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Monday, April 20, 2015

Paul Krugman: Greece on the Brink

Is there any hope for Greece?:

Greece on the Brink, by Paul Krugman, Commentary, NY Times: ... At the end of 2009 Greece faced a crisis driven by two factors: High debt, and inflated costs and prices that left the country uncompetitive.
Europe responded with loans that kept the cash flowing, but only on condition that Greece pursue extremely painful policies. These included spending cuts and tax hikes that, if imposed on the United States, would amount to $3 trillion a year. There were also wage cuts on a scale that’s hard to fathom, with average wages down 25 percent from their peak.
These immense sacrifices were supposed to produce recovery. Instead, the destruction of purchasing power deepened the slump, creating Great Depression-level suffering and a huge humanitarian crisis. ...
It has been an endless nightmare... Can Greek exit from the euro be avoided?
Yes, it can. The irony of Syriza’s victory is that it came just at the point when a workable compromise should be possible. ...
By late 2014 Greece had managed to eke out a small “primary” budget surplus... That’s all that creditors can reasonably demand... Meanwhile, all those wage cuts have made Greece competitive on world markets — or would ... if some stability can be restored.
The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope.
But right now that deal doesn’t seem to be coming together..., creditors are demanding things — big cuts in pensions and public employment — that a newly elected government of the left simply can’t agree to, as opposed to reforms like an improvement in tax enforcement that it can. ...
To make things even worse, political uncertainty is hurting tax receipts, probably causing that hard-earned primary surplus to evaporate. The sensible thing, surely, is to show some patience on that front: if and when a deal is reached, uncertainty will subside and the budget should improve... But in the pervasive atmosphere of distrust, patience is in short supply.
It doesn’t have to be this way. True, avoiding a full-blown crisis would require that creditors advance a significant amount of cash, albeit cash that would immediately be recycled into debt payments. But consider the alternative. The last thing Europe needs is for fraying tempers to bring on yet another catastrophe, this one completely gratuitous.

    Posted by on Monday, April 20, 2015 at 07:28 AM in Economics | Permalink  Comments (45)


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