cannot do this from the markets, the IMF or other governments should step in to ensure this efficient adjustment can take place and avoid the waste and suffering of unnecessary unemployment.


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

This is what failed to happen in the case of Greece. Whether this was just the result of poor calculations, or a consequence of feeling that creditor bankers were more of a priority (see, for example, Mark Blyth), need not concern us here. Once the mistake became clear, perhaps creditor voter fatigue meant additional loans were not politically possible. But to demand primary surpluses (i.e. to take money out of the country) while unemployment remains so high – as the Troika continues to do – is unforgivable in my view. It clearly makes the unemployment problem worse – see here, footnote [2]. At best it indicates an impatient creditor with no concern for the welfare of the debtor, but given the responsibility the creditor has for the debtor’s current position it is far worse than that.

That is not the only reason Greece’s story is about austerity. Its problems were made worse by the austerity across the Eurozone as a whole, and the deflation which that has brought. Deflation increases the real value of nominal debts. It also makes competitiveness adjustment more difficult because of a well known non-linearity.

Even those that have a great dislike or distrust of Syriza should recognise that Syriza is also a product of acute austerity, a point which the referendum reaffirmed. As economists might say, Syriza is endogenous.

That the Greek economy now lies broken is not the inevitable result of imprudent borrowing a decade ago, or structural weaknesses, or a left wing government elected just a few months ago. It is also the result of the actions of those who effectively ran the economy from 2010 to 2014, and their imposition of draconian austerity. Greece long ago recognised the folly of its borrowing, and has made a start on addressing its structural weaknesses. The Troika has yet to acknowledge its own part in making this tragedy.

This post was first published on Mainly Macro.

Simon Wren-Lewis

Simon Wren-Lewis is Professor of Economics at Oxford University.

You are here: Home / Economy / Austerity Is An Integral Part Of The Greek Tragedy

Most Popular Posts

Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter

Most Recent Posts

G7,BRICS,China,Russia G7 versus the BRICS: taking stock in 12 figuresThorvaldur Gylfason
solar energy,photovoltaic,Europe,EU,PV Powering up: the EU and solar energyFrancesco Crespi, Dario Guarascio, Serenella Caravella and Giacomo Cucignatto
Nagorno-Karabakh Nagorno-Karabakh: it’s not over yetSvante Lundgren
Sweden,climate,green Sweden’s climate policy—off the railsLisa Pelling
Biden,Detroit,UAW,strike Detroit, Joe Biden and a union renaissancePaul Knott

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube