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View Diary: Austerity doesn't work: New IMF report details the damage (167 comments)

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  •  Two things (0+ / 0-)

    1) They've already taken haircuts.
    2) Keynesian policy will require that someone want to buy Greek debt. Having been stiffed already to a fair degree, I don't see any enthusiasm for buying further into the Greek economy. Would you buy Greek bonds?

    As I said originally, it's not so much a matter of what might be theoretically in anyone's possible best interest, but of what might be feasible.

    •  Sorry, but no. (10+ / 0-)

      Keynesian policy would require that Greece's currency issuer sell debt.  In a country with a sovereign currency, that would be the Greek central bank or some similar institution.  But because Greece is part of the euro, it can't sell debt on its own.  It can't print money on its own.  That's why it's stuck where it is.

      Austerity wasn't inevitable in Greece or elsewhere in the eurozone.  It could have been avoided if the euro countries collectively had chosen to adopt growth-oriented policies to deal with the recession.  The Germans didn't want that, despite the fact that they'd implemented such policies domestically to prop up their own economy after the financial crisis.  Without German agreement, no deal was possible.  

      Merkel decided to hang the southern tier countries out to dry, a decision she made largely for reasons of domestic politics.  German voters resented the idea that they were paying money to bail out countries they viewed as irresponsible, and Merkel didn't dare rouse their ire by pushing for more expansionary policies.  Any such policies would have to be financed by the richer eurozone countries for the benefit of the less fortunate ones.  Of course, Merkel's decision is now coming back to bite her, since the economic crisis in the southern tier countries (and in the eurozone in general) means there's less of a market for German products.  Thus, her decision to force austerity onto other countries was shortsighted.  She may well pay for it in the upcoming election.

      Finally, note that while Greece had a lot of debt, Spain did not.  Prior to the financial crisis, Spain's debt to GDP ratio was not only better than Germany's, it was better than Switzerland's, the country that's always held up as the paragon of fiscal virtue.  Spain's problem was the housing bubble.  Even though it didn't have a debt problem, it's now facing crushing austerity measures.  

      Again though, I think the basic problem is that the euro has left countries without the ability to control their own monetary policy.  The eurozone will therefore either have to imitate the U.S., where richer regions effectively subsidize poorer ones, or it may well fail as a single currency.

      "Ça c'est une chanson que j'aurais vraiment aimé ne pas avoir écrite." -- Barbara

      by FogCityJohn on Fri Jan 04, 2013 at 10:10:48 AM PST

      [ Parent ]

      •  the idea of economic union without political union (2+ / 0-)
        Recommended by:
        tardis10, FogCityJohn

        was a non-starter to begin with.

        It leads exactly to the problems being pointed out here.

      •  True of Ireland, too, if I'm remembering (2+ / 0-)
        Recommended by:
        Rube Goldberg, FogCityJohn

        correctly. Everybody always talks about Greece, b/c everybody always wants to make some sort of moral case about irresponsible spending and how austerity is the stern medicinal cure for such spendthrift policies.

        if necessary for years; if necessary, alone

        by SouthernLiberalinMD on Sat Jan 05, 2013 at 01:04:26 AM PST

        [ Parent ]

        •  Krugman: Spain's low govt debt disprove moral case (2+ / 0-)
          Recommended by:
          SouthernLiberalinMD, FogCityJohn

          Spain had low government debt before the crisis. Private debt was run up by banks (notably from Germany) lending to real estate speculators, which drove up Spanish inflation and labor costs.

          This all per Krugman, who says that Spain is the best example for understanding the key factors, and for testing the sustainability of a largely unchanged Euro area.  The main reason that much-smaller Greece matters is that most observers expect that a Greek exit from the Euro area would spook markets so much that keeping Spain inside then would be more expensive than keeping Greek inside now.  Italy is another large country that matters more than Greece, although its circumstances are more muddied than Spain's.

          Ireland's debt problem, although less clear-cut than Spain's, was also mainly a private one until the government unwisely responded to the original crisis by abruptly guaranteeing huge private debts.

      •  1st inflation & rebalancing; then Greek austerity (1+ / 0-)
        Recommended by:
        FogCityJohn

        Key points of the Keynesian prescription (per Krugman, Delong et al) can be summarized roughly as follows:

        1. Greek austerity should be deferred until its economy swings from the lower to the higher growth stage of the economic cycle.

        2. Before and during that austerity, since Greece cannot devalue its currency under the single currency arrangement, Greece needs an inflation differential with Germany, such as 3% inflation in Greece and 5% inflation in Germany.  This would enable Greece's production per unit of labor cost to catch up with Germany's at a rate of 2% per year.  The flip side of this cost reduction is a 3% per year reduction of real (accounting for inflation) average Greek worker incomes. This manner of arranging the catch-up and reduction would be much less destructive than the large scale reduction of employment that is presently a major element of the policies seeking to accomplish such income & cost reduction.

        Part of the resistance to this basic approach seems to be German phobia of inflation, based on recollections of (and arguably confusion about) the hyper-inflation in Germany's Weimar era that led to the Nazi takeover.

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