Is There Any Real Alternative To Austerity For Greece And The Rest?

| July 26, 2012 | 0 Comments
It's maybe everlasting debate between stimulation and cutting, but what
possibilities Greece or European Union missed or even made impossible
to make?

Photo from flickr user Bob baron

It’s hard to speak only about Greece when we talk about European  austerity measures. Spain is a new Greece these days  in terms of big anti austerity protests, suffer from cuts and chaos in society. That does not mean that  Greece got on their  foot and we have a new troubled country.  More likely  that sovereign debt crises is spreading.

That this will happen to Spain too was predicted  years ago. So now we just need to wait for prediction of bigger problems in Portugal and Italy to happen. Not only – Belgium and Ireland  are projected by the European Commission to run debt beyond the 95 percent level this year. Level of debt  that starts costing economic meltdown.

So while austerity measures does not stop fire to spread it’s the best time to ask for any alternatives to austerity.  And I’m not talking about the radical one – default. All Europe can’t and won’t go default, neither that would prevent struggle for Greece.  Neither I think that we need to limit ourselves to traditional alternatives such as Keynesian economics, what now offers Paul Krugman. Also if they are  wrong, that does not prove that Austerity is right. We might need to try harder and find the working alternative then.

What’s interesting that global debates about fiscal policy and austerity alternatives are not very relevant to what’s happening now in Europe, because non of them included European Union  effect. And EU changes the rules of the game, for example Greece had limited options to solve their crises on their own.

European Union as handcuffs

Greece couldn’t start printing more money or have other games with currency, because of not totally controlling the Euro. That’s one option of plugin deficit holes out of the table. Actually this was a problem in the first place, because it made possible to run out of the money, therefore Greece government were trapped to ask for bailout.

That puts a question about European central bank role and administration of monetary policy for all Euro zone. It would be wrong to accuse ECB of not caring about  Greece, they simple can’t take some action without consideration of the rest eurozones members. For example – issuing more money would jeopardize inflation rates to other countries.

As long as the question if administration of ECB executive board is equally shared is reasonable, it must acknowledge that ECB will never be able to use full powers of monetary policies, because of the complexity  of large currency. Euro seems to be more political project to strength the feeling of unity in Europe, that was started without a real central administration nor synchronizing countries fiscal policies.

However ECB played it’s rolle with buying banks debts and buying weak Government’s bonds and finally of course bailing out. It also helped to maintain low inflation, but all benefits of membership of large currency and EU will always come with an obligation to make common decisions with the rest of Europe. Greece even couldn’t get a loan from IMF on their own like Iceland did. IMF insisted to loan only together with  agreement on European bailout pack. So in this scenario if Europe wants austerity measures then there isn’t a lot that Greece can do.

Unused options

Without IFM and EU bailout there would be the only one option that is left for Greece  – to fund their government budget from inside. But it was barely an option since no matter how hard they would try they never find hundred billions to cover their debt.

First option that always comes first, in recession times, is taxation and bigger taxes for the richest. In terms of social justice this is an necessary option, but economically speaking it is a tricky one. From one point it should bring more funds to a budget, but bigger taxation can slow economic grow – creation of jobs and GDB growth. With global economic there are always a risk that business can ship to other countries with cheaper labors and bigger revenue after taxation. The best option in my opinion would be a balance – to tax big companies and make a special tax – free arrangements for small business, who will be  near bankruptcy anyway.

With radical situation it seems that Greece took the first option. That was also required by bailout packs from EU. They have  a progressive taxation system, raised luxury taxes, taxed heavily middle class and small business. So no wonder that more than 100 thousands companies went bankrupt:

  Overall the Greek GDP had its worst decline in 2011 with -6.9% a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005,and with 111,000 Greek companies going bankrupt (27% higher than in 2010) As a result, the seasonal adjusted unemployment rate also grew from 7.5% in September 2008 to a record high of 19.9% in November 2011, while the Youth unemployment rate during the same time rose from 22.0% to as high as 48.1%

Meanwhile about 20 billions euros per year were unpaid in taxes because of offshore companies and according to OECD the size of the Greek to be around €65bn (equal to 25% of GDP).

Hardly to understand why Greece didn’t stimulate small business, but a big part off blame for such  strategy goes to EU institutions that orchestrated Greece fiscal policy with bailout packages.

Another option that countries use to fund budget in recession is government bonds. Unfortunately it wasn’t Credit rating agencies immediately downgraded Greek governmental bonds to an even lower than  junk status. But Europe comes in help at this case. At first European central bank bought bonds from Greece and now with a creation of Europe bonds it will be possible to avoid bad ratings and high interest rates in government bonds.

Most important option in finding funds in recession time is obviously cutting government spending. We all know how EU and IFM bailout required Greece to make cuts in their welfare, but it’s hard to understand why there was no big cuts in other section. And there were many more options, for start – military.  It was reported that Greece spend about €2 bn. to buy submarines from Germany that they won’t use.  Considering German’s big role in bailout process it is an interesting fact with uncut military spending.

