Now that Greece has voted "no" on the latest proposal by the European Commission, the European Central Bank, and the International Monetary Fund (the so-called "troika"), will Greece stay in the eurozone? If so, Greece may save the euro.
Why is this choice even necessary when most economists know the solution to Greece's problems--a combination of easing the most draconian conditions that have really been imposed on all EU and eurozone members and enacting a European version of our Marshall Plan that would reinvest in productive capacity to bring back growth to those countries suffering most from the worst recession since the Great Depression?
And it isn't just Greece. As Paul Krugman's most recent op-eds have asserted, countries from Finland to Spain to even the Netherlands are also suffering from too much austerity--austerity in the sense of focusing too much on cutting spending and raising taxes to pay down the debt accumulated mostly from the Great Recession, when more spending is needed to speed up economic recovery, which is the only proven way to pay down debts:
The truth is that Europe's self-styled technocrats are like medieval doctors who insisted on bleeding their patients -- and when their treatment made the patients sicker, demanded even more bleeding. A "yes" vote in Greece would have condemned the country to years more of suffering under policies that haven't worked and in fact, given the arithmetic, can't work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.
It is a dilemma brought on mostly by the EU's massive bureaucracy that rules almost every facet of EU life. One commentator once said the regulations that must be satisfied to join the EU would rise to 5 feet if stacked vertically.
Included in those requirements are economic policies--such as a rule that budget deficits cannot exceed 3 percent. Another condition even more draconian is an inflation target of 2 percent. It is mainly a German condition intended to avoid the horror of the sort of economic collapse that led to Hitler and the Holocaust. Yet without a higher and more flexible inflation target, sustainable growth cannot happen. The recovery from George W. Bush's first recession only happened with massive deficit spending and as much as 5-percent inflation at one time.
The horror of hyperinflation is really no longer possible in a modern world so interlinked by trade and finance (and modern technology that produces anything required cheaply and quickly). In other words, we suffer from an oversupply of goods and services that makes deflation the realest danger.
In fact, Japanese-style deflation has been more the norm since the 1980s, since the Fed's then-chairman Paul Volcker's focus on austerity (in the form of double-digit interest rates) to bring down America's sky-high inflation of the early 1980s.
Then why isn't there more discussion among the troika of debt relief, which seems to be Greece's main problem? The austerity policies foisted on Greece by the troika have put Greece into a major depression, with 25-percent unemployment and a 25-percent reduction in its economic growth. And nothing but higher and sustained growth can ever pay down the huge mountain of debt -- some $323 billion at last count -- owed to its creditors. But to allow that to happen, Greece's debt load must be eased in some way.
Columbia University economist Jeff Sachs, a specialist in economic development, has lamented Germany's insistence on adhering to agreed-upon "rules" rather than allowing more flexibility in Greece's debt repayment terms:
Sovereign debts have been restructured hundreds, perhaps thousands, of times -- including for Germany. In fact, hardline demands by the country's US government creditors after World War I contributed to deep financial instability in Germany and other parts of Europe, and indirectly to the rise of Adolf Hitler in 1933. After World War II, however, Germany was the recipient of vastly wiser concessions by the US government, culminating in consensual debt relief in 1953, an action that greatly benefitted Germany and the world. Yet Germany has failed to learn the lessons of its own history.
And we know what happens when history repeats itself. Even Germany has to know. So saving Greece is important for a number of reasons--not just European unity. Foremost is the need to reform an unworkable system, to make it more flexible, with plans that would already be in place to aid countries that have suffered the most from the Great Recession -- which, lest we forget, was almost a repeat of the Great Depression.
© Harlan Green 2015