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Old May 4 2013, 04:51 PM   #3
Re: Greece's Underlying Policy Problem.

I don't feel about these matters, I think.

You are right that Greece is basically bankrupt because it did not manage its public finances well. The right thing to do would have been to accept this bankruptcy and partially default on the debt like Iceland has done. Instead the European taxpayer basically bailed out the bondholders and the main institutional bondholders are of course banks
The main structural problem of Greece which has not been addressed at all by the Troika is the badly functioning tax system. Everybody is focused on expenditures.

It is pretty obvious that Greece has to reduce its expenditures and increase its revenues. But you do not that that immediately, in a recession cutting public expenditures reduces aggregate demand and the recessions is intensified, hence unemployment rates over 20% in Greece. The right way to do it is to commit to a long-run reduction of public debt.

It is no coincidence that economists like Krugman or Koo who did research on Japan analyze the contemporary crisis so well. Japan faced a similar problem as the whole world does nowadays in the nineties. A balance sheet recessions with interest rates being stuck at zero which implies that monetary policy has become ineffective. They did the right thing, compensate the reduction of private spending via an increase of public spending. And as I already explained to you, they have no problems with maintaining a debt over GDP ratio of 200% because their central bank can prevent speculative attacks via committing to buy treasury bonds.

This is via a country like Spain where a debt/GDP was around 30% before the crisis cannot finance itself nowadays. No independent monetary policy, no central bank which was willing before the end of last year to play the role of lender of last resort. This is not a new notion, Walter Bagehot already advocated this in 1873.

So yeah, although conservative politicians in the US uses Greece as bogeyman to warn about rising public debt (Once again, long-run public debt is a problem. Gee, I even think that governments should emit no debt but strive to finance themselves via taxes plus holding assets and living of their returns. But you gotta separate this long-run issue from the short-run necessity of counter-cyclical public spending. As Keynes said "the boom, not the slump is the time for austerity".) it cannot happen as the US can print its own money.

Another problem of not having your own currency is that you can devaluate it (via printing more if it) during a recession to increase export demand.
Countries have to "internally devaluate", let wages and prices drop which leads to massive unemployment.
Furthermore the Euro created massive European trade imbalances. Germany constantly had positive net exports vs. negative net export in the South which implies a flow of capital from the north to the south ... and nowadays the north basically whines that their investments weren't totally sound. Two sides are to blame here, not just the debtor but also the creditor. At least if you dislike socialism for the banks and are rather a fan of free markets, taking responsibility for your actions and so on.
The illegal we do immediately; the unconstitutional takes a little longer. - former US Secretary of State and unconvicted war criminal Henry Kissinger

Last edited by horatio83; May 4 2013 at 05:16 PM.
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