Paul Krugman on the Greek crisis

Paul Krugman, columnist with The New York Times and winner of the 2008 Nobel prize for economics, opened his article on the Greek financial crisis with  “It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency – above all, the kind of fiscal and banking union automatically protects (people).”

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Don’t you just love it when guys like Krugman demolish a large proportion of the world economy in one sentence, well in this case a paragraph!

He goes on to say “You need to realise that most – not all, but most – of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But since then it has repeatedly slashed spending and raised taxes. Government employment has fallen more than 25 per cent, and pensions (which were indeed much too generous) have been cut sharply. If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus.

So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.

And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive. This is what happened, for example, in Canada in the 1990s, and to an important extent it’s what happened in Iceland more recently. But Greece, without its own currency, didn’t have that option.”

And finally whether the Greek population should vote yes for a continuation of the austerity measures, “They shouldn’t, for three reasons. First, we now know that ever-harsher austerity is a dead end: After five years Greece is in worse shape than ever.

Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there’s not that much more damage to be done.

Finally, acceding to the troika’s ultimatum would represent the final abandonment of any pretense of Greek independence.”

My other post on the Greek crisis

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