I very rarely feel sympathy for the people of Greece. Indeed, events over the past five years have even led me to write that “I hate the Greeks.”
I also disparaged the people of Greece by stating on TV that they’ve beentrying to loot and mooch their way through life.
So you can see that I generally believe in the tough-love approach.
But there comes a point when even a curmudgeon like me is going to say enough is enough and that the Greek people have suffered enough already.
And I had that experience yesterday. Check out this headline from a story in yesterday’s EU Observer.
Economic advice from the French government?!? Isn’t that a bit like asking the Chicago Cubs for suggestions on how to win the World Series?
What are the French advisers going to do, propose ways to make the government even bigger? Suggest ways of driving even more entrepreneurs out of the country?
For Heaven’s sake, this is the last thing the people of Greece need.
Sort of reminds me of a headline I saw attached to a report by Reuters a few years ago.
Geesh, the Greeks already suffered because of an invasion by people working for the German government back in the 1940s. Seems like another deployment of German bureaucrats would be adding insult to injury.
Particularly since it would create the worst of all worlds, marrying Teutonic tax efficiency (for example, taxing prostitutes with parking meters) with Greek profligacy (for example, subsidies for pedophiles).
I’m not sure where that would end, but it surely wouldn’t be a good place.
Now let’s make a more serious point about tough love and Greek suffering.
Back in early 2010, about the time the Greek fiscal crisis was becoming a big issue, I warned that a bailout would actually make things worse. I suggested it would be better to let Greece default, both because it would penalize foolish investors who lent too much money to the Greek government and because it would force Greece to live within its means.
That would have meant short-run pain, to be sure, but I think that approach would have involved the least amount of aggregate suffering.
But the political class ignored my helpful advice and instead decided that bailouts would be a better idea. But how has that worked out? The Greek economy has been moribund and the Greek people are now saddled with far more debt. Yes, some short-run pain was mitigated, but only at the cost of much more pain over the past few years (with more pain in the future).
Interestingly, the International Monetary Fund’s top economist unintentionally has confirmed my analysis. Here’s some of what Olivier Blanchard recently posted as part of an effort to defend the IMF’s choices back in 2010.
Had Greece been left on its own, it would have been simply unable to borrow. …Even if it had fully defaulted on its debt, given a primary deficit of over 10% of GDP, it would have had to cut its budget deficit by 10% of GDP from one day to the next. These would have led to much larger adjustments and a much higher social cost.
Blanchard obviously thinks reducing government spending by 10 percent of GDP would have imposed too much “social cost,” but imagine if Greece had bitten the bullet back in 2010. Sort of like what Estonia did in 2009.
Yes, there would have been a challenging adjustment. Interest groups would have received fewer handouts. Greek bureaucrats would have lost jobs and/or had their pay reduced. Payments to vendors would have been delayed. State-run TV may have been shut down.The regulatory apparatus probably would have been cut back. And I’m sure the Greek government probably would have raised taxes as well.
Now imagine how much better off Greece would be today if it went with that approach.
We don’t have a parallel universe where we can see the results of that different approach, but consider the fact that Estonia had a deeper downturn than Greece, presumably in part because it undertook strong measures, but since that time has been Europe’s fastest-growing economy.
Greece, by contrast, has been Europe’s slowest-growing economy. Hmmm…seems like this should be part of any discussions about “social cost.”
So what lessons can we learn?
I realize there are lots of factors that determine economic performance and that it’s impossible to isolate the impact of either Estonia’s spending-cut policy or Greece’s bailout policy. But it would take a very bizarre and untenable set of assumptions to conclude that Estonia didn’t make smarter policy choices.
The only silver lining to Greece’s dark cloud is that it’s not too late to do the right thing.
