Hi Everyone,
With the latest election results in Greece and France there
is another round of media coverage on the ongoing crises in Europe. I say “crises” plural because there are, in
fact several national crises with different causes and different possible
solutions. All of them are contributing
to an overall problem for the Eurozone as a whole. That much is covered well in the press. I heard this point in particular made today
on NPR. But what is not discussed is how
the fact there are different types of crises in Greece, Italy, Spain and
Ireland leads to different options for responding to each of them. This is fitting because in a real sense, all
of these problems result from a flaw in the Euro zone which was that there was
no way to establish a single monetary policy that would be optimal for both
rapidly developing but poor countries like those currently in crisis and the
wealthier, slower growing countries of Northern Europe. Just as there was no one optimal policy for
the entire Euro zone before 2008, there is no one-size-fits-all solution to the
various problems today.
Greece
For example, in Greece the problem is that the government is
incapable of enforcing its own tax laws.
Even though its population might have been able to support the level of
government spending established in the heady days after the Athens Olympics,
that would only have been possible if everyone actually paid their taxes – or at
least a sufficiently high percentage of people that any losses to evasion would
be manageable. The problem is that the
Greek government spent its resources during the boom largely on gifts to
constituents. Policies like lower
retirement ages, more generous pensions, more generous vacations, etc, did not
prepare Greece for the problems it might face in the future. There was little emphasis on investing in
things that might have enable Greece to weather an economic downtown. Greece did not, for example, invest in civil
service reform or professionalization.
While the world economy was inflating the global bubble, Greece could
borrow money to finance all of this. But
as soon as borrowing became in practical, the Greek government simply did not
have funds to function. So when the 2008 recession hit, much of the revenue
available to the government disappeared just when demands for government
services spiked and the government was incapable (note: not necessarily
unwilling) to respond effectively to either development. Now Greece is in a situation where its
spending is unsustainable with locally attainable resources and its debt load
is such that it cannot borrow more to keep things going through the current recession. The debt load is so big that it cannot manage
the payments on existing debt, let alone assume more debt on its own. Greece has no choice but to cut spending and
try to raise taxes (although it is unlikely to successfully increase revenue in
proportion to its tax increases). The
only way Greece can do anything other than a massive austerity package for
years to come is if someone else pays for it.
Even a devaluation would probably have to be so draconian that it would
devastate not only the Greek economy with hyperinflation but risk dragging down
the rest of the Euro zone along with it.
And by “someone else” of course I mean German and other Northern
European tax payers. And even in that
event, the long term problem of the inability of the Greek civil service to
effectively manage the political economy of the country would not likely be
solved by any bailout – at least not one
envisioned by any of the key parties involved so far. Greeks opposed to bailout/austerity package
frequently complain that austerity is being forced upon them from the
outside. But their proposed solution,
that German tax payers write a blank check to the Greek government is no less
undemocratic and has the added flaw of being grossly unfair.
Italy, Ireland and Spain
But in Spain and Ireland the government was relatively
responsible. Prior to the 2008 crash
debt/deficit levels in these countries were manageable if a bit on the flabby
side. Italy and Spain in particular had recent
histories of seemingly sustainable spending levels. Italy had actually been paying down its debt
for over a decade. But the
sustainability of their long term debt schedules were dependent on continued
economic growth. The 2008 crash hammered
the real estate and construction bubbles in these three countries. Even after that pounding, the Irish government
could raise its corporate tax rates (for example) quite a bit and still have
the lowest corporate tax rates in the Euro zone. Another possible solution for these countries
would be a relatively modest devaluation of the Euro (say back to its original
value against the dollar at one-to-one).
That would boost exports and possibly stimulate some growth not only in
the Mediterranean but in export dominated Germany as well. The difference between these three countries and
Greece is that IF these countries could manage to borrow (or print) enough money to stimulate their
economies back into growth, these three countries could be back on track in
relatively short order (like a year or two instead of the decade or more of
misery that Greece faces). In these
cases the people of these countries who complain about harsh austerity being
imposed by Germany may have a point.
Other options are viable.
Keynes and the Europeans
The interesting thing here is that the differences between
Greece on the one hand and most of the rest of the European countries facing
deficit crises is that it underscores the necessity of professionalized and
effective government institutions for the success of a Keynesian approach to
political economy. Absent effective
institutions, any attempt to apply the kind of Keynesian stimulus approach to a
recession will only result in the kind of quagmire Greece faces today. Eventually, no more new borrowing will be
allowed and the government will have no other means of sustaining existing
government services. But if there is a minimally effective government in place, Keynesian stimulus might be an option that deserves more consideration in Europe than it currently receives.
Lessons for and false comparisons with the US
The US has a functioning and professional civil
service. The US also has historically
low tax rates across the board. When
Republicans begin to shout that the current deficit/debt situation in the US
will lead us to become “like Greece,” they are simply wrong. If there are any useful analogies to be found
for the US in Europe, they are Ireland with its low tax rates and fairly
straight forward housing bubble collapse.
For both Ireland and the US simply raising taxes – even selectively and
not dramatically - is a perfectly workable, long term solution. It is also worth noting that the US economy is already flirting with growth rates that are high enough to make even the Italian debt levels sustainable based on their pre-2008 bond yield rates. Unfortunately for Italy, Italian bond yield rates are now far higher, requiring a much higher growth rate to sustain continued borrowing. US bond yield rates however are very very low. So we can engage in a lot of Keynesian stimulus and "get away with it" contrary to Republican rhetoric.