Greece will likely begin recovery this year: Is austerity working?

27 Mar

by Mark Weisbrot [Documenti]

Last month the Greek parliament approved a stimulus program involving highway construction that is quite large. According to the Ministry of Infrastructure, Transport, and Networks, total spending on this project will be 7.5 billion euros over the next year and a half. This amounts to about 2.7 percent of GDP during this period. For comparison, the U.S. federal stimulus that helped us out of our 2008-09 Great Recession (after subtracting the state governments’ budget tightening) was less than 1 percent of GDP.

This stimulus will likely make the difference between growth and another year of recession. Most of the financing comes from European Union grants, so it does not add to Greece’s debt.

In other words, the Greek economy is going to grow next year because of a significant policy reversal. The austerity, or fiscal tightening, is basically coming to an end.

Why is this so important? Because the people who designed or supported the policy of the last four years will, when the Greek economy begins to recover, claim that the “austerity worked.” But even the IMF’s own analysis of the Greek economy refutes this claim. The austerity can only “work” (if one accepts the obscenely high human cost of it) if the massive unemployment drives down wages enough so that the economy becomes more competitive and can export its way out of the recession. The IMF projects a 20 percent decline in wages and salaries for 2010-2014; but this has not been enough to make Greek exports significantly more competitive, according to the Fund’s latest (July) review. Exports have remained weak and haven’t come close to compensating for the fiscal tightening and reduced domestic private spending. The strategy of “internal devaluation” has not yet worked for Greece, nor – according to the IMF’s data and analysis – for the eurozone as whole.

Of course, Greece is still far from out of the woods. With a debt-to-GDP ratio of 176 percent (it was about 115 percent when Greece began the austerity), and facing high interest rates if it returns to market financing, there could be more crises and another debt restructuring ahead. And even if the return to growth this year convinces investors to put their money in Greece, it will take years for unemployment to reach humane levels.

That is why it is so important to understand the causes of Greece’s return to growth, if it happens (it could still be derailed by adverse shocks). The human tragedy of the past five years in Europe, as well as the repeated financial crises and damage to the world economy caused by bad policy there could have been avoided – as many economists have argued. But looking forward, the eurozone is still stuck near record levels of unemployment (12.1 percent), and how soon it returns to normal will depend on how quickly the European authorities are willing to reverse their policies for the region.

From Real World Economics Review Blog, January 23, 2014

27 marzo 2014

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