Austerity was the big loser in the Greek elections
from Dean Baker
Austerity was the big loser in the Greek elections on Sunday. The two main Greek parties, who endorsed the austerity pact signed last year, together got just over one-third of the vote. This is an extraordinary rebuke given that between them, these parties have governed Greece since the end of the dictatorship in 1976.
On the anti-austerity side, a left-wing coalition came in second with around 17 percent of the vote. More ominously, a far right anti-immigrant party, which is also anti-austerity, received almost 7 percent of the vote.
It is important for people elsewhere in the world, and especially in Europe, to understand that the Greek voters were not just being cranky kids who refuse to take their medicine. There is no doubt that Greece’s government and economy were poorly managed in the years leading up to the crisis.
However the current path of austerity does not offer the country a path to a better future. The current path of austerity is simply a path of pain as end in itself. This can be seen from examining the official projections.
The IMF now projects that 2012 will be Greece’s fifth successive year of economic contraction, with 2013 being a year of stagnation. Even with growth projected to resume again in 2014, Greece’s per capita income is still projected to be more than 8.0 percent lower than it was a decade earlier. Its unemployment rate, which is currently hovering near 20 percent, is still projected to be almost 15 percent in 2017. And, its debt to GDP ratio is projected to be 137 percent in five years, far higher than it was at the onset of the crisis.
This is not a path to a healthy economy. And it’s important to remember that the projections from the IMF and European Central Bank have consistently proven to be overly optimistic. Given this economic reality, it’s difficult to see why the Greek people should go any further with such a disastrous policy.
The argument usually given is that there is no alternative. This is not true. Leaving the euro and bringing back the drachma is an alternative, however disruptive this may prove to be.
Leaving the euro would spark a financial and political crisis, but at the end of the day, this move would almost certainly leave Greece better off than staying on its current dead end path. With a devalued currency, Greece would become much more attractive as a tourist destination. Its agricultural exports would be much more competitive in the European Union and elsewhere.
It would be necessary to renegotiate debts. Where this can’t be done, there will inevitably be many bankruptcies for those with large euro denominated debts. This process will not be pretty, but there can be little doubt at this point it is the better path forward.
The model here is Argentina. After it defaulted and broke its currency link with the dollar at the end of 2001, its economy plummeted for three months. It stabilized in the second quarter of 2002 and then began six and half years of solid growth that was only derailed by world economic crisis in 2009.
There are reasons why Greece will have a more difficult path than Argentina; most importantly Argentina always kept its own currency. But even if Greece can only achieve half the pace of growth sustained by Argentina, its prospects from going this route look far better than staying in the euro.
There is an alternative path that would be preferable to Greece leaving the euro: this would be the path where the ECB abandons its austerity path altogether. This would involve some sort of ECB guarantee for the debt of Greece and other heavily indebted countries, a relaxation of budget restrictions across the euro zone and most importantly a commitment to sustain a higher rate of inflation in Germany and other core euro countries. The latter is essential since it is the only way that Greece and other peripheral countries will be able to regain competitiveness if they stay in the euro.
Two weeks ago, the possibility of this sort of change of course seemed far-fetched. Today it still seems unlikely, but following the elections in Greece and the defeat of Sarkozy in France, a major change in course is beginning to look like a possibility.
The leadership of the ECB and Germany may not recognize it, but their current path is unsustainable. The only question is whether they can adjust before the institutions of Europe begin to collapse around them. Yesterday, the voters in Greece gave this message as clearly as possible.
The issue is not the retention of the euro but staying the course for the austerity policies that conservative governments set to bail out Greece and others. It won’t work and will end up even bringing down the neo-liberals running Europe the past decade. And it is not just a question of macroeconomics. In Argentine the workers, rather than seeing their firms closed down as part of private as opposed to public austerity measures, took them over. That should tell us something. That the old model of proprietary capitalism is broken and must be replaced by an entity conception of firm governance — then with a vigorous partnership between proactive civil servants, trade unions, and investors — a policy of growth and austerity can be put through.
Exactly workers took over firms in Argentina that the prior managers deemed umprofitable, but they were only unprofitable because too much was being extracted in the short term from the top to run it into the ground in a terminal vampire bonus payable …(How often does this happen? too often now. Short term greed. Fly by night managers not in for the long haul).
When these short term highly mobile executive parasites learn that they have to (are expected to) work also once again and stay the course…we will have solved some of the problems at least.
The problem with making a nation’s industries “more competitive: by either a devaluation of a nation’s currency (like the drachma if Greece was to leave the Euro) or by austerity to drive down wages by creating more unremployment is that it leaves another nation’s industries less competitive. If only one country devalues –especially a small economy like Greece — maybe the other nationis industries (i.e., Germany’s industries including agriculture) can take the blow — but if this encourages Portugal, Spain, Italy, Ireland to also make their industries “more competitive” , the result can be further global recession.
In the 1930′s making a nation’s industries “more competitive” led to exchange rate devaluation wars — which were finally recognized as policy attempts to “export your unemployment”.
When will our professional colleague economists recognize that this devaluation to more competitive industries policy is “an immoderate policy [that] may lead to a senseless international competition for a favorable bslsance of trade which injures all alike” [Keynes, The General Theory, pp. 338-9. ]
The solution is, as I explain in detail in my book THE KEYNES SOLUTION: THE PATH TO GLOBAL ECONOMIC PROSPERITY, (Palgrave/Macmillan, 2009), is for the credit nations (eg.,. Germany and Japan today) to spend more on foreign made goods, i.e., the creditor nations need to solve the international debt problems by increasing global aggregate demand!!
Paul Davidson
Paul, why not implement Keynes’ proposal of an International Clearing Union then?
Trond:
That is exactly what I advocate in my book THE KEYNES SOLUTION: THR PATH TO GLOBAL ECONOMIC PROSPERITY, Chptert 8, entitled “Reformig The World’s Money”.
Also at the recent (April 13, 2012) Berrlin conference sponsored by INET [Institute For New Economic Thinking] I presented a paper explaining my variation of Keynes’s International Monetary Cearing Union [IMCU] – mine does not require a supra-national central bank, whille Keynes’s did.
INET got its original funding from George Soros.
Paul Davidson
Paul, your persistence in advocating Keynes’ IMCU solution is admirable. I agree completely. The IMCU concept elegantly balances economies between countries without allowing unstable devaluation races. Keynes would have made an excellent control engineer (my own profession).
Trond, I too appreciate Paul’s persistence and Keynes’ IMCU solution. The problem is that the Americans scuppered Keynes at Bretton Woods, so I see a need to implement the IMCU solution within a smaller but still potentially self-sufficient context, eg the European Community (not its Anglo-American inspired governmental EU).
It is good to see another control engineer getting involved in economics. Would you agree with the point I keep trying to make about the significance of Keynes’s General Theory: that its infrastructure investment added ‘Integrated’ feedback to correctives ‘Proportional’ to failing profitability, thereby anticipating Cybernetics by 12 years and PID servos by about 30 years? And that the Greek revolt against Austerity is adding the ‘Differential’ feedback, equivalent the ship’s lookout demanding a different course because of “icebergs ahead”?