Greece, Austerity and the European Monetary Union

In the next couple of weeks, Greece will elect a new government and according to the polls, the emerging Syriza party could form that government.  They are calling for an end to austerity measures and their Marxist Communist roots are causing quite a bit of concern in the wider Europe.  Greece, austerity and the European Monetary Union are a heady mix! But regardless of who wins this election, Greece faces substantial problems. Among them, a huge, and growing, public debt. Craig Barfoot spoke to Greek economist Dr Yiannis Kitromilides, an Associate Member of the Cambridge Centre for Economic and Public Policy, Department of Land Economy, University of Cambridge, about the current situation and the position of Greece within the European Monetary Union (EMU). He started by asking Dr Kitromilides  to comment on the repeated narrative that high public spending and widespread tax evasion, combined with the credit crunch, were the causes of Greece’s problems. Yiannis Kitromilides:  This narrative is correct.  There was widespread tax evasion, and avoidance. There is tax avoidance in most countries, but there was tax evasion on a large scale in Greece; there was corruption; an overblown public sector (politicians were creating jobs in the public sector and employing their supporters, even in key positions). Craig Barfoot:  so where are we now? YK: The current economic situation in Greece is best compared to the economic situation in the US in the 1930s.  Since 2009 the economy has lost 25% of its output, they are 25% poorer, unemployment is 25%, youth unemployment is about 60% and the prospects of growth are – as in the wider Eurozone – quite bleak.  And yet the debt, the original form of the problem, is increasing. So, after five years of sacrificing all this output the prospects are bleak. CB: When we talk about austerity measures specifically for Greece, what was implemented? YK: Austerity measures are those measure imposed in order to produce a balance in the annual budget.  The reason you owe money is that you are spending more than you’re earning, so if you are an individual who wants to avoid insolvency the only way to get out of it is to cut down on your spending and increase your income. If you apply this to governments, it means cutting government spending and increasing taxes, as in Greece. CB:  That sounds reasonable…. YK: But this is a process that many economists believe to be counterproductive. If you are trying to pay your debts as a country, you must not look at the solution for an individual family.  It is what the economists call the ‘fallacy of composition’ - what is true for the part is not always true for the whole. This is something that has a long history in economic thought going back to the 1930s, when Keynes argued along similar lines about what needed to be done to deal with the 1930s depression in the UK and USA.  That if you are in a bad situation economicallhy, the solution is not to act in the same way as a family in economic difficulties (ie to impose austerity), but rather to do the opposite. It sounds paradoxical and counter intuitive, but some people say this is what needed to be done, not only in Greece but also in other indebted economies.  By trying to solve the problem of indebtedness by austerity, you are making the problem worse. CB:  Who does Greece owe its debt to? YK: Not to the European banks, though they were the original lenders, but rather to international institutions like the International Monetary Fund (IMF) and the European Central Bank (ECB) - which means Greece owes money to the other members of the Monetary Union. Syriza is asking them to cut the debt by 50% - to forgive 50%.  The other 50% they say they will repay as soon as Greece achieves sustainable growth of 3-4%.  They says this was exactly what was done for the German debt in 1953 - it is what the allies agreed – to give Germany more time to repay,