Thursday, May 6, 2010

Krugman on Greece

Here are some key bits from a NY Times op-ed by Paul Krugman on the crisis in Greece:
Consider the often-made comparison between Greece and the state of California. Both are in deep fiscal trouble, both have a history of fiscal irresponsibility. And the political deadlock in California is, if anything, worse — after all, despite the demonstrations, Greece’s Parliament has, in fact, approved harsh austerity measures.

But California’s fiscal woes just don’t matter as much, even to its own residents, as those of Greece. Why? Because much of the money spent in California comes from Washington, not Sacramento. State funding may be slashed, but Medicare reimbursements, Social Security checks, and payments to defense contractors will keep on coming.

What this means, among other things, is that California’s budget woes won’t keep the state from sharing in a broader U.S. economic recovery. Greece’s budget cuts, on the other hand, will have a strong depressing effect on an already depressed economy.

So is a debt restructuring — a polite term for partial default — the answer? It wouldn’t help nearly as much as many people imagine, because interest payments only account for part of Greece’s budget deficit. Even if it completely stopped servicing its debt, the Greek government wouldn’t free up enough money to avoid savage budget cuts.

The only thing that could seriously reduce Greek pain would be an economic recovery, which would both generate higher revenues, reducing the need for spending cuts, and create jobs. If Greece had its own currency, it could try to engineer such a recovery by devaluing that currency, increasing its export competitiveness. But Greece is on the euro.

So how does this end? Logically, I see three ways Greece could stay on the euro.

First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation; this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento — that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.

The trouble, of course, is that none of these alternatives seem politically plausible.

What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.
Paul Krugman is a very smart guy. I would bet that he has the right analysis of this situation. That means there are rocky times ahead financially for the whole world.

4 comments:

kanna said...

RY,
I also heard a short interview with Mr. Steve Forbes. Here is an excerpt.
If only the world would just give business more tax breaks...

Forbes said he believes the German Parliament will vote to approve the government's contribution to the EU bailout package for Greece, as France did yesterday. But he said it was very important that Greece undergoes systemic reform, and that other nations facing the fallout from Greece's near-bankruptcy must follow suit.

"The thing that on this to watch is not that Greece is going to have to go through austerity, but will they also make systemic reforms, like their tax code which is anti-business, so the economy can get back on its feet? You'll see the same thing in Britain: they know they have to cut back but they have to do it in a way that lets the economy recover?"

"But there's some self-reflection that might be important here as well," said "Early Show" anchor Harry Smith, "because as we look around the country, states like New York, Illinois, California, are looking at mountains of not only debt but deficit."

RYviewpoint said...

Kanna: I don't give much credence to anything Steve Forbes says. He is the billionaire offspring of billionaire Malcolm Forbes. He lives in a world I don't live in, and I'm sure he has no idea of the struggles of ordinary people.

His comment is the standard rich guy viewpoint: cut taxes, cut services, squeeze the people harder.

If anything, the last 30 years has proved that you need to stop squeezing the little guys and start squeezing the fat cats.

The one area where I might agree is on making the country more "business friendly". Not tax cuts, but find ways to help companies be more competitive. Unlike Forbes, I would stress tax collection since that seems to be a serious weakness in Greece.

I don't think Harry Smith is helping to be worrying about debts and deficits in the US. The fact is, every government has a deficit problem right now because tax revenues fall when the economy shrinks. Rather than cut services, governments should be focused on stimulating growth so that the tax collections will begin growing.

Canada pulled itself out of a perilous debt problem in the early 1990s by cutting government services and using economic growth the shrink the debt relative to the size of the economy. This approach worked.

thomas said...

The trick will be to avoid forcing reform or cutbacks on the average citizen. They will need to lead this from example and convince the people that it is voluntary or their idea not something that once again is sacrificing the lives and dreams of the people while the elite wealthy continue to live in luxury without any sacrifice on their part. If this cannot be done in this way or close to it there will be a lot of trouble to put it mildly and for G audiences.

Greece is the deciding and maybe the trigger state for Europe.. If this goes wrong it will lead to greater and more widespread problems that could lead to even worse events and catastrophe for the whole world (not to be an alarmist).

RYviewpoint said...

Thomas: I'm reading that the EU has come up with yet another package deal to save Greece and prevent the conflagration from taking down Portugal and Spain. I sure hope it works.

Ultimately what will work is something that is seen as fair. The problem is a debt crisis. People have lived for too long beyond their means. Most people have some ability to tighten their belts, but they aren't willing unless they see this as a shared burden that is shared fairly. I sure hope the EU has found a way that spreads the burden fairly. (I notice that 5 German academics tried to stop the deal calling it "illegal". But a court in Germany has now quashed that lawsuit.)

This financial crisis is like a war. Some hotheads yell "do or die!". They sell the idea that the war will cost little (think of Bush in 2002/3) or that the debt crisis is some "conspiracy" and you get rioters in the streets saying "no way!". But selling war or refusing to face financial facts of life only make the outcome worse.

What the EU has done is swallowed a bitter pill. Greece was the author of its own doom, but if the EU ignored the current crisis, then everybody goes down. So the EU has had to collectively tighten their belt to save Greece. Meanwhile a portion of Greeks are in the street screaming "no way!". That is insanity. If they don't work with the EU and reform, then the only other way is a complete economic meltdown, mass unemployment, mass starvation, a future so grim it frightens a rational person even to consider it.