A Deep Contrite Apology to the people of Greece
By Shlomo Maital
Greece’s new prime minister Alexis Tsipras has been sworn in and vows to lead an anti-austerity coalition. He could possibly lead Greece out of the euro and back to the drachma. This would be unspeakably painful for Greece, in the short run, but possibly best in the long run.
Meanwhile, we economists all owe Greece an apology. We have caused immense suffering, needlessly, to 11 million innocent Greeks. According to Nobel Laureate Paul Krugman, economists drafted the ‘troika’ agreement in May 2010, under which the IMF, European Central Bank and European Commission lent Greece money, in return for extreme austerity. Greece had no choice in the matter.
This document assumed Greece would suffer only a small contraction in 2011 and by 2012 would be recovering. Yes, unemployment would rise to 15 per cent (Would Merkel’s Germany ever accept such a scenario??) in 2012, but then it would fall rapidly. Why? Because austerity would work quickly, heal Greece’s economy, and restore growth.
Really? Did the troika economists ever find a single (just one! One!) example in history where austerity worked?
No. There are none.
Instead, Greece suffered a depression, 28 per cent unemployment, its young people migrated abroad, learning German for instance, and youth unemployment reached nearly 60 per cent.
Greece kept its part of the bargain, slashing public spending by 20 per cent. But the promised benefits of austerity turned out to be disaster. That is why Tsipras won the election. And it is why the euro has dived. The EU and its economists brought it on themselves.
It isn’t complicated at all. To heal a budget deficit, you need a growing economy, because when the GDP grows, tax revenues grow much faster, 1.5 times faster. To get a growing economy, you need spending and demand. If people can’t spend, because they have no jobs and their wages are falling, only the government can take up the slack. But if you slash government budgets, the economy will shrink, not grow, and the debt problem will become even worse. That is what ‘austerity’ does. It’s pretty simple.
On behalf of my fellow economists, I would like to apologize to the people of Greece. We screwed up. And worse of all — none of those responsible seem willing to admit it.