Evident Failure of the EU-IMF Austerity Policies

[Leonardo Giuffrida]

The worsening Greek crisis is clear evidence that the hasty policy of austerity forced by the EU-IMF “troika” team, aimed at making Greek government run in to the budget, was and is going to be the problem not the solution to European economic sorrows. It is ever more clear that just cannibalising the real economy of any country such as Greece to protect banks and bondholders does not work at all and actually makes the situation worse. Here is an interesting article about that:

http://enoughcampaign.org/2011/10/04/worsening-greek-crisis-shows-failure-of-eu-imf-austerity-economics/

Unfortunately, the same policies are going to be enforced in other Eurozone countries such as Italy, net of surprises. Every professor in macroeconomics always teaches own students how fiscal authorities should behave in the face of a recession: they must implement expansionary policies not austerity! In the bargain, european treaties allow national governments not to fulfil curbs on public deficit if the same countries are going through a recession. So? Why keeping on protecting protect bondholders in the short run without considering this will be lethal in the long run both for the economies and creditors themselves? What do you think about that? Greetings

[Arjeta]

I would like to discuss another problem.

Greece! Difficult case! I agree completely with you about the role of fiscal policy during transition, but we have to keep in mind that Greece does not have the luxury not to follow the rule. They have done a lot of mistakes. They have to look carefully at their spending. I don't know if you are aware of Greece budget, but if you look carefully you will find a lot of economic policies (they say that they can not get rid of those) that you would delete.

Example: they pay pensions to people in Albania. You would ask me WHY? Greece says that they are part of the Greek minority in Albania. I completely do not agree with this. Around 90% of those people are Albanian.  Another policy is the financing of Greek schools in Albania. I am sure that they follow the same policies even in other neighbor contries. I hope you have heard about buying of weapons from Grecce. They spend a lot of money on weapons! What are they afraid of?

About banking sector, I can say that accepting EURO they have lost the independence of their Central Bank. This is very clear and they have to follow the rules that are followed from all the other contries.

 

[petagny]

I would tend to agree with Arjeta. Greece is a case apart. Unfortunately, the 'solutions' for Greece have been extrapolated to the rest of the eurozone. The mistake has been to diagnose this as a fiscal crisis and respond accordingly with universal fiscal austerity measures. The crisis in the rest of the eurozone started with private sector imbalances which have subsequently been nationalised to a large extent. While not always perfect, fiscal management in the rest of the eurozone was not too bad before the crisis erupted. Leonardo is right that a fiscal expansion is required to eliminate the structural imbalances, but not in the countries like Italy and Spain: the expansion must come from Germany and Netherlands to create demand for the goods and services of countries suffering from twin deficits. A universal austerity programme without a depression is an impossibility: in a eurozone that is roughly in balance with the rest of the world savings by one set of countries need to be offset by dis-savings by another set of countries. What are the chances of expansionary policies in Germany and the Netherlands? Practically zero! We may end up being envious of Japan's 'lost decade'!