Costas Azariadis looks at the most recent “vital signs” of the Greek economy and argues that austerity measures without investment or market reform will not succeed in balancing the government budget. He finds that private economic activity has already dropped by 20% since 2008, and concludes that austerity by itself has brought the country to the brink of a Great Depression similar to the one that gripped Britain in the 1920’s and 1930’s.
The full article of C. Azariadis
Austerity without Growth
At the end of World War I victorious Britain took a momentous decision– return to the gold standard at the prewar exchange rate between paper money and gold, despite having printed a lot of paper money to pay for the war. To achieve this wrongheaded aim, the UK cut government spending–including investment and defense–to the bone and plunged the economy into a period of austerity that sapped British society to the marrow, and lasted until World War II. George Orwell’s The Road to Wigan Pier gives a vivid account of social conditions in the 1930’s.
As the unemployment rate climbed above 22% in the early 1930’s and days lost to strikes peaked at 6 times their post WWII maximum, Britain surrendered its status as one of the richest nations on earth and the greatest of the great powers. In 1931 the British Empire became a Commonwealth and the Gold Standard was dropped. On a much smaller scale than Imperial Britain, Greece faces today a similar dilemma. Is it sensible, or even possible, to stay in the Eurozone at the original exchange rate of 341 drachmas to the euro? How deep must Greek society cut spending to remain in “core” Europe? Is austerity pushing Greece into a depression as it did Britain ninety years ago?
The answers depend a lot on the future state of the EU and world economies, and even more on Greece’s willingness to implement reforms that will get its economy growing again, as suggested repeatedly by many members of this blog in earlier posts. To diagnose where Greece is headed we’ll have to take its “vital signs” from Eurostat and ELSTAT (the EU and Greek statistical authorities) with an assist from the National Bank of Greece Economic Bulletin.
Where Is The Greek Economy Now?
Greece’s vital signs are not those of a healthy or even a mildly sick society. The production sector of the economy has taken a back seat to accounting and finance in the public opinion brouhaha that obsesses about rating-agency downgrades, panicky lenders, bailout packages and default rumors. Amid the comings and goings of grim-faced experts, ordinary people are having experiences that bring to mind John Steinbeck’s The Grapes of Wrath. This time the victims and the heroes are shopkeepers in Athens instead of farmers in Oklahoma.
To spare you the gory details, I’ll sum up the situation in a few numbers. Four hundred thousand jobs have been lost since 2008, virtually all of them in the private sector; the unemployment rate has shot up from 6.5% in 2007 to 18.3% in August 2011. Gross domestic product will have fallen 13.8% from its peak by the end of this year. The private economy—consumption, investment plus net exports–has dropped nearly 20%; sixty thousand small businesses have closed, with another sixty thousand expected to go by the end of 2012.
Irish statistics look almost as grim as Greek ones, but the Irish economy seems to have bottomed out. Greece has not. As the Greek economy continues to plummet, the odds become longer that the government can balance its books and avoid an uncontrollable default. Ignoring interest payments on national debt, Greece was close to a primary budget balance in 2010 but not in 2011 (the deficit is slated to rise from 0.3% of GDP to 1.7%). Next year looks worse still. As of now the government could not pay its bills even if creditors forgave all public debt because tax hikes are rapidly shrinking taxable income. No politician wants to think about selling or leasing– to developers, hotelkeepers and other investors–even a small fraction of the government’s vast holdings of public land.
Without the spark of economic growth, it looks like sheer belt tightening is defeating itself. Austerity without investment did not work for Britain in the 1920’; chances are that it will not work for Greece in the 2010’s.
The Next Couple of Years
Both Eurostat and the National Bank of Greece predict that the economic freefall will taper off in 2012. They forecast a 3% drop in GDP, and the economy back to growth in 2013. Are they right? Last year’s predictions for 2011 were also for a 3% drop; it will likely be double that.
The reason analysts are hard put to forecast the course of the Greek economy is that it all depends on two volatile factors: the health of the country’s trading partners, in the eurozone and elsewhere, and the progress of internal economic reform. Greece is too small to influence Europe and very reluctant to reform itself.
Wages and salaries have been cut 10% or more, but deeper reforms are hitting a brick wall. Labor unions are dead set against them and public opinion is not sure reforms are needed. As a result, government commitments to sell public-sector firms, improve tax collection, liberalize markets, open closed professions, foster competition, and remove hurdles to investment have foundered on the shoals of daily strikes and petty acts of urban terrorism. Parliament legislates reforms, the street vetoes them, and the economy goes into a freefall.
Growth or Bust?
Why is Greece refusing to reform itself against all economic advice from the international organizations like the IMF, the EU, the ECB, sensible politicians, and experts of all stripes? Every pundit is for reform, and yet reform is not in the air. One reason could be a utopian strain in Greek society, much like the Occupy Wall Street movement in America but bigger. Recent polls show left-wing parties are getting roughly a 25% vote share. Part of that comes from people who yearn for a more egalitarian society in which government guarantees equal opportunity for all, fair prices and wages, and a job for anyone ready to work.
A bigger reason may be cynicism from a jaded electorate that refuses to believe things will be put right by the same spendthrift politicians and profligate labor leaders who spread corruption like algae and ruined the economy. As an aside, the latest sampling from Transparency International makes Greece the undisputed corruption champion of the eurozone, on a par with some really shady countries.
What will it take to get the economy moving? My colleague Yannis Ioannides calls the shock that’s needed an expectations jolt: combining a war on corruption with a flood of public works to persuade public opinion that times are indeed “a-changing” as Bob Dylan so eloquently claimed in the 1960’s. Will that happen? And, if it does, will it work? Stay tuned to this blog.