The Europeans continue to struggle to contain the burgeoning Greek debt crisis, hoping to contain it but struggling to keep the ship afloat while fixing a Greek debt problem that may be too large to fix without default. The subject has been the object of much political infighting, with the differing interests of the separate members of the Euro Zone contributing to gridlock. Much lip service has been given by all involved to the continued existence of the Euro, but in light of the starkly different needs of the Europeans that has to be very much in doubt.
One of the many stories written about the Greek debt crisis had a section that I found interesting. The New York Times ran a story on Tuesday that had some tidbits from several economists on the consequences for the Greek economy of austerity. First, the disagreements are highlighted:
The German analysis, shared by the Dutch and others in prosperous northern Europe, like the Finns, sees as the main problem the indiscipline and profligacy of others, especially in the south, like Greece, Portugal, Italy and Spain, which have run up high debts or fiscal deficits.
To rebuild confidence, this analysis says, the sinners must repent, restructure their economies and fix themselves. The road to redemption requires hard work, discipline, sacrifice and pain, even punishment for previous misbehavior.
With regard to Greece there is no question that the economy was run into the ground, with borrowing essentially to maintain an overall higher standard of living than the country could afford. The list of outrages committed by the Greek government is too long to list, but includes the obvious. Lifetime job guarantees for government employees, unionism run amok, productivity and enterprise stifled, and on and on we go. The question now centers on getting the Greeks out without causing a collapse, which requires them to get their house in order and pay all or some of their staggering debt burden. But will strict austerity, which is what is being recommended in Greece and many other places, including the U.S., produce growth that is necessary for such a repayment? To hear many here in the U.S. talk such austerity will produce a spurt in economic activity, leading to job creation and economic growth? How? I still cannot figure that out. And a French economist points out the obvious:
Everyone agrees that countries like Greece need to cut their deficits. But if everyone is cutting at the same time, and in an uncoordinated way, the result may be a fierce economic contraction for Europe as a whole. And without growth, there is very little hope of getting out of the “debt trap,” whereby more cuts in government spending result in recession, lower tax receipts and larger deficits.
“If there is austerity everywhere, where is the engine for growth?” said Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. “If there is no consumption, no reason to invest, difficulty in accessing the credit market, where is the growth? The only engine that is functioning in this view is the engine of depression, and this will worsen the sovereign debt and deficit problem.”
The Germans and northerners, Mr. Fitoussi said, still believe that austerity and recession eventually will lead to stability, confidence and growth. “But there is no way what the Germans are saying can be true without divine intervention or a belief in miracles,” he said. “No austerity program can lead to growth in a period of discontinuity in the global economy and slowing economic activity everywhere.”
Yes, the belief in divine intervention or a belief in miracles. There is no question that Greece needed to put its house in order, and I also agree that some pain was necessary. But you cannot grow through severe austerity. I realize that folks are making light of the “demand side” economists like Krugman, but through all the debate I still am at a loss as to how you grow with depressed demand. So when people ask why business, with all of their additional profits and cash reserves, are not adding jobs the answer seems straightforward to me. Why would you add jobs when you have sufficient (or more) capacity to meet existing demand for your products? Maybe I just don’t understand how “business confidence” creates demand. Lessons for the U.S.A.?