Should Greek Voters Listen to American Economists?


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July 03, 2015 00:05 EDT

Economists writing in The New York Times put forth a weak argument to vote “no” in the Greek referendum, says former Prime Minister John Bruton.

Paul Krugman, in The New York Times, urges the Greeks to vote “no” in the referendum on July 5. So too does Joe Stiglitz, in another article for The Guardian. Is this serious advice, or an unhelpful extension to Europe of an ongoing American polemic?

Krugman says the euro was a “terrible mistake,” because he claims it failed to insulate the public finances of eurozone states from bubbles in particular countries—like, he says, the US system does. In fact, the US only does this to a limited extent and, unlike the European Union (EU), it has no general bailout fund for states.

If I recall correctly, our present collapse in confidence originated in the United States, in a housing bubble in a small number of American states, which eventually engulfed the whole world. The US system did not prevent that. Puerto Rico, a US dependency that is in the dollar zone, has got itself into a Greek style debt trap, without the US monetary union—which is much older and stronger than the EU one—being able to prevent it.

Krugman says that “most of what you hear about Greek profligacy is false.” He makes this bizarre claim on the basis that Greece has made cuts and tax increases since 2010. He completely ignores the profligacy, poor tax collection and the debt accumulation that went on for decades before that, when Greece erected a completely unsustainable pension regime on the strength of borrowed money.

According to Krugman, since 2010, the Greek economy has collapsed because of “austerity.” However, he fails to outline what the Greeks might have used for money since 2010 if, as he seems to advocate, they had continued with their previous “non-austere” spending policies. They would not have been able to borrow the difference on commercial markets. Where would they have got the money?

Just because a country is in the eurozone, it does not mean it can have an unlimited call on the taxes or loans of other euro members.

While there is more to do, like euro-area-wide deposit insurance, the EU has remedied many of the initial design flaws in the euro, something Krugman does not acknowledge. He says that “even harsher austerity is a dead end,” as if cuts and tax increases were all that the EU has been urging unsuccessfully on the Greeks.

Product and labor market reforms, opening up the professions, better tax collection and privatizations have been an important part of the recipe urged on Greece by the European Union, and these would greatly improve the allocative efficiency of the Greek economy and promote growth. Greece needs to move its human resources out of unproductive activities, and into areas that will earn money from abroad—and the EU reforms will assist that.

Yet Another Economist

Another Nobel Prize-winning economist, Joe Stiglitz, calls for a “no” vote, but he is more extreme. Stiglitz claims the eurozone was ”never a democratic project.” He seems to have completely forgotten that the Maastricht Treaty, which created the legal basis for the euro, was approved by the elected parliaments of every state that is currently a member. It was approved in referenda in several countries, including France and Ireland. Furthermore, each of the Eurogroup of Finance Ministers, who make all the key decisions, represent democratically elected governments.

Greece was not forced to join the euro. This was a free choice of the Greek government. Now, governments everywhere would sometimes like to repudiate some decisions of their predecessors, but if that luxury is to be afforded, it would destroy the basis for credit and interstate relations.

Stiglitz makes a more substantial point when he says that a good deal of the money—lent to Greece by the taxpayers of other EU countries and the International Monetary Fund (IMF)—has gone to help them pay debts they owe to private creditors. But he fails to point out that, unlike those of Ireland and Portugal, Greece’s private creditors have been obliged to take a haircut.

It is true that money from the EU has been used in part to repay banks the money they had put into Greek government bonds. Some of these banks were indeed French and German. But some were from outside the eurozone altogether, including from Stiglitz’s own country and from the United Kingdom.

Back in the 2010-12 period, thanks to the crisis that started after Lehman Brothers went south, there was a legitimate public interest, a public good, in preventing a run on any of these banks. There remains a justifiable argument, however, that it was unfair the taxpayers of a few countries should now be bearing a disproportionate share of the cost of this public good, which the whole world has enjoyed. Yes, the taxpayers of the rest of the eurozone should, in moral terms, bear more of the burden.

But if that is the case, so too should the taxpayers of non-eurozone countries like the US and Britain, whose banks were also saved when Ireland, Greece and Portugal received help. Why should German taxpayers, whose personal incomes have grown more slowly than elsewhere in Europe and who face substantial extra costs in the near future due to ageing, be the focus of all the wrath?

But then neither Krugman, nor Stiglitz are writing for German, Slovak or Latvian public opinion. They are writing in journals, published in countries whose governments are not being asked to write more and more checks for a Greek government that seems to blame everyone else for home-grown problems.

There is an argument for a comprehensive debt conference to consider whether the burdens of dealing with the aftermath of the Lehman collapse have been fairly distributed between the governments of the world.

But the convening of any such conference, and eligibility for any help from it, should be something that might happen five years from now and be conditional on growth-promoting reforms and budget balancing by governments seeking debt relief from it. Perhaps a third party might put such a proposal forward, as a way of getting out of the terrible situation Greece is bringing upon itself.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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