PostPolitik - The blog of Alessio Postiglione

Errare humanum est, perseverare diabolicum. The Greek crisis shows the negative impact of misjudged theories put to the test of reality. Thus, it is useless to label Tsipras as a dangerous communist when we face the disastrous consequences of ideas biased by false analysis or flawed by coarse errors.

Between 2010 and 2014, the Greek governments tried out all the recipes offered up by the Troika without experiencing fiscal relief or balancing the economy. Grexit
The tax burden has increased by 5% GDP points, public spending has fallen by a quarter, overall GDP has hit a tremendous 25% decline, and wages have fallen by 20%.

Greek demand, production and income have shown an unprecedented collapse. The debt/GDP ratio has increased by 30% and the rate of youth unemployment now exceeds 60%. The only positive parameter is the improvement of the foreign balance, due to the fall in imports caused by the crash of domestic consumption.

The application of the doctrine of Austerity has undermined the Greek economy. Austerity is the disease, therefore it cannot be the cure.

Yet the Troika has again called for even tougher measures, refusing to admit its suggestions were wrong. As Joseph Stiglitz argues:

It is startling that the Troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have learned nothing from this. The Troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

The austerity fanatics have created an economic wasteland and call it fiscal consolidation. They make a desert and name it peace. This desert is produced by an oxymoron: “expansionary austerity”, which sounds as odd to me as “reproducive chastity”. Expansionary austerity suggests that spending cuts, by triggering a reduction of fiscal pressure and an increase of private income and consumption, boost the overall demand and bolster an economic expansion. As a result, if growth is to be sustained, the welfare state must be dismantled.
The lessons we have learned after seven years of austerity measures dictated by the Troika to resolve the crisis tell another story. The more cuts, the futher the recession deepens. The vicious spiral of debt deflation leads to bankruptcy and unemployment. As Keynes said “the boom, not the slump, is the right time for austerity”.

Instead, in time of recession, a fiscal stimulus can charge the economy, favour growth and, in the long run, create the conditions for repaying excessive debts.

Moreover, in 2013 we bitterly discovered that the Austerity manifesto, the main theoretical reference in justifying cuts in government spending requested by the Troika to concede loans to the countries subjected to “memorandum of understanding” and constrained to “structural reform”, as the Eurocrats have labelled the spending cuts with a foxy euphemism, was flawed with errors.

The paper “Growth in a time of debt”, by the Harvard economists Carmen Reinhart and Kenneth Rogoff, contained a spreadsheet coding error. Meanwhile, even the former International Monetary Fund’s top economists Olivier Blanchard and Daniel Leigh admitted to have dangerously “underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation”.
The assumptions that proved the expansionary capacity of austerity were simply miscalculated. Despite the errors and the reality checks, the stubborn Troika continues to reiterate its poor recommendations. Therefore, Grexit is not a matter of economics, but of politics.

As Stiglitz writes “it is about power and democracy much more than money and economics”. Alas, also when it comes to power, perseverare est diabolicum.

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