Investigative Journalism that is as
Radical as Reality Itself.

Greece and Those Wild & Crazy Guys at the ECB

by DEAN BAKER

I have been following the European sovereign debt crisis since it first developed more than two years ago. It was evident from the beginning that the conditions on the debtor nations being demanded by the “troika” of the European Central Bank, the European Union, and the International Monetary Fund were both onerous and counterproductive.

This view has been confirmed by the fact that the debtor countries have missed target after target and that growth has consistently come in far below projections. (Actually, the crises countries have been contracting for much of the last two years.)  This could leave analysts guessing as to what economic reasoning lies behind the troika’s conditions.

Last week I got the answer when I had occasion to meet with a high-level EU official. There is no economic reasoning behind the troika’s positions. For practical purposes, Greece and the other debt-burdened countries are dealing with crazy people. The pain being imposed is not a route to economic health; rather it is a gruesome bleeding process that will only leave the patient worse off. The economic doctors at the troika are clueless when it comes to understanding a modern economy.

The basic story of the crisis countries is simple. Their economies became uncompetitive with the rest of the eurozone in the last decade as inflation in these peripheral countries outpaced inflation in the core eurozone countries of northern Europe, most importantly Germany. This created a large gap in price levels that caused peripheral countries to run massive current account deficits.

In some countries, like Greece and to a lesser extent Portugal, the current account deficit corresponded to excessive public-sector borrowing. In Spain and Ireland the current account deficit was associated with a massive private-sector borrowing boom.

The remedy for this situation is obvious, even if getting from here to there may not be simple. The peripheral countries have to regain competitiveness by having their prices fall relative to prices in the core countries. If these countries still had their own currencies, this could be accomplished quickly through a devaluation of the currencies of the peripheral countries.

However, being part of the eurozone rules out this option. With a single currency the only route for the peripheral countries to regain competitiveness is to have a lower inflation rate than the core countries.

This would be a doable task if the core countries were prepared to run inflation rates in the range of 3-5 percent annually. If the peripheral countries kept their inflation rates in a range of 1-2 percent, they would soon be able to restore their competitiveness.

But the core countries have zero intention of allowing their inflation rate to increase from the current 1-3 percent range. As I learned from my conversations with this EU official, low inflation is viewed as the equivalent of a commandment from God. He could not even see the logic of deliberately allowing the inflation rate to rise.

He viewed the idea of 4-5 percent inflation as being like a dreaded disease, as though there was not a long history of countries experiencing robust growth with inflation rates in this range or even higher.

The alternative route suggested by this EU official was that Greece and other peripheral countries would bring about a restructuring of their economy. This would lead to lower costs and higher productivity, and thereby a return to competitiveness.

There is little doubt that there are many inefficiencies in the peripheral economies that should be eliminated or reduced. But the idea that this can be quickly done, in the context of economies that are rapidly contracting, is more than a little fanciful. There certainly is no precedent for a successful restructuring like this anywhere in the world.

The country that some proponents of this route hold up as a model is Latvia. Latvia has seen its economy contract by more than 20 percent, although it is now seeing respectable growth. Still, its unemployment rate is well into the double-digits. Furthermore, Latvia’s unemployment rate would undoubtedly be much higher if close to 10 percent of its workforce had not emigrated to other countries in search of work.

If people on the left proposed a set of economic policies that has so little theoretical or empirical support they would be laughed out of public debate. In this case, because the people pushing such policies hold the highest positions in government and the European economic establishment, they end up as official policy.

The people in Greece and peripheral countries must wake up to the fact that they are not dealing with reasonable people at the other side of the negotiating table. The notion of leaving the euro cannot be a pleasant one, but the troika is giving the peripheral countries little choice.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Al Jazeera.

July 07, 2015
ANDRE VLTCHEK
In Ecuador, Fight for Mankind; In Greece, Fight for Greece!
Binoy Kampmark
Warrior Economist: the Varoufakis Legacy
Shamus Cooke
Unions Must Act Now to Survive Supreme Court Deathblow
Dave Lindorff
The Greek People Have Voted ‘No!’ to Austerity and Economic Blackmail
Mateo Pimentel
The Pope’s Letter: Neoliberalism and Fukushima
Raouf Halaby
Beware Those Who Speak With Forked Tongues
Ron Jacobs
The Grateful Dead: The Ship of the Sun Bids Farewell
Jonathan Cook
Hasbara Industry: Why Israel’s Army of Spin-Doctors is Doomed to Defeat
Rev. William Alberts
Charleston: a Reality Check on Racism in America
Ellen Brown
A Franciscan Alternative: the People’s Pope and a People’s Bank?
Colin Todhunter
The Warped World of the GMO Lobbyist
John Wight
Who Will Join With Greece?
W. T. Whitney
Colombia’s Fensuagro Union is Revolutionary, Persecuted, and Undaunted
Mel Gurtov
Keep It in the Ground, Obama
July 06, 2015
MICHAEL HUDSON
Greece Rejects the Troika
Steve Hendricks
Will FIFA’s World Cup Sexism Ever Die?
Binoy Kampmark
Oxi in Greece
Gareth Porter
How US Spin on Access to Iranian Sites has Distorted the Issue
Peter Bach
ISIL and Ramadan in the Rag
Paul Craig Roberts
A Rebuke to EU-Imposed Austerity
Quincy Saul
The View from Mount Olympus
Robert Hunziker
Looking Inside Fukushima Prefecture
ADRIENNE PINE, RICHARD JOHNSTON, FIONA WILMOT, et al.
Seven Reasons to Scrap the USA’s $1 Billion Aid Package to Central America
Norman Pollack
Capitalism’s Self-Revealing Practices
David Macaray
Could Justice Scalia Be the One to Rescue Labor?
Linn Washington Jr.
Storm Smashes Chris Christie’s Presidential Candidacy
Benjamin Willis
US and Cuba: What Remains to be Done?
Robert David Steele
The National Military Strategy: Dishonest Platitudes
Joan Roelofs
Whatever Happened to Eastern European Communism?
Weekend Edition
July 3-5, 2015
Mike Whitney
The Pentagon’s “2015 Strategy” For Ruling the World
Jason Hirthler
Going Off-Script in St. Petersburg
Rob Urie
Greece and Global Class War
DIMITRIS KONSTANTAKOPOULOS
The Future of Greece Without Illusions
ANDRE VLTCHEK
Ecuador Fights for Survival – Against its Elites
David Rosen
White Skin Crisis
Jerry Lembcke
Nobody Spat on American GIs!
Stavros Mavroudeas
The Greek Referendum and the Tasks of the Left
Andrew Levine
Dumping on Dixie Again
Richard Pithouse
Charleston (It’s Not Over)
Arun Gupta
What Does It Mean to Call Dylann Roof a “Terrorist”?
Michael Welton
The Tragedy of Harper’s Canada
Brendan McQuade
The Right Wing Resurgence and the Problem of Terrorism
Chris Floyd
Heritage and Hokum in Rebel Banner Row
Victor Rodriguez
Puerto Rico’s Economic and Fiscal Crisis: Made in the U.S.A.
John Halle
Four Thoughts on the Sanders Insurgency