The Washington Post recently published a heartrending story on the suffering being imposed on ordinary Greeks. So much for the doctrine of expansionary austerity.
I do have a small bone to pick, however. In the article, published on Jan. 10 and titled “In Greece, Fears That Austerity Is Killing the Economy,” there’s the discussion of why such harsh austerity is being imposed: “European powers, led by fiscally conservative Germany, have been insisting that Greece correct years of mismanagement by enacting swift waves of cuts and other major economic reforms to regain the confidence of investors and ensure the integrity of the euro. Slashing the deficit quickly is essential to ushering in a sustainable future, they have argued, and the resulting social pain is necessary to impress on Greek politicians and society that such excesses should never happen again.”
Most of that is right — but not the bit about regaining the confidence of investors — or at any rate, that’s not what it’s about these days. For it’s quite clear that at this point investor confidence is unregainable. Greek borrowing costs aren’t coming down to affordable levels for a very long time.
So now the austerity isn’t market-driven — it’s political, the pound of flesh official lenders are demanding for maintaining the trickle of cash. And it really is in large part about punishment; we’ve now seen a fairly impressive demonstration that big budget cuts in a depressed economy hardly even reduce the deficit, because they drive the economy down and tax receipts with it.
I really don’t see how this can continue. But, you say, the alternative is default and a euro exit. Well, that’s a terrible scenario — but how can it be worse than what’s happening now?
Trading With Aliens
The New York Times published an article on Jan. 9 about Germany’s faith in austerity as the answer to depression: “Spain, Italy and Greece are taking a knife to public spending because they have no choice. But Germany is still healthy enough that it could do its troubled trading partners a favor and focus more on promoting demand and less on cutting debt,” wrote the reporter Jack Ewing. “Could, but almost certainly will not. Even if German lawmakers had not made a balanced budget a constitutional obligation two years ago, there is a deep consensus among policy makers and economists that austerity and growth are not enemies. They are comrades.”
It’s sad reading for anyone hoping that Europe will get its act together; it’s especially galling that Germans remain so committed to belief in expansionary austerity, despite the thorough empirical debunking the notion has been given over the past year and a half.
But the Germans believe that their own experience shows that austerity works: They went through some tough times a decade ago, but they tightened their belts, and all was well in the end.
Not that it will do any good, but it’s worth pointing out that Germany’s experience can only be generalized to other countries if we find some space aliens to trade with, fast.
Why? Because the key to German economic affairs this past decade has been a truly massive shift from current account deficit to surplus. Now, other countries within Europe could emulate Germany’s past if Germany herself were willing to let its current account surplus vanish. But it isn’t, of course. So the German demand is that everyone run a current account surplus, just like they do — something that would only be possible if we can find someone or something else to buy our exports.
It remains remarkable to see with how little wisdom the world is governed.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007).
Copyright 2011 The New York Times.
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