THE BLOG
01/08/2015 06:02 pm ET Updated Mar 10, 2015

Hello 2015. Goodbye Austerity?

Greece is facing front, looking towards the new year and the upcoming January elections. But it would be foolish not to learn from a look backwards, as well.

At the Athens economics conference, Europe At The Crossroads, the participants were a diverse collection of policymakers, overflowing with disagreements on the very best route to growth. Nonetheless, with one notable exception (the leader of Ireland's central bank, endorsing European Central Bank policy), the overwhelming majority united on a single principle:

The bailout and its related austerity programs have failed miserably.

That consensus could not come at a more significant moment. The electoral contest between Syriza, with its fiercely anti-austerity outlook, and the New Democracy coalition, with its determination to stay the course, will reach a head on January 25th.

The home base of some of the conference's strongest austerity critics may come as a surprise. Peter Bofinger of Germany, the only Keynesian in Chancellor Angela Merkel's council of economic advisers, described the risks the current approach poses for Greece, France, and Italy, and outlined why a continuation also threatens to destroy the rest of Europe.

That includes Germany. Pointing to serious weaknesses in its economic foundations, Bofinger particularly singled out the FRG's problematic physical infrastructure, an issue echoed by Elga Bartsch, Chief European economist at Morgan Stanley. And Bofinger raised the widely ignored fact that -- despite endless German bellyaching about the so-called EU drain on its wealth -- Germany's contribution to other members of the European Union has been exactly zero euros.

Another German, Heiner Flassbeck, also made the case that the eurozone is headed for disaster unless its southern nations band together against the fiscal tightening being promoted by Germany. A former deputy economics minister of Germany, Flassbeck believes that Greece will bear a heavy burden if it must act alone to oppose the faith in austerity that has become an EU leadership religion.

The event's real highlight was the presentation by Yannis Dragasakis, an MP of Syriza and an architect of its economic program. By now, most of us are familiar with what the Syriza coalition's rejection of austerity might entail. Key moves would include negotiating a write-down on debt of the public sector bailout funds, while protecting the private sector investors who were subjected to a write-down in 2012. In addition, social spending would be increased as the long, difficult process of ending the humanitarian crisis began.

Can these policies create growth? They are on the right track. At the Levy Economics Institute we've documented the benefits that would result from turning away from austerity programs. The Levy Institute's presentation delved into many of the problems Dragasakis described, and shared many of the theories behind Syriza's approach.

And, while the International Monetary Fund and European leadership are optimistic about Greece's economy, our research showed why that optimism is unfounded and wrongheaded.

We demonstrated that Greece's reduction in output since the start of the recession is worse, in relative terms, than the 1929 US depression. Real GDP has fallen for 23 consecutive quarters, and both median income and real wages have dropped about 30 percent since 2010. We showed why the fall in the unemployment rate is not due to the creation of new jobs, and that the risk of sinking into poverty continues. Manufacturing and construction also continue their descent. Credit availability is low, and debt is high. Signs of recovery are limited to the tourism industry, which simply can't hold up everything else. With all this and more, we illustrated just a fraction of the damage.

But we also presented a reasonable -- and feasible -- way out. Our alternative policy options included a New Deal for Greece plan, with programs similar to US depression-era initiatives. And we considered debt-freezing, with a temporary suspension of interest payments.

When we modeled these scenarios together, new or expanded programs -- like public job creation, for example -- used funds that would otherwise have been applied to debt servicing. Additional support would come from redirected structural funds that have already been approved for Greece straight out by the EU.

We saw that when debt forgiveness plays a central role, as it did for Germany at the end of World War II, and is incorporated together with New Deal-type investments that target public needs, the resulting growth is impressive.

Athens conference participants acknowledged the economic devastation and needlessly ruined lives left in austerity's wake. Greece and the rest of Europe really are at a crossroads. The different routes are clearly marked. It is time to choose the right one.