Greece – The Story of Wrong lessons Learnt: Marc Saxer

Guest post by MARC SAXER

Ten reasons Why Austerity is Dangerous Fallacy

Another European summit without any resolution has passed. Even if a last minute settlement for this round can be reached, it would most likely continue the austerity policies of the last years. In any event, the next showdown would be just around the corner. Instead of tackling the risks of a global financial crisis, the collapse of the European integration project or the undermining of democracy, Europeans are fraying over olive tree subsidies and pensions. The debate over Greece is out of touch with the real challenges, and leads to flawed policy responses.

It is infuriating to watch Europe tumble down the path of austerity. Frugality! Discipline! Rules! The guardians of virtue seem to have turned a deaf ear to all expert advice. One Nobel Prize Laureate after the other cautions that too much fiscal bloodletting might just kill the patient. Amartya Sen. Paul Krugman. Joseph Stiglitz, Jeffrey Sachs. In Europe, Jürgen Habermas, Ulrich Beck and Thomas Piketty chimed in. Even the chief economist of the International Monetary Fund, Olivier Blanchard had to admit that the tax hikes and spending cuts have created more havoc than the architects of austerity have ever deemed possible.

Austerity is tomfoolery. Here are ten reasons why.

  1. Austerity is strategic folly. In order to discipline an economic appendix of Europe, the troika of European Commission, European Central Bank and International Monetary Fund risks the next global financial crisis. The write-down of a haircut for Greece’s creditors would be dwarfed by the cost of another round of bailouts and recession.
  2. Austerity is political suicide. The new nationalist chauvinism is fanning the flames of right wing populism all over Europe. While UKIP is pushing for the Brexit, Marine Le Pen is running on a Frexit platform for the French Presidency.
  3. Austerity is dangerous brinkmanship. After centuries of war, the European integration introduced peace to a divided continent. The wars at Europe’s periphery should be a dire warning of how fragile this layer of civilization really is.
  4. Austerity is an economic self-goal. Fiscal frugality further weakens aggregate demand and deepens the recession in debtor countries. It is telling that the often cited “success cases” Iceland, Lithuania, and Latvia have started to grow the very moment austerity had been ended.
  5. Austerity is a fiscal miscalculation. A contracting economy makes the debt ratio even more unsustainable, and blocks the return of debtor countries to bond markets, keeping them dependent on recurring bail-outs.
  6. Austerity is executed by an imperial technocracy, which undermines national democracies in the interest of the financial markets. After the elected governments of Greece and Italy were replaced by technocrats in 2011, today austerity ideologues question the legitimacy of the newly elected leftist government in Athens.
  7. Austerity is a developmental non-starter. Repeating the devastating structural reforms promoted under the Washington Consensus around the world, austerity fails to understand that much needed structural reforms such as the fight against corruption and a more efficient tax collection – against the resistance of powerful patrons – can only be implemented with the strong support of a broad change alliance. Austerity, however, undermines this much needed popular support.
  8. