May 09, 2012
The Guardian Unlimited, May 7, 2012
Austerity was the big loser in the Greek elections on Sunday. The two main Greek parties, who endorsed the austerity pact signed last year, together got just over one-third of the vote. This is an extraordinary rebuke given that between them, these parties have governed Greece since the end of the dictatorship in 1976.
On the anti-austerity side, a left-wing coalition came in second with around 17 percent of the vote. More ominously, a far right anti-immigrant party, which is also anti-austerity, received almost 7 percent of the vote.
It is important for people elsewhere in the world, and especially in Europe, to understand that the Greek voters were not just being cranky kids who refuse to take their medicine. There is no doubt that Greece’s government and economy were poorly managed in the years leading up to the crisis.
However the current path of austerity does not offer the country a path to a better future. The current path of austerity is simply a path of pain as end in itself. This can be seen from examining the official projections.
The IMF now projects that 2012 will be Greece’s fifth successive year of economic contraction, with 2013 being a year of stagnation. Even with growth projected to resume again in 2014, Greece’s per capita income is still projected to be more than 8.0 percent lower than it was a decade earlier. Its unemployment rate, which is currently hovering near 20 percent, is still projected to be almost 15 percent in 2017. And, its debt to GDP ratio is projected to be 137 percent in five years, far higher than it was at the onset of the crisis.
This is not a path to a healthy economy. And it’s important to remember that the projections from the IMF and European Central Bank have consistently proven to be overly optimistic. Given this economic reality, it’s difficult to see why the Greek people should go any further with such a disastrous policy.
The argument usually given is that there is no alternative. This is not true. Leaving the euro and bringing back the drachma is an alternative, however disruptive this may prove to be.
Leaving the euro would spark a financial and political crisis, but at the end of the day, this move would almost certainly leave Greece better off than staying on its current dead end path. With a devalued currency, Greece would become much more attractive as a tourist destination. Its agricultural exports would be much more competitive in the European Union and elsewhere.
It would be necessary to renegotiate debts. Where this can’t be done, there will inevitably be many bankruptcies for those with large euro denominated debts. This process will not be pretty, but there can be little doubt at this point it is the better path forward.
The model here is Argentina. After it defaulted and broke its currency link with the dollar at the end of 2001, its economy plummeted for three months. It stabilized in the second quarter of 2002 and then began six and half years of solid growth that was only derailed by world economic crisis in 2009.
There are reasons why Greece will have a more difficult path than Argentina; most importantly Argentina always kept its own currency. But even if Greece can only achieve half the pace of growth sustained by Argentina, its prospects from going this route look far better than staying in the euro.
There is an alternative path that would be preferable to Greece leaving the euro: this would be the path where the ECB abandons its austerity path altogether. This would involve some sort of ECB guarantee for the debt of Greece and other heavily indebted countries, a relaxation of budget restrictions across the euro zone and most importantly a commitment to sustain a higher rate of inflation in Germany and other core euro countries. The latter is essential since it is the only way that Greece and other peripheral countries will be able to regain competitiveness if they stay in the euro.
Two weeks ago, the possibility of this sort of change of course seemed far-fetched. Today it still seems unlikely, but following the elections in Greece and the defeat of Sarkozy in France, a major change in course is beginning to look like a possibility.
The leadership of the ECB and Germany may not recognize it, but their current path is unsustainable. The only question is whether they can adjust before the institutions of Europe begin to collapse around them. Yesterday, the voters in Greece gave this message as clearly as possible.