In my view another good option that was completely unused were stimulation of biggest incomes – tourism, agriculture and shipping industries. Growth always are mention as alternative to an austerity. Greece could try to lower prices of tourism, subside it. Unfortunately in reality some airlines are cancelling their flights to Greece islands because of council’s  refuse to pay for advertisements. Investment in tourism would always pay off because of tourists contribution to GDB and would help small business and employment. Needless to say all chaos and strikes made a negative impact towards tourism. With Euro rates going down it was very welcome situation to stimulate the  export, but many shipping companies got bankrupt. It seems that effort were made only to save  German banks in Greece.

Besides all recession problems Greece were pushed in crisis because of their own local problems such as corruption and bad tax collections.  And till now it is not fixed yet, wasn’t spotlight with EU bailout packs either. So is it worth to through the money to a sock with a hole?

 

Baltic’s example – not for everyone

Probably everybody heard about Estonian president cyber conflict with Paul Krugman. Paul Krugman was wrong to use a silly Estonian GDB chart to depreciate Estonian achievement. This is true that for Estonia and other Baltic states – Latvia and Lithuania austerity worked and helped to slow down crises. But Paul Krugman can take his steam off because Baltic states in my opinion cannot  be used as an example for global debate about austerity anyway. Those countries are small and still developing with a lot unique factors.

 

One of them are immigration, when 1/3 percentage of all population leave the welfare state it’s a bit of a relief for government budget and unemployment rates. And yes there were such huge number of immigration, especially in Lithuania (no1 @EU). Secondly those countries despite their economic boom still had developing economics and were quite poor in big picture. Even after all that Greece went through their economic  is still 15th in EU.  Lithuanian government managed to balance their budget by publishing 2bn
euros worth government bonds. This would be a joke amount for Greece. Not to say that small countries economy always works different from big countries and requires different measures. So this applies for Iceland too and people can’t so easily through arguments like – look how it worked for Iceland we should do the same everywhere.

Finally Baltic states managed to apply hard austerity measures without big public fight back. Not because they agree with that, people  were already used to live in lower living standards . More important they are new democracies without a culture of protests and democratic values. So even when unemployment hit records and food and petrol price were 40 % up, education and health care become not free anymore, there were no  strikes or protests like in Spain or Greece. People here are simple not mature enough for democracy.

What Paul Krugman and other  stimulation  supporters don’t tell

Mainly their idea is to get more money that will stimulate growth and that will pay back the gab in deficit. Simple. But stimulation pack goes mostly through public sector and there is a big debate if public sector  makes productivity or not. Most public sector activities wont even go to real GDB and economic growth rise  obviously from private sector and their activities that are not limited like on public sector.

Also more borrowing makes bigger debt and that only slows progress. That of course are relevant to austerity measures too, but with stimulation pushes debt quicker and bigger. Another important problem with stimulation is long time that it takes for changes. Strange that with knowing that stimulation supporters still back up politicians unrealistic promises.

But what annoys me the most is how Paul Krugman and Joseph Stiglitz feels comfortable to speak about Europe with such ignorance of what is European union’s policies and  European culture.  If they knew more about  EU political reasons, then maybe they would understand why there is no such option as withdraw from Euro, how Euro important for all EU integration. And most what all those USA economist lack is spotlight of diversity of European sovereign debt crises. Every single country different factors – Spain regions, Greece local system, Ireland real estate problem. EU are doing now what were doing all the time – bringing balance and union in diversity.

What austerity measures supporters don’t tell

There a lots of holes in austerity system too. First  austerity measures do not entire  stimulates spending and therefore GDB growth.
People either will have less money to spend, buys the same amount with more money or puts into savings. Austerity can in fact make everything worst – bigger unemployment  will lead to bigger welfare therefore bigger deficit.  Greek has subsequent recession that were happen part of austerity measures too. Actually there are a good question if there really are subsequent recession or is this a failure of austerity and Greek government to fix their system.

But of courses the biggest reasons  urgently to find an alternative is the public reaction. You cant’ argue about austerity being acceptable way to control macroeconomics with such disagreement of society and punch to a living standards. Of course  that doessn’t mean that famous Keynesian stimulation wouldn’t cost strikes or protest. The long time that it takes with stimulation to lower unemployment rates can make society angry. Occupy movement in USA are example of that.

European fiscal treaty – the end of discussion?

Macroeconomics are quite new subject and we need discussions about alternatives and different discussions in Europe because of unique system and different use of monetary and fiscal policies, large currency that never been discuss in economics textbook before and not from EU politics prism.

But it seems that with signing European fiscal treaty  all those discussions ends without a real start. Europe choose austerity monopoly in a fight with a recession.

In other hand when situation is critical and requires quick actions there is no time for experiments and you need to choose the best option that economists have.  Not to forget that one of the biggest task of European fiscal pack  is to discipline governments to balance their budgets and not to run in big debt.

If wee look back the biggest impact to Greek and the rest problems were uncontrolled government borrowing and too big debt.

So maybe this is the best alternative to austerity – balance your budget so you never run in such problems that you would need to take austerity measures.

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Category: Explanatory, Feature, International

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