Simon Wren-Lewis
It was all going so well. True, Greek GDP did shrink by 25% over 4 years, unemployment rose to 25% and youth unemployment to 50%, but before Syriza’s election Greek GDP had actually stopped falling. Further austerity was planned so that Greece could start to pay interest on its enormous debts, together with various ‘reforms’ that were so obviously in the interests of the Greek economy, and the consensus forecast was that the Greek economy might start to grow at a pace that would also stop unemployment rising. Who knows, in a decade or so it might even fall below 20%.
But then disaster struck. The Greek people went and spoilt everything by electing a government that suggested that there might be an alternative to all this. Of course the Greek people are not really to blame: how can they be expected to understand there was no alternative to their suffering. The real blame must lie with the ‘populist’ politicians who pretended there could be an alternative. The ever patient and understanding Troika negotiators then had to deal with ‘adolescent ideologues’ who were prepared to use the suffering of the Greek people as a means to achieve their own political ends. They were cheered on by pundits and economists on the left in the UK and US who wanted nothing more than to use Greece as part of a ‘proxy war’ to get more Keynesian policies in their own countries.
If you think the above parody is over the top, click on the two links. The hypocrisy of some of the commentary on Greece is amazing. When the ‘adolescent ideologue’ Mr Tsipras shows a statesman-like maturity in being prepared to compromise in an effort to get a deal, he is accused of inconsistency and not being able to make up his mind. When those who he is negotiating with push him further than he is prepared to go, he is accused of ‘taking Greece to the brink’ by having the temerity to ask the Greek people to choose. (Any mature politician knows that in modern Europe you only call a referendum when you know you will get the answer you want, and when that does not happen you ignore the result and call another one.) Mr Tsipras is accused of failing to grasp that other nations too have democracies, as if the Troika had shown huge respect for democracy by acting as if nothing was changed by Syriza’s election.
The OECD estimate that the output gap in Greece is currently well over 10%. In plain English that means that those currently unemployed could be producing something useful and GDP could easily expand by at least 10% without generating any increase in inflation. (Greek inflation is currently around -2%.) That would not only be in the interests of Greece, but also in the interests of Greece’s creditors. It is a way of achieving the primary surpluses that the Troika wants without inflicting more pain. It is also absolutely undeniable that further austerity would tend to reduce GDP, just as past austerity has done. So everyone can be made better off by giving Greece the breathing space so that its economy can recover. But apparently it is childish to try and negotiate for such an outcome.
Why is it impossible for the Troika to agree to such a deal? They say their own democracies would not allow it, but it is part of being a good politician that you can afford to compromise when that compromise is in everyone’s interest. I suspect that in at least some cases this argument is a smokescreen, particularly when you see what Mr Tsipras is being told he should do. There is a pattern here. For the ECB to act as a lender of last resort was impossible, and the only answer was yet more austerity – until that austerity had been put in place and OMT became possible. When the French government tried to meet deficit targets by raising taxes rather than cutting spending, they were told that this was the wrong kind of austerity. When it came to Quantitative Easing (QE) some were quite explicit – a problem with QE is that it might take some pressure off governments to undertake austerity and ‘reforms’. So perhaps only when the Syriza government has fallen and their successor agreed to more austerity and reforms will it turn out that the Troika can after all be flexible about restructuring debt.
One of the charges frequently made against opponents of austerity in the Eurozone is that we are really seeking the failure of the whole Euro project. The opposite is nearer the truth. The problem for the Euro project is that it has become captured by an economic ideology, and austerity is that ideology’s principle weapon. A self-confident and mature Eurozone would be able to tolerate diversity, rather than trying to crush any dissent. A Eurozone captured by an ideology will insist there is but one path, and that the imperative of austerity is too important to accommodate democratic wishes. Pursuing that ideology has brought the Eurozone to the brink, where it is prepared to force out one of its uncooperative members. Critics of austerity are not trying to destroy to Eurozone, but save it from the grip of this self-destructive ideology.
This post was first published on Mainly Macro
Simon Wren-Lewis is Professor of Economics at Oxford University.