The problem with Greek austerity

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Austerity policies deal with the symptoms rather than the causes of the crisis. For as long as the underlying malignancies of the Greek economy stay in place, austerity will remain a largely self-defeating approach towards to the crisis. Image Source: Daily Mail

The second bailout to Greece was approved by the last Eurogroup summit, effectively bringing this marathon of negotiations (ever since October 26) to its end, even though a few formal steps are still required. The new deal, is not at all “new” as far as its policy orientation is concerned, since it will follow the same economic regime of the first bailout, i.e. draconian austerity or “fiscal consolidation” as it is officially known. I have repeatedly expressed my opposition to the policies of the troika, not because I wish to defend the frivolous spending of the Greek state – but because these monolithic policies do little to arrest the crisis, since they do not deal with the causes, but the symptoms.

The problem with Greek austerity is that the underlying malignancies and structural flaws of the Greek economy/state/society are not addressed. This can be wrapped up in the following three observations:

  1. Austerity implies tax hikes, without however making real, deep reforms in the tax regime and the tax collection mechanisms. In other words, the chronic inability of the Greek state to tax in a fair and efficient way persists, which means that those who were previously burdened with taxes will pay ever more, while those who were systematically evading their obligations are now evading even more. As such there is a growing chasm between those who pay taxes and those who don’t, which is not a good thing both for the economy and the social order. Given that revenues are falling, while inflation remains relatively high, increased taxes which in effect are levied only on a portion of the Greek society, put more pressure on the real economy and raise less revenue for the state. Hence more are the businesses that are threatened with bankruptcy and more are the people that are led to the margins of unemployment – all this while the actual revenues of the state do not really increase, at least not as much as they should. Meanwhile those who evade taxation have a relatively good time.
  2. The trade balance of Greece remains negative. The Greek economy imports much more than it exports, thus more money is leaving Greece, than entering. Given that Greece does not attract foreign direct investment, primarily due to its cumbersome and counter-productive bureaucracy, this negative trade balance proves to be an obstacle towards the road to recovery. For the country to be relieved from the pressures, the exports need to become more than the imports. This does not happen with currency depreciations (return to the drachma) for several reasons that would prove catastrophic for the economy, but only with modernization and rationalization of the public administration; simplification of all official procedures; and stabilization of all economic policies that affect investment, in order to minimize policy uncertainty. So far little to nothing is done towards these directions, to the contrary we see more of the same sort of malpractices and more political uncertainty.
  3. The banking sector is quasi bankrupt and will continue to remain in a highly stressed position for as long as no decisive action is being made to restore faith in it and put an end to the silent bank runs that have been taking place for some years now. Indeed large amounts of money have left the Greek banking system in fear of a financial meltdown, sovereign default and reconstitution of the drachma. This is a very big problem, yet is also not being dealt with under the current set of measures. To the contrary austerity reinforces the uncertainty that permeates the Greek public (this is also sustained by the loose talk of Greek and other European politicians).

The gist is that fiscal consolidation might be necessary to control the finances of the state but definitely is self-defeating in addressing the sources of the problem. For as long as the structural flaws of the national and supranational economies remain in place; austerity can at best go as far as producing some “fine” macroeconomic aggregates which are necessary to please the troika, at the expense of eating in to the muscle of the real economy. A new strategy is needed, not just for Greece, but for the whole EU; one that will see robust growth especially in the European periphery, deriving from the real economy, not some credit bonanza that will ultimately lead to the same bubbles that brought us here. As such one-sided austerity is clearly not working.</div>