By Mike Andrew
Greece’s debt crisis came to a head on November 11, when socialist Prime Minister George Papandreou resigned to make way for a coalition “national unity government.”
The new Prime Minister, Lucas Papademos, is a former Vice President of the European Central Bank committed to pushing ahead with the package of austerity measures demanded by European bankers in return for a “bailout” of Greek debts.
This “bailout” properly speaking is not a bailout of Greece, still less a bailout of Greek workers, but a bailout of the German and French banks which invested in Greek bonds and now stand to lose substantial assets if Greece defaults on its debts.
Some 20% of the bailout money Greece receives is slated to go to recapitalize Greek banks, and another 20% must be invested in top-rated AAA bonds that can be used as collateral in future debt-swap deals with lenders.
The austerity program the EU has imposed on Greece is not designed to help Greece repay its debts – or if it is, it is sadly misdirected. In fact, their austerity program is designed to impose the EU economic model which views inflation as the main economic risk.
In an effort to reduce Greece’s deficits and keep inflation below the EU-sanctioned maximum of 2%, the Greek government was compelled to cut wages and pensions, eliminate COLAs, and reduce the number of public sector workers by one-third.
Last year unemployment hit almost 19%, with the rate for workers under 30 going to almost 40%. The Greek economy as a whole contracted by 4.5% in 2010.
If the goal was to reduce Greece’s debt-to-GDP ratio, the austerity program was clearly misdirected.
Papandreou was elected Prime Minister in 2009 on an anti-austerity platform, when the debt crisis was only just breaking.
The right-wing New Democracy Party, which held power from 2004 to 2009, precipitated the debt crisis by cutting income and social security taxes and then cooking the books to conceal the real dimensions of the resulting budget deficit.
Instead of the EU-approved 3% deficit, or the rumored 6% “real” deficit, Papandreou found the deficit was almost 13% when he took office. Unemployment at that time was over 10%.
What made Greece’s situation even worse was that it had joined the Eurozone in 2001, and therefore no longer controlled its own money supply.
Papandreou’s father, the late Andreas Papandreou, who was Prime Minister in 1981-1989 and again in 1993-1996, had brought his country an unprecedented period of economic prosperity by an admittedly inflationary policy – financing public works projects, and wage and pension increases by increasing the money supply.
That option was no longer open in the current crisis, and George Papandreou realized he had no choice but to ask for a restructuring of Greece’s debt, the consequence of which was the austerity package demanded by European bankers.
Papandreou’s seemingly reasonable proposal to put the austerity policy up for a vote was vetoed by Greece’s creditors, including the United States.
The referendum proposal did have one positive result, however. It forced the right-wing opposition into entering a national unity government and accepting shared responsibility for the austerity measures.
The long term future for the Greek economy remains in doubt, as does the issue of whether Greece will retain the Euro or try to return to the drachma, its former national currency.
Showing posts with label austerity. Show all posts
Showing posts with label austerity. Show all posts
Wednesday, November 30, 2011
Sunday, July 4, 2010
Krugman: Spend now, save later
By Steve Dzielak
Paul Krugman, the column-writing, Nobel Prize winning college professor, said it best back in May: We could use more fiscal stimulus — but Congress is balking even at extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low!
Krugman’s big worry? That policymakers would just sit there for years congratulating themselves on the soundness of their policies. In June, Senate Republicans just said Hell No! to everything in sight, including an extension of unemployment benefits for said long-term unemployed. Never mind that America is facing the highest rate of long-term joblessness since the 1930s.
Krugman focused on what many leading economists see as a huge mistake: a return to austerity. He cited 1937, when FDR’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. Then, as now, creating jobs was suddenly out, inflicting pain was in.
In an imaginary conversation with a German Deficit Hawk, Krugman counters the Hawk’s frenzy to cut deficits immediately (“because Germany must deal with the fiscal burden of an aging population”). Cutting doesn’t make sense, Krugman says, because even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your gross domestic product (GDP).
When Krugman points out that austerity will threaten economic recovery while doing next to nothing to the long-run budget position, the Hawk takes cover behind fear of the Market reaction. When Krugman wonders aloud why the Market should be moved by policies with almost no long-run fiscal impact, he is cut dead with an all-time classic: You just don’t understand our situation.
