THE BLOG

All We Are Saying Is Give Greece a Chance

Six years after the onset of the global financial crisis, the Greek economy is still in decline. Last year it fell by over 5 percent. On a per capita basis, Greek incomes have fallen by over 14 percent since the onset of the crisis. To get a sense of how difficult this experience has been, consider that U.S. per capita income declined by 5.1 percent from 2008 to 2010. Since then, the U.S. economy has begun to recover, so as of the end of 2012 our per capita GDP is down 2.5 percent from its pre-crash peak in 2008 (however, let me note that those who experienced the bulk of the losses during the recession and those who have benefitted the most from the recovery are very different groups of people).

Greece's unemployment rate, which was below 8 percent at the beginning of the crisis, has soared to 26 percent. As of yet, there is no sign that this trend is about to change course. Ah, but what of the young people who are the future of Greece? Here the numbers are so staggering as to make one incredulous. Fully 62.5 percent of Greece's young people are unemployed which tops the almost-as-absurd 56 percent of Spanish youth.

Now, readers may know that in official discourses unemployment is usually attributed to the absence of "education" or "skills." Structural features such as bank crises, especially if they are exacerbated by a fixed exchange rate (called the "Euro"), and/or senseless austerity measures, are never identified as the cause of mass unemployment. But in this instance this tired old narrative may be revealed for what it is because 30 percent of Greek and 40 percent of Spanish youth have a college degree. By any historical standard, this is a very well-educated generation of young people. Nevertheless, this entire generation is being denied the primary means to learn a trade and become full members of society -- which is the opportunity to have a job. Worse, numerous statistical studies have shown that prolonged unemployment early in one's life is correlated with lower incomes throughout the rest of one's career. Stated simply, southern Europe is sacrificing a generation of its young people to the idols of EU driven austerity policies.

Remarkably, the Troika (the International Monetary Fund, the European Central Bank, and the European Commission) has convinced itself, solely on the basis of Greece's falling wages, prices, and trade deficit, that their actions are enhancing Greece's "competitiveness." They seem unaware that one of the greatest contributors to the "improved" trade deficit they are observing is the decline in Greek incomes (because people without money buy fewer things, including imports). The Troika seems unaware that an entire generation of Greeks (along with a generation of Spaniards and Italians) will be denied the opportunity to learn the on-the-job skills that are the true foundation of "competitiveness." They seem to be unaware that investment in productive capacity and bank credit tends to shy away from places where incomes and price levels are falling (the reason is that when people's earnings decline they find it harder to pay back their loans).

The Troika is correct in its belief that the fiscal problems of the Greek government are notorious. But these problems are of long-standing and for that reason fail to explain why the government's external debt rose by almost a third between 2008 and 2010. While it is true that the government needs to address the equity and efficiency of its tax system, it is equally clear that the global financial crisis is the primary reason for the sudden collapse in the government's finances. You cannot, as they saying goes, get blood from a rock. Moreover, it should not be necessary to point out that even if the tax system worked perfectly, it would be the height of folly to raise revenues during a deep recession.

With all this bad news what, pray tell, is the solution being advanced by the Troika? According to recent IMF reports, the approach taken was theoretically and practically sound. After a recent assessment that admitted a few errors and flawed assumptions, they have indicated that they fully intend to do more of the same. They are calling for more wage-cutting, more price-cutting, more budget-cutting, and more tax raising, in short more of what technocrats call "internal devaluation."

Let me break this down. The Troika knows that they cannot depend upon spending from Greek consumers to restart the economy (household incomes are too depressed), and government spending is scheduled to shrink per the conditionality agreement dictated by none other than the Troika itself. Private investment is unlikely to be a source of growth as few firms are willing to add productive capacity in the midst of a recession.

By default, this leaves exports as the sector most likely to drive a turnaround in the Greek economy. However, there are several barriers to exporting more goods. The most immediate of these is the fact that Greece's primary trading partners suffered badly during the recession. Moreover, being a member of the Eurozone precludes boosting exports through the simple expedient of devaluing the currency. Ergo, the only remaining "solution" is to "enhance competitiveness" by reducing wages in the hope that firms facing lower costs can, in time, lower the prices of the goods they wish to export. To accelerate this process, the IMF and its colleagues are pushing for what they term "labor market flexibility" by pressing for the rolling back or elimination of labor market protections, privatizing firms, reducing or weakening regulations, etc.

This relentlessly deflationary program is slated to remain in place until such time as -- are you ready for it -- "confidence is restored." But really, the idiocy has to stop. Greeks without jobs will never develop any skills, much less the skills to become competitive in international markets. Firms without customers would be foolish to invest in more capacity or hire additional workers. Banks whose clients are struggling to survive in a deflating economy are unlikely to lend. In a word, the IMF's program is not working because it cannot work.

Sadly, the leadership of the European Commission is also blind to the politics of downward mobility. In a word, downwardly mobile become desperate. Being desperate they turn to the political system for solutions. If it is impervious to their concerns, they will seek solutions from groups outside the mainstream. None of this is new and the dynamics are certainly familiar to historians of politics. For that reason no one can be surprised that a fascist-inspired political party, "The Golden Door," has emerged from out of nowhere to achieve fourth place in the last elections.

Lest the point be unclear, nothing the Greek people have done merits the ongoing and systemic destruction of their lives and livelihood. The Troika's program is not helping the economy and is dangerous politically. It is time to give Greece a chance.

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