there’s a broader lesson from Greece that is relevant to all of us — and it’s not the usual one about mending our free-spending ways lest we become Greece, Greece I tell you. What we learn, instead, is that fiscal austerity plus hard money is a deeply toxic mix. The fiscal austerity depresses the economy, and pushes it toward deflation; if it’s accompanied by hard money (in Greece’s case the euro, but a fixed exchange rate, a gold standard, or any kind of obsessive fear of inflation would do the trick), the result is not just a depression and deflation, but quite likely a failure even to reduce the debt ratio.
For comparison, look at everyone’s favorite example of successful
austerity, Canada in the 1990s. Canada came in with gross debt of
roughly 100 percent of GDP, roughly comparable to Greece on the eve of
the financial crisis. It then proceeded to do a pretty big fiscal
adjustment — 6 percent of GDP according to the International Monetary
Fund’s measure of the structural balance, which is about a third of what
Greece has done but comparable to other European debtors. But
unemployment fell steadily. What was Canada’s secret?
The answer was, easy money and a large currency depreciation. These
offset the drag from austerity, allowing growth to continue.
So why Tsipras is caving in to the austerians now is just plain baffling. Everyone with
half a should understand by now: Austerity Does Not Work (OK, maybe when
offset by massive monetary easing and currency devaluation but those
are NA here).
In the pantheon of legacy-destroying and utterly baffling moves, Tsipras has joined Blair at the top of the pile.
"The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to a close. In its place, we are entering a period of consequences." - Winston Churchill, The Gathering Storm