Paul Krugman - Most of what you’ve heard about Greek profligacy and irresponsibility is false
It has been obvious for some time that the creation of the
euro was a terrible mistake. Europe never had the preconditions for a
successful single currency—above all, the kind of fiscal and banking union
that, for example, ensures that when a housing bubble in Florida bursts,
Washington automatically protects seniors against any threat to their medical
care or their bank deposits.
Leaving a currency union is, however, a much harder and more
frightening decision than never entering in the first place, and until now even
the Continent’s most troubled economies have repeatedly stepped back from the brink.
Again and again, governments have submitted to creditors’ demands for harsh
austerity, while the European Central Bank has managed to contain market panic.
But the situation in Greece has now reached what looks like
a point of no return.
Banks are temporarily closed and the government has
imposed capital controls—limits on the movement of funds out of the country. It
seems highly likely that the government will soon have to start paying pensions
and wages in scrip, in effect creating a parallel currency. And next week the
country will hold a referendum on whether to accept the demands of the
troika—the institutions representing creditor interests—for yet more austerity.
Greece should vote no, and the Greek government should be
ready, if necessary, to leave the euro. To understand why I say this, you need to realize that
most—not all, but most—of what you’ve heard about Greek profligacy and
irresponsibility is false. Yes, the Greek government was spending beyond its
means in the late 2000s. But since then it has repeatedly slashed spending and
raised taxes. Government employment has fallen more than 25%, and pensions
(which were indeed much too generous) have been cut sharply. If you add up all
the austerity measures, they have been more than enough to eliminate the
original deficit and turn it into a large surplus.
So why didn’t this happen? Because the Greek economy
collapsed, largely as a result of those very austerity measures, dragging
revenues down with it.
And this collapse, in turn, had a lot to do with the euro,
which trapped Greece in an economic straitjacket. Cases of successful
austerity, in which countries rein in deficits without bringing on a
depression, typically involve large currency devaluations that make their
exports more competitive.
This is what happened, for example, in Canada in the
1990s, and to an important extent it’s what happened in Iceland more recently.
But Greece, without its own currency, didn’t have that option.
So have I just made the case for Grexit—Greek exit from the
euro? Not necessarily. The problem with Grexit has always been the risk of
financial chaos, of a banking system disrupted by panicked withdrawals and of
business hobbled both by banking troubles and by uncertainty over the legal
status of debts. That’s why successive Greek governments have acceded to
austerity demands, and why even Syriza, the ruling leftist coalition, was
willing to accept the austerity that has already been imposed. All it asked for
was, in effect, a standstill on further austerity.
But the troika was having none of it. It’s easy to get lost
in the details, but the essential point now is that Greece has been presented
with a take-it-or-leave-it offer that is effectively indistinguishable from the
policies of the past five years.
This is, and presumably was intended to be, an offer Alexis
Tsipras, the Greek Prime Minister, can’t accept, because it would destroy
his political reason for being. The purpose must therefore be to drive him from
office, which will probably happen if Greek voters fear confrontation with the
troika enough to vote yes next week.
But they shouldn’t, for three reasons. First, we now know
that ever-harsher austerity is a dead end: After five years Greece is in worse
shape than ever. Second, much and perhaps most of the feared chaos from Grexit
has already happened. With banks closed and capital controls imposed, there’s
not that much more damage to be done.
Finally, acceding to the troika’s ultimatum would represent
the final abandonment of any pretence of Greek independence. Don’t be taken in
by claims that troika officials are just technocrats explaining to the ignorant
Greeks what must be done. These supposed technocrats are in fact fantasists who
have disregarded everything we know about macroeconomics, and have been wrong
every step of the way. This isn’t about analysis, it’s about power—the power of
the creditors to pull the plug on the Greek economy, which persists as long as
euro exit is considered unthinkable.
So it’s time to put an end to this unthinkability. Otherwise
Greece will face endless austerity, and a depression with no hint of an end.
Paul Krugman is a New York Times columnist.
http://www.livemint.com/Opinion/RfadGhnAM03ZOeudGmBcLN/Paul-Krugman--Greece-over-the-brink.html#ref=newsletterIMF: austerity measures would still leave Greece with unsustainable debt