Krugman sees hypocrisy in this obsession with the deficit. Lawmakers eager to slash benefits for those in need are equally quick to stump for tax breaks for the wealthy. Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion for the unemployed, supported the first Bush tax cut, which cost a cool $1.3 trillion.
The Ben Nelsons of the world seem stumped by the truism, spend now, while the economy remains depressed; save later, once it has recovered. Here’s how Krugman sees it: Much of the deficit is the result of the ongoing crisis, which depressed revenues and required extraordinary expenditures to stabilize the financial system. As the crisis abates, things will improve---just not fast enough. After bottoming out in 2014, he believes, the deficit will start rising again, largely because of rising health care costs.
The answer is clear: First bring health costs under control, then find additional revenues and/or spending cuts. Right now, our severely depressed economy is inflicting long-run damage. This is not the time for austerity. The deficit should become a priority only when the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.
Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, as unemployment falls — probably below 7 percent— the Fed will want to raise rates to head off possible inflation. At that point we make a deal: The government starts cutting back, and the Fed holds off on rate hikes so that cutbacks don’t tip the economy back into a slump. But the time for such a deal is at least two years off. The responsible thing, then, is to spend now, while planning to save later.
As Krugman emphasizes, every year that goes by with extremely high unemployment forces many long-term unemployed into a permanent underclass, even as many new graduates are denied a start on their working lives.
Penny-pinching now isn’t just cruel; it endangers the nation’s future while failing to lighten future debt burden. Krugman implores the hawks: Please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.
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Paul Krugman, the column-writing, Nobel Prize winning college professor, said it best back in May: We could use more fiscal stimulus — but Congress is balking even at extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low!
Krugman’s big worry? That policymakers would just sit there for years congratulating themselves on the soundness of their policies. In June, Senate Republicans just said Hell No! to everything in sight, including an extension of unemployment benefits for said long-term unemployed. Never mind that America is facing the highest rate of long-term joblessness since the 1930s.
Krugman focused on what many leading economists see as a huge mistake: a return to austerity. He cited 1937, when FDR’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. Then, as now, creating jobs was suddenly out, inflicting pain was in.
In an imaginary conversation with a German Deficit Hawk, Krugman counters the Hawk’s frenzy to cut deficits immediately (“because Germany must deal with the fiscal burden of an aging population”). Cutting doesn’t make sense, Krugman says, because even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your gross domestic product (GDP).
When Krugman points out that austerity will threaten economic recovery while doing next to nothing to the long-run budget position, the Hawk takes cover behind fear of the Market reaction. When Krugman wonders aloud why the Market should be moved by policies with almost no long-run fiscal impact, he is cut dead with an all-time classic: You just don’t understand our situation.
Krugman sees hypocrisy in this obsession with the deficit. Lawmakers eager to slash benefits for those in need are equally quick to stump for tax breaks for the wealthy. Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion for the unemployed, supported the first Bush tax cut, which cost a cool $1.3 trillion.
The Ben Nelsons of the world seem stumped by the truism, spend now, while the economy remains depressed; save later, once it has recovered. Here’s how Krugman sees it: Much of the deficit is the result of the ongoing crisis, which depressed revenues and required extraordinary expenditures to stabilize the financial system. As the crisis abates, things will improve---just not fast enough. After bottoming out in 2014, he believes, the deficit will start rising again, largely because of rising health care costs.
The answer is clear: First bring health costs under control, then find additional revenues and/or spending cuts. Right now, our severely depressed economy is inflicting long-run damage. This is not the time for austerity. The deficit should become a priority only when the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.
Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, as unemployment falls — probably below 7 percent— the Fed will want to raise rates to head off possible inflation. At that point we make a deal: The government starts cutting back, and the Fed holds off on rate hikes so that cutbacks don’t tip the economy back into a slump. But the time for such a deal is at least two years off. The responsible thing, then, is to spend now, while planning to save later.
As Krugman emphasizes, every year that goes by with extremely high unemployment forces many long-term unemployed into a permanent underclass, even as many new graduates are denied a start on their working lives.
Penny-pinching now isn’t just cruel; it endangers the nation’s future while failing to lighten future debt burden. Krugman implores the hawks: Please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.
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