I don’t know how many Eurozone finance meetings have been seen as consequential, but we’ve got another one today, with the Greek bailout as the main topic. Greek leaders hope that the finance ministers will approve the bailout, after they gave final assent to austerity measures. CNBC quotes officials saying the chances are “little higher than 50-50.”
What we learned going into the meeting is more evidence that the cure for Greece’s ills, austerity, is causing the disease:
The International Monetary Fund now expects Greece’s debt to reach 129% of the country’s gross domestic product in 2020, three people with direct knowledge of a draft debt-sustainability analysis put together by the fund said on Sunday.
That is even further above the level most economists consider sustainable than previously thought, making it more difficult than ever to argue that the country can ever repay its debts.
They say this as if it’s Greece’s fault. The problem here is that growth cannot happen by cutting spending to the bone, cutting salaries, and somehow expecting everyone to survive. It’s fantasyland. Not only does it feed social unrest, it cannot possibly work on its own terms.
If anyone in the world should have reason to gloat over this, it’s Paul Krugman, a prominent force suggesting that expansionary contraction is a total myth. But he’s far more sad than self-satisfied in this column, saying for the umpteenth time that austerity in the midst of a recession makes no sense:
For things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.
Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.
Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.
While this is a more pronounced problem in Europe, it’s also a hindrance to recovery in the US. In an earlier blog post, Krugman sketches out the austerity gap from local government contraction. He notes that filling that gap through federal transfers to state and local governments would “put well over a million people to work directly, and probably around 3 million once you take other effects into account, without any need to come up with new projects.” The unemployment rate would be pushing 7% or less if state and local government merely continued its path upward along with increases in the population.
In other words, the stimulus is well within reach and you wouldn’t even need to devise a whole lot. You could merely let the public sector work its will. But even though austerity out of recession has been completely discredited around the world, the Krugmans of the world aren’t being listened to.
…the plan the finance ministers have for Greece, incidentally, appears to be an escrow account, where the finance ministers grant the bailout funds but still hold control over their access, in case Greece “does something wrong” like not punish its population enough.