Monday, 2 November 2015

Who is to Blame for Austerity and its Consequences in Greece?

By the end of the crisis, Greece will have lost about 27-30% of its economic output. This sort of disaster is usually seen only after wars and biblical events –but who is to blame in this case since God and the generals had presumably nothing to do with it? A popular cause is “austerity forced upon Greece by international institutions”. This is doubly flawed.
First of all, it is unclear, even now, to what extent austerity has contributed to the recession. With almost half the deposits fleeing Greek banks due to the fear of exit from the Eurozone, Greece would have had a huge recession, even without any fiscal adjustment. On top of it, fiscal adjustment, like a person going on a diet, can be necessary or dangerous, depending on the state of the economy (the dieting person). Before the first Memorandum the Greek government was running mountainous primary fiscal deficits -it was like a 250 kg sumo player at risk of an imminent heart attack. The diet was just absolutely necessary, its speed was the only real choice. The institutions indeed influenced the speed of adjustment, but only helping Greece avoid an even more drastic one. Even if Greece defaulted completely, it would still have to reduce expenses and raise taxes immediately, faster than it actually did. The institutions plugged the gap, when no private investor would have. But what about the direct impact of austerity and its distributional consequences: the reduction of resources for worthy social policy goals? That is indeed always a choice for society to make and no international institution would claim otherwise. Indeed, the World Bank ran a pilot programme in Greece, with the blessings of the EU, trying to establish a Guaranteed Minimum Income for all citizens. However, the fundamental nature of resource allocation problems dictates that when you give one euro to one citizen, somebody else has to give it away. In a situation where the whole pie was shrinking and every citizen's allocation of national wealth was becoming ever more meagre (at least in their own eyes), a truly effective social policy was not feasible. Successive Greek governments gave every effort to keep the allocational status quo and please their most important clients: the middle class -always thinking of itself as low income, always asking for the lion’s share of government expenditure. The truly poor, the long term unemployed, the ones who can’t strike to disrupt everyday life, end up losing. As always.

Dr Sotiris Georganas, Reader in Behavioural Economics, City University of London

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