Greece And Other Benefit Scroungers

Simon Wren-Lewis

Whenever I write a post critical of German views on Eurozone policy, I get comments which can be paraphrased in the following way. Greece (and maybe other Eurozone countries) are incapable of governing themselves properly, and when they get into difficulties Germany has to bail them out, so it is only reasonable that as a price for this Germany should insist on imposing changes to the way these countries do things.

To say such an attitude is inherently wrong (wrong in any possible circumstances) seems to be too strong. The IMF, after all, has played a very similar role many times. Many may criticise the kinds of reforms that the IMF has demanded as part of its conditionality, but to suggest that conditions are never made as part of such a loan package seems unrealistic.

But while conditionality of any kind cannot be ruled out, it can also go far too far. It should never become imperialism, and the choices of a sovereign people should be respected and accommodated, not ignored.

It is clear that the Greek government ran up unsustainable debts, and tried to hide these. As a result, it was bound to default on those debts. As doing so would exclude it from the markets for a time, it was also reasonable to lend (not give) Greece money to enable it to gradually rather than immediately achieve primary balance. Some conditionality to correct any underlying weaknesses in the openness and accountability of the budgetary process would seem reasonable in such circumstances.

Contrast that with what actually happened. First the Eurozone resisted default, and then it was only partial, which meant providing far larger official loans than were needed. The beneficiaries of this were mainly the financial institutions (e.g. Eurozone banks) who would have otherwise lost money. Second, ridiculously severe austerity was imposed, which crashed the economy and made it much more difficult for Greece to adjust. Third, conditionality far in excess of what was required is being imposed.

I have argued before, based on very rough and ready calculations that the fall in Greek GDP since 2010 could be entirely accounted for by fiscal austerity. This conclusion has now been backed up by rather more rigorous analysis in a new paper by Sebastian Gechert and Ansgar Rannenberg. As we both acknowledge, some GDP loss was inevitable because the deficit had to be reduced (and Greece does not have an independent monetary policy which could offset the impact of deficit reduction). However, as always, timing is everything. The paper argues that “most of the costs of fiscal consolidation could have been avoided by postponing and gradually implementing it after the recovery of the Greek economy, due to the lower expenditure multipliers during normal times.”

Simon Wren-Lewis explains why the view that Greece is effectively a benefit scrounger is fundamentally flawed.

The delay in default, its partial nature and a degree of austerity that Gechert and Rannenberg describe as ‘biblical’ and which did such damage are all acutely embarrassing for the Troika. But instead of criticism being directed at these governments, we see a narrative that tries to blame what happened from 2010 onwards on Greece itself, and the Greek people in particular. The economy has crashed because the Greek people do not work hard, austerity has not worked because it has not really happened, and there have not been enough reforms. None of this is true, but the narrative seems largely impervious to facts. (On reforms, for example, see here.)

All this reminds me strongly of how certain attitudes to beneficiaries of the welfare state have been encouraged by the UK coalition government. Rather than admit that unemployment benefits had risen because of the recession and the absence of a recovery (itself a result of austerity), the focus became on the personal failings of the unemployed themselves. The media (TV as well as the tabloids) are still full of examples of supposed ‘welfare cheats’, but they rarely put such examples into context: how tax evasion is a bigger problem that benefit fraud, for example.

People do hate the idea of ‘their taxes’ allowing ‘other people’ to get ‘something for nothing’. In contrast tax evasion does not sound too different from tax avoidance, which many people do as much of as they can. Condemning one and ignoring the other may be human nature. What is clearly wrong is politicians playing on these feelings to misdirect anger away from their own mistakes, or undertaking unnecessary or even harmful policies to play to the gallery. A clear case of the latter is the recent increase in benefit sanctions, which are being applied in an excessive and unfair way, greatly increasing the use of foodbanks as a result. That a committee of MPs where the government is in a majority have expressed grave concerns about the policy just before an election gives an indication of the scale of the injustice that has been taking place.

When politicians do this, it is a sign of chronic political weakness: a desperate attempt to cover up past mistakes. There is a strong danger that the same dynamic may occur in the continuing standoff between Greece and the Eurozone. Having encouraged a rhetoric where a virtuous Eurozone has shown nothing but generosity to a feckless Greece, politicians feel compelled to live up to that false narrative by acting tough in negotiations, which does no one any good to put it mildly. When Putin behaves recklessly to boost his popularity and succeeds, we can blame the lack of press freedom. When political leaders in the UK or Germany play the same trick, do we blame the media for playing along or the people for falling for it?

This blogpost was first published on MainlyMacro