The troika plan for the Greek economy has already failed twice, and it will fail for a third time if the economically illiterate plan being foisted on Athens is adopted. Greece requires growth and debt relief, but the proposals currently being discussed provide neither.
As usual, the International Monetary Fund, the European commission and the European Central Bank will come up with forecasts showing that the latest set of austerity measures will boost confidence, promote investment, stimulate growth and lead to lower unemployment. As usual, they will be wrong. The recession will deepen and the crisis will return.
Back in 2010 when it first got involved, the IMF assumed that the Greek economy would have a painful but relatively short recession. There would be a 6% peak to trough contraction in the economy, which would bottom out in 2011.
Things did not go according to plan. By the time the fund announced its second programme for Greece in March 2012, the economy was in freefall. The IMF assumed the decline would end that year, with a period of flatlining followed by the resumption of growth.
In the end, the Greek economy shrank by 25%, a slump equivalent in its severity to that suffered by the US between 1929 and 1932. Recovery coincided with the arrival of Franklin Roosevelt in the White House.
One of the insights gleaned during the Great Depression was that it does not make a lot of sense for governments to try to balance budgets during a severe downturn, because tax increases and spending cuts reduce demand. That deepens the slump, leaving an even bigger hole in the public finances.
In Greece, though, it as if the clock has been turned back to the pre-FDR days when Herbert Hoover was US president. Weak growth means that Athens continues to miss the deficit targets the troika sets for it. The troika responds by insisting on additional savings to put the budget back on track.
Paul Krugman, the Nobel prize-winning US economist, posted a chart last week based on IMF data that illustrates what happened to the underlying public finances of the eurozone members in 2014.
This measure of budgetary discipline looks at the primary budget surplus – the gap between revenues and spending excluding debt interest payments – adjusted for the state of the economic cycle. Measured in this way, Greece ran a surplus of more than 5% of GDP last year, comfortably higher than any other eurozone country.
It is, however, not enough for the troika. In order to avoid a debt default and a run on its banks that would threaten its continued membership of the single currency, Greece has now had to table proposals that will suck an additional €8bn out of the economy in the next 18 months. Consumer spending will be hit by an increase in VAT and higher pension contributions, while investment will be dampened by a one-off levy and an increase in corporation tax.
Greece has a number of severe economic problems. It suffers from a lack of demand, and a five-year slump has pushed it into deflation. Falling prices have added to the real, inflation-adjusted burden of the government’s debt, which currently stands at 175% of GDP. A fresh dose of austerity will make all these problems worse.
One way for Greece to get out of its mess would be for it to leave the euro, devalue its currency and renege on all or part of its debt. That is not an option if it stays in the single currency, which the public wants.
Another way out would be for the creditors to cut Greece some slack. That would involve immediate debt relief and more realistic targets.
The troika, though, will continue with policies that have failed before in the hope that they will succeed this time. Einstein had a definition for this – insanity
