Saturday, 31 January 2015

Weeping and wailing over Greek austerity.

I’m getting tired of people who weep and wail about austerity in Greece – unless the weepers and wailers have some nice simple solution to the problem, in which case I’m all ears.

The popular chant “austerity doesn’t work” is fatuous. That chant doesn’t begin to solve the basic problem.

For the benefit of the uninitiated, the basic problem is as follows, and it’s quite simple. If you just stop weeping and wailing for a minute, it’s easy enough to grasp.

If a country in a common currency area becomes uncompetitive, it’s external balance of trade deteriorates and it runs into debt. For a country with its own currency, that problem is solved by devaluing its currency. E.g. the UK’s currency fell 25% in value in 2008, and no one I know personally even noticed.

In contrast, for a country WITHOUT its own currency the only real option is to cut wages and profits in money terms. That’s called “internal devaluation” and it comes to the same thing as the above “regular” devaluation. And just like regular devaluation, there isn't a big effect on living standards in the relevant country in that the above mentioned wages and profits are themselves a big constituent in the cost of goods and services consumed in the relevant country.

Unfortunately the only really effective way of cutting those wages and profits is to cut aggregate demand in the relevant country: i.e. have a period of deficient demand, and that means excess unemployment – possibly lasting for many years.

And that is a HUGE DEFECT in common currencies. That’s the basic problem.

Moreover, there is no absolute guarantee that regular devaluation or internal devaluation will work. If the elasticity of supply and demand for a country’s exports and imports are sufficiently low, neither form of devaluation will work. Indeed Wynne Godley claimed that that was the case for the UK about twenty years ago. And if neither form of devaluation works, the only remaining solution is mass emigration from the relevant country, and that to a significant extent has been the solution for Greece for many decades. And if emigration goes on for long enough, obviously the country just becomes an area that specialises in “extensive agriculture”: that is (like agriculturally unproductive areas of Australia) where large amounts of land are used in combination with few other in puts like labour or machinery or fertiliser.


Debt jubilees.

A popular alleged solution for Greece is debt forgiveness or a debt jubilee. Unfortunately that simply kicks the can down the road. It completely fails to deal with the above competitiveness problem.


Other solutions.

In contrast to the above fatuous non-solutions, one possibly realistic solution recently suggested by Simon Wren-Lewis (Oxford professor of economics) is to organise a MODERATE increase in unemployment in uncompetitive countries, rather than the sort of catastrophic levels of unemployment we currently see in Greece. As Wren-Lewis points out, it is possible that the fall in wages, profits and prices in the problem country would be almost as fast as where the unemployment level is in the “catastrophic” range.

But the disadvantage there is that an increase in demand is involved which means the country draws in more imports which means it goes further into debt .


My proposed solution.
Another solution which I suggested long ago is as follows.

As pointed out above, regular devaluation can take place overnight, whereas internal devaluation involves years of pain. However, IN THEORY it would be possible to organise a more or less overnight internal devaluation. One would have to get almost everyone in the relevant country (wage earners, entrepreneurs, pensioners, etc) to agree the same percentage cut in pay.

In a country with a high degree of social cohesion, a country where everyone trusted everyone else, a country where everyone behaved responsibly, that would work. But unfortunately that’s not Greece. Greece is more in the nature of a country where everyone tries to cheat everyone else. E.g. the scale of tax avoidance by the elite as well as by doctors, lawyers and taxi drives exceeds by a big margin the tax avoidance that takes place in other countries.


  1. 1. Yes, forgiving debt would not deal with competitiveness problem. However, it could still be justified because:
    (a). It is unfair to punish the children (by interest and debt burdens) for the past sins of the parents.
    (b). Failure to forgive could harm future prospects for Greece and other EZ countries. Without more debt forgiveness there is no prospect of any future Greek government ever being solvent within the EZ.

    2.Is a MMT Job Guarantee program a further option for Greece, or for the Euro Zone as a whole? This would not be a full fiscal union.
    Could the Greek government raise taxes to provide JG jobs? This is very doubtful.

    Alternatively the ECB would print money to pay for Greek jobs at a "living wage". This could be instead of, or in addition to, the new ECB program to print money to buy financial assets.
    Which would be the best agency to operate a JG scheme - the ECB, the Greek Government, non-profit agencies, or private companies?
    And what jobs would a Greek JG scheme offer to fully employ the Greek labour force in Greece?
    Or should the scheme provide JG jobs in other countries as well as Greece open to all EC citizens as well as Greeks?

    1. Hi KK,

      Re your para No.1, I don’t flatly disagree with you, but speaking with my German hat on, and re “a”, we aren’t talking about different GENERATIONS here. The generation that incurred the debt are for the most part people who are currently Greek voters and politicians.

      Re, your “b”, Greece actually has a primary surplus at the moment, thus strictly speaking there’s no need to forgive debt, though a delay in interest payments would be a big help.

      Re your para No 2, looks like the Greeks are actually going to implement a JG program. I predict that will be pretty chaotic as most of the more enthusiastic advocates of JG haven’t a clue, far as I can see.

      “Alternatively the ECB would print money to pay for Greek jobs at a "living wage". Trouble there is that that amounts to preferential treatment for Greece, and other EZ countries (especially Germany) having loaned money to Greece and not got all of it back (or having seen interest payments delayed) will be reluctant to lend or give any more.

      “Which would be the best agency to operate a JG scheme - the ECB, the Greek Government, non-profit agencies, or private companies?” I’ve argued for a long time that JG labour should be allocated to EXISTING EMPLOYERS, public and private. That’s more or less what the UK’s Work Programme does, though the latter is deficient in various ways. My arguments for “allocation to existing employers” are here (and elsewhere):


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