published at The New York TImes
The troika was peddling an economic fantasy: Greeks have paid the price
Alexis Tsipras, leader of the left-wing Syriza coalition, has become prime minister of Greece. He is the first European leader elected on an explicit promise to challenge the austerity policies that have prevailed since 2010. And there will be many people warning him to abandon that promise, to behave “responsibly”.
So how has that responsibility thing worked out so far?
To understand the political earthquake in Greece, it helps to look at Greece’s May 2010 “standby arrangement” with the International Monetary Fund, under which the so-called troika – the IMF, the European Central Bank and the European Commission – extended loans to the country in return for a combination of austerity and reform. It’s a remarkable document, in the worst way. The troika, while pretending to be hardheaded and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.
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The economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment. Greece was in recession when the deal was reached, but the projections assumed this downturn would end soon – that there would be only a small contraction in 2011, and that, by 2012, Greece would be recovering. Unemployment, the projections conceded, would rise substantially, from 9.4 per cent in 2009 to almost 15 per cent in 2012, but would then begin coming down fairly quickly.
What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. Greece didn’t hit the bottom until 2014 and, by that point, it had experienced a full-fledged depression, with overall unemployment rising to 28 per cent and youth unemployment rising to almost 60 per cent. And the recovery now under way is barely visible, offering no prospect of pre-crisis living standards.
What went wrong? I fairly often encounter assertions to the effect that Greece didn’t carry through on its promises, that it failed to deliver promised spending cuts. Nothing could be further from the truth. In reality, Greece imposed savage cuts in public services, wages of government workers and social benefits. Public spending was cut much more than the programme envisaged, and it’s about 20 per cent lower than it was in 2010.
Yet Greek debt troubles are if anything worse than before the programme. One reason is the economic plunge has reduced revenues: the Greek government is collecting a substantially higher share of gross domestic product in taxes, but GDP has fallen so quickly that overall tax take is down. Furthermore, the plunge in GDP has caused a key fiscal indicator, the ratio of debt to GDP, to keep rising even though debt growth has slowed and Greece received some modest debt relief in 2012.
Why were the original projections so wildly over-optimistic? As I said, because supposedly hardheaded officials were in reality engaged in fantasy economics. Both the European Commission and the European Central Bank decided to believe in the confidence fairy – that is, to claim that the direct job-destroying effects of spending cuts would be more than made up for by a surge in private-sector optimism. The IMF was more cautious, but it underestimated the damage of austerity.
And here’s the thing: if the troika had been truly realistic, it would have acknowledged it was demanding the impossible. Two years after the programme began, the IMF looked for historical examples where Greek-type programmes, attempts to pay down debt through austerity without major debt relief or inflation, had been successful. It didn’t find any.
Unable to lecture
So now that Tsipras has won, European officials would be well advised to skip the lectures calling on him to act responsibly and to go along with their programme. The fact is they have no credibility; the programme they imposed on Greece never made sense. It had no chance of working.
If anything, the problem with Syriza’s plans may be that they’re not radical enough. But it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that.
Still, in calling for a major change, Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare. – (New York Times)