Cogito Ergo Non Serviam

Greece Accepts More Austerity Poison

The Greek parliament voted to continue poisoning its economy in a bid to secure further bail-out funds from the European Union to stave of a sovereign debt default next month. The Greek people took to the streets over the week-end, and the BBC reports that "45 buildings were burned in the capital, 150 stores looted or smashed." MSNBC states, "More than 120 people were hurt in the rioting. Authorities said 68 police needed medical care after being injured by gasoline bombs, rocks and other objects hurled at them, while at least 70 protesters were also hospitalized .... violence also erupted in Greece's second-largest city Thessaloniki and on the islands of Corfu and Crete." Five years of economic contraction due to bad policy will do that.

The Greeks and other members of the eurozone periphery are in deep debt, and they need to pay for their mistakes. At the same time, their creditors made some really bad lending decisions, and they need to suffer for that as well. That is the logic of free-market capitalism. However, there are ways to deal with the problem that will allow the periphery to recover, and then, there are the ways currently being adopted that will only serve to increase the misery. Removing government demand from the economy at a time when private demand is slack only aggravates the problem.

All states within the eurozone surrendered control over their monetary policy to the European Central Bank the day they joined. So, they cannot undertake the usual measures that would result in recovery, most specifically devaluing their currencies. Instead, all of the eurozone has to accept the same "one-size-fits-all" approach despite the vast economic and financial differences among them. The policies that would help Greece, Portugal, Ireland, Spain and Italy are anathema to Germany, the Netherlands and Finland.

Thus far, the ECB has engaged in the austerity prescription demanded by the teachings of F.A. Hayek and the Austrian School of Economics. The basic moves are: cut government spending to balance the budget, reduce regulation to let the free market flourish, and stand back to watch an economic miracle happen. It hasn't worked -- not in Greece nor in Britain (which may be in a double-dip recession despite having monetary sovereignty). When a patient doesn't respond to treatment, the doctor needs to change approaches. The ECB and the EU political leadership are merely reinforcing failure (putting Pelion atop Ossa, as it were); the Greeks have just approved: 15,000 public-sector job cuts, liberalization of labor laws and lowering the minimum wage by 20% from 751 euros a month to 600 euros. And this will not improve the economy.

The ECB would be better advised to flood the eurozone with money. This would allow the Greeks and others time to get their economies growing again. The debt-to-GDP ratio, the measure by which the ECB and markets are judging things, will not improve enough if GDP is not rising. Cutting interest rates and undertaking quantitative easing are much better prospects than more cuts.

Of course, this would likely spark inflation in many countries of the eurozone, and as the world is constantly told, this is a great German bugaboo. The Germans' experience with hyperinflation in the 1920s has made them very conscious of the dangers of inflation, the conventional wisdom goes. Any German who can remember that time is around 90 years old, so the experience is more folktale than fact. And 5% inflation is much different than 50% or 500%. Moreover, when the German export markets of the periphery stop buying German goods because of economic contraction, inflation will be the very least of its problems.

The fact is that inflation is a lesser evil than years of economic contraction, also known as a depression. The flames of Athens can be seen from Berlin, but they need not spread there.

© Copyright 2011 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.



Kensington Review Home