Greek Bailout, Episode III

Never bark at the big dog. The big dog is always right.

If your goal is to restore growth and full employment in a crisis-ridden economy, don’t use austerity. It does not work. I have explained this for two years now – in blogs, research papers and numerous debates – and I am pleased to say that my work has been recognized. One step forward on that front is my book, out in July. But more important than the recognition of my work is the constant reminders of austerity failure that reality provides. In addition to raw, statistical evidence of decline and stagnation all over Europe, the German government is now de facto conceding defeat on the austerity front. From British newspaper The Guardian:

Germany has signalled it is preparing a third rescue package for Greece – provided the debt-stricken country implements “rigorous” austerity measures blamed for record levels of unemployment and a dramatic drop in GDP. The new loan, outlined in a five-page position paper by Berlin’s finance ministry, would be worth between €10bn to €20bn (£8bn-16bn), according to the German weekly Der Spiegel, which was leaked the document. Such an amount would chime with comments made by the German finance minister, Wolfgang Schäuble, who, in a separate interview due to be published on Monday insisted that any additional aid required by Athens would be “far smaller” than the €240bn it had received so far.

So how can the German government be admitting it has lost the austerity fight against the economic crisis, when it actually demands more austerity by the Greek government? Simple: the German government together with assorted Eurocrats from Brussels have sold last two fiscal-disaster packages as “the” fix for the crisis. If only Greece agreed to this-or-that austerity measure, and then got a loan, then the Greek economy would be on a fast track to a recovery.

By now proposing not a second, but a third bailout for the Hellenic welfare-state wasteland the German government is de facto admitting that the prior two packages did not at all deliver as promised.

Which, of course, is an outstanding reason to try the same policies a third time while expecting a different outcome…

The Guardian again:

The renewed help follows revelations of clandestine talks between Schäuble and leading EU figures over how to deal with Greece, which despite receiving the biggest bailout in global financial history, continues to remain the weakest link in the eurozone. The talks, said to have taken place on the sidelines of a Eurogroup meeting of eurozone finance ministers last week, are believed to have focused on the need to cover an impending shortfall in the country’s financing and the reluctance Athens is displaying to enforce long overdue structural reforms.

It is a bit unclear what the “structural” element of those reforms would be, but if the history of Greek bailouts is any indication we can safely assume that the “reforms” would be higher taxes and lower entitlement spending. While less spending is highly desirable, it has to come in the form of predictable reductions – and they have to be coupled with targeted tax cuts that give those dependent on government a fighting chance to provide for themselves once the government handouts are gone.

Such reforms are not rocket science. Two years ago I put together five such proposals in a book. I would not expect the Greek government to have read it, or that any Eurocrat would have seen it… but the basic idea – permanent spending cuts coupled with targeted tax cuts – is so common-sensical that you would expect someone in Europe to propose it as a guideline for getting Greece, and Europe, out of its crisis.

So far, though, I have not seen a single proposal for “structural reform” in Greece along these lines.

Perhaps it is understandable, at the end of the day, why no such ideas are floating around in the public debate. After all, the end result is a dismantling of the welfare state, an idea as alien to Europeans as a monarchy is to Americans. But so long as Europe’s political leaders remain married to the welfare state, they will also have to continue to come up with non-solutions to the crisis. One of those solutions is another debt write-down. The Guardian again:

Most of the debt overhang now haunting the country belongs to European governments and at 176% of GDP – up from 120% of national output at the start of the crisis – is not only a barrier to investment but widely regarded as being at the root of its economic woes. “They are missing the point: Greece does not need a third bailout, it needs debt restructuring,” said the shadow development minister and economics professor, Giorgos Stathakis. “Even in the IMF, logical people agree there is no way we can have any more fiscal adjustment when the whole thing has reached its limits,” he said. “There is simply no room for further cuts and further taxes and that is what they are going to ask for.”

It is precisely this attitude that traps Greece in a perpetual crisis. Its plunge into industrial poverty over the past five years was not caused by a financial crisis, as public economic mythology suggests. The plunge was the work of the welfare state, which over a long period of time had drained the private sector of money, entrepreneurship, investments and productivity. When the global recession hit, the excessive cost of the welfare state was exposed full force. Trying first and foremost to save the welfare state, Eurocrats from the EU and the ECB joined forces with economists from the IMF to squeeze even more taxes out of the private sector. At the same time, the rapidly growing crowds of unemployed and poor were deprived of more and more of the only thing that had kept them going: welfare-state handouts.

The result was that those who saw their handouts shrink were even less able to find a job than they had been before. Rising taxes killed the job market for them.

At the core, the Greek crisis is one of a welfare state that costs vastly more than the private sector of the Greek economy can afford, even on a good day. The debt that the good professor and fellow economist Stathakis wants to have forgiven is the result of this historic mess of irresponsible entitlements and burdensome taxes.

If Greece does not fix its welfare-state problem, it does not matter how much debt that is forgiven. It will continue to accumulate more debt, and then what? Another round of debt forgiveness?

Again, this basic insight is missing from the European discussion on what to do with Greece. Even the IMF is apparently concentrating on the debt burden, suggesting, according to the Guardian, that “without additional debt relief by eurozone governments, Greece’s debt burden could smother the country’s economy.” That is exactly wrong: the economy is being smothered by the welfare state, which austerity measures are aimed at saving.

At least there is some common sense in the debate. The Guardian concludes:

China, Brazil, Argentina, India, Egypt and Switzerland have been among the countries expressing grave doubts that the assistance would work, arguing that Greece might end up worse off after the austerity programme.

Thank you for that. Let’s now hope that more people see this and that we can get some traction for a reform program that combines entitlement phase-out with targeted tax cuts. It is the only way to save Greece from generations of industrial poverty – and it is the only way to save the rest of Europe from the same fate.

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