The Kroog points out that despite five years of doing everything that it was told to do by the troika and sucking down that Good Ol’ Austerity Juice, Greece still finds itself in the bank holiday/capital control stage of the mess that it was supposed to avoid.
But doesn’t the ultimate cause lie in wild irresponsibility on the part of the Greek government? I’ve been looking back at the numbers, readily available from the IMF, and what strikes me is how relatively mild Greek fiscal problems looked on the eve of crisis.
In 2007, Greece had public debt of slightly more than 100 percent of GDP — high, but not out of line with levels that many countries including, for example, the UK have carried for decades and even generations at a stretch. It had a budget deficit of about 7 percent of GDP. If we think that normal times involve 2 percent growth and 2 percent inflation, a deficit of 4 percent of GDP would be consistent with a stable debt/GDP ratio; so the fiscal gap was around 3 points, not trivial but hardly something that should have been impossible to close.
Now, the IMF says that the structural deficit was much larger — but this reflects its estimate that the Greek economy was operating 10 percent above capacity, which I don’t believe for a minute. (The problem here is the way standard methods for estimating potential output cause any large slump to propagate back into a reinterpretation of history, interpreting the past as an unsustainable boom.)
So yes, Greece was overspending, but not by all that much. It was over indebted, but again not by all that much. How did this turn into a catastrophe that among other things saw debt soar to 170 percent of GDP despite savage austerity?
The euro straitjacket, plus inadequately expansionary monetary policy within the eurozone, are the obvious culprits. But that, surely, is the deep question here. If Europe as currently organized can turn medium-sized fiscal failings into this kind of nightmare, the system is fundamentally unworkable.
For whatever reason, this time around was different, as they say. Maybe PM Alexis Tsipras miscalculated, maybe the troika miscalculated, Junker and Merkel and the like, but the rules of the EuroCalvinball changed and now we’ve got ATMs across Greece closed today and a whole lot of people asking a whole hell of a lot of questions.
The other lesson is austerity kills economies, as can be evidenced from Greece to Kansas to the UK to Puerto Rico. I’m not sure how many more financial meltdowns we need to get this into the heads of the suits that make the decisions, but you don’t need a Nobel Prize in order to figure out that maybe drastic reductions in spending for programs that people depend on isn’t the way to save a struggling economy.