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Credit Stimulus Not Austerity

Is Greece on the Rebound?

by MARK WEISBROT

It was nearly four years ago that the Greek government negotiated its agreement with the IMF for a harsh austerity program that was ostensibly designed to resolve its budget problems.  Many economists, when we saw the plan, knew immediately that Greece was beginning a long journey into darkness that would last for many years.  This was not because the Greek government had lived beyond its means or lied about its fiscal deficit.  These things could have been corrected without going through six or more years of recession.  It was because of the “solution” itself.

Four years later, Greece is down about a quarter of its pre-recession national income – one of the worst outcomes of a financial crisis in the past century, comparable to the worst downturn of the United States’ Great Depression.  Unemployment has passed [PDF] 27 percent and more than 58 percent for youth (under 25).  There are fewer Greeks employed than there have been at any time in the past 33 years.  And real public health care spending has been cut [PDF] by more than 40 percent, at a time when people have needed the public health system more than ever.

The IMF is the subordinate partner in the “troika” (including the European Central Bank and the European Commission) that has been calling the shots for the Greek economy these past four years, but it is the one in charge of putting numbers on the page.  It repeatedly projected economic recoveries for 2011, 2012, and 2013 that did not materialize.

Now the IMF is projecting economic growth for 2014.  But this time they are probably, finally, going to be right.  It is vitally important that we understand why.

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 [PDF] (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.

Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This essay originally ran in the Guardian.