Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 14 November 2014

Growth vindicates Greek Austerity

I cannot resist quoting from this editorial in today’s Greek edition of the FT.

Greek government and Troika’s austerity policy vindicated

Since unveiling its austerity strategy to reduce its yawning budget deficit in 2010, the Greek government together with the Eurozone’s Troika has faced immense pressure to change tack. An alliance of Keynesian economists and opposition parties has accused them of choking off growth. The prophets of doom predicted years of stagnation with soaring unemployment and falling living standards.

After a run of positive growth numbers this year, the Greek government and Troika have reason to feel vindicated. They have won the political argument. True, the Greek economy is still a quarter smaller than its pre-crisis peak. But the current acceleration looks like the beginning of a sustained recovery. The anti-austerians grumble that the upturn would have come earlier had the Greek government and Troika eased up on the fiscal squeeze. This is impossible to prove as economic history offers no counter-factuals. What we do know, however, is that the critics overstated the obstacles standing in the way of a recovery. Their position was too extreme and they have found themselves snookered.

OK, the FT here is the Fictitious Times, but otherwise I have kept pretty close to the beginning of this real Financial Times editorial about somewhere else. The numbers may be different, but the reason why this editorial would be ridiculous are exactly the same as why the original editorial was. And yes, I know I have complained about it a few times, but because the FT is a quality financial paper that generally gets things right, and which other journalists look to for economic expertise, it is important not to forget the occasional lapse from otherwise high standards. And the FT are not the only respected economists who sometimes mistakenly treat growth from a deep recession as an indicator of a successful policy.


  1. Of course, we don't want growth from a deep recession, do we?

    1. We want growth, but without the deep recession. Surely that's obvious?

    2. Surely, loss of living standard is inevitable when you have lived beyond your means for some time? That some people don't want to accept that they have been living beyond their means is a given - yet it does not make it untrue. Particularly in the case of Greece.

    3. Surely, it's circular to identify the cause of a deep recession as living beyond your means, where the evidence for having lived beyond your means is the subsequent recession. Perhaps the highly restrictive monetary and fiscal policies increased the degrees to which the Greeks have lived beyond their means? Although the Greeks surely lived beyond their means, six years of falling nominal output surely didn't help them to reset business arrangements.

    4. "Surely, loss of living standard is inevitable when you have lived beyond your means for some time?"

      Loss of living standards is different from loss of economic output and mass unemployment. In theory a reduction of living standards could be achieved without a loss of output or employment by a reduction of imports and increase in exports.

      Even at the level of the (questionable) "common sense" analogy with a household - would it make sense for a family that suddenly discovered it had been "living beyond its means" to reduce it's labour output by a quarter (there were c.25% fewer Greeks at work in 2013 than in 2008)?

    5. "In theory a reduction of living standards could be achieved without a loss of output or employment by a reduction of imports and increase in exports."

      I theory, yes. In practice, it's not possible unless you adjust your real exchange rate. Doing it via internal devaluation doesn't work. Adjusting the exhange rate does. A money-financed deficit spending to reduce taxes on labor, too.

    6. even if greeks lived beyond their mean, the spanish did not; the irish did not; their sins were different.

    7. How do you explain Germany in the early 2000s and wage moderation, Marco?

  2. There’s a crucial difference between Greece and the UK: we issue our own currency while Greece doesn’t. That means there is no excuse for extended periods of austerity here (in the sense of extended periods of above NAIRU unemployment). In contrast, the EU periphery needs to regain competitiveness relative to Germany, and absent German willingness to endure excess inflation, that means periphery deflation (in both senses of the word). The social costs may be high, but that’s common currencies for you.

    1. Which is the reason why common currencies are a huge mistake.

    2. Why should Germany endure excess - I repeat: excess - inflation? Give me one good reason.

    3. it is the job of the ECB to maximize out put in the EMU; if it does that by using QE and helicopter money an idea named after Milton Friedman for God's sake then let the chips fall where they may.

    4. rob sol15 November 2014 18:20

      The ECB's mandate is price stability. When it does something it has to look where the chips fall.

    5. "Which is the reason why common currencies are a huge mistake" - Marco Cattaneo

      But where do you draw the line? Your argument seems based on matching the currency with the economic needs based on output and other factors. If you say Italy has a problem because it shares a currency with Germany, why can you not also say that the impoverished South of Italy should have a separate currency to the richer North of Italy? Why should Scotland or the deprived North of England or Wales not have their separate currencies, so as to make them competitive with the richer South East of England?

      Now, if you tell me there are separate mechanisms that support growth in the depressed areas, why would these same mechanisms, if they are so good, not also work on a Europe-wide basis?

      Surely, this argument has more emotion attached to it than logic?

    6. Anon wants a reason why Germany should endure excess inflation. This isn't a totally foolproof reason, but for what it’s worth: they’ve joined a club / union called the EZ, and when you join any sort of club / society etc you sign up to compromising with other members.

    7. Ralph Musgrave16 November 2014 05:12

      They were blackmailed. Surely they have the right to resist.

    8. Ralph Musgrave16 November 2014 05:12

      What kind of a compromise is it that leads to excess?

    9. Dear Mr. Musgrave,

      You say:
      "when you join any sort of club / society etc you sign up to compromising with other members."

      Excellent thought. So what are your proposals for the British government about the European Union and the idea of exit?

      And even more interesting: What are yor proposals on the subject to the leadership of UKIP?

    10. if the ECB wants to get 0% inflation; that is fine, but it has and will inflict a lot of hardship. Explicit or not, the ECB should try to maximize GDP in the EMU. That is what people care about.

  3. Greece and uk there is teo country. Then greece and uk there,s a crucial different between. So they are face to very very problem. Ok many many thanks for your very imprtant post.
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