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Yes, Greek Austerity Kills the Greek Economy

Maybe we need a “Ya Think?” of the day, going to the article that shows the best grasp of the obvious. If so, the article with the headline In Greece, fears that austerity is killing the economy would win:

Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as Greece’s economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work?

Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals are facing acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping.

Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending — the biggest driver of the economy — has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees.

Those paragraphs could have been written by any economist with a rudimentary textbook sitting in an office, without any real-world knowledge about Greece. It’s as simple as knowing supply and demand. When you already have a situation of low demand, and your government does everything possible to lower it more, you make the situation worse. The only element this story doesn’t include is the fact that the budget deficit, the entire reason for the austerity, increases, amid collapsing revenue. That’s especially true in Greece, which raised taxes without any way to enforce payment of them. Greece never had a spending problem as much as it had a tax collection problem. Then they exacerbated it.

It’s telling that the proponents of austerity have no economic basis for why Greece should destroy their society. Instead they talk the language of morality plays. Greece lied about their deficit (this was two governments ago, but whatever), and they must suffer for their lies so they never forget what they’ve done. Really, that’s the actual rationale:

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.

As if the public employees and ordinary workers, the ones who really suffer, had anything to do with the disclosure of Greek fiscal policy.

And in fact, by forcing this level of austerity on Greece and its other trading partners, Germany is actually killing their own economy. They were able to avoid this for a while by shifting their exports to Asia and South America, but if every country around you stagnates, you’re bound to catch that cold.

Germany’s economy contracted slightly in the fourth quarter, putting Europe’s powerhouse on the verge of a mild recession and raising questions about how much longer Berlin will continue to shoulder the burden of rescuing fiscally wayward euro-zone members.

Germany’s statistics office said GDP slid around 0.25% in the fourth quarter from the third, ending a two-year expansion.

When we look back at this in 30 years, we will identify Europe in 2009-2012 as making some of the most catastrophic economic errors in world history.

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David Dayen

David Dayen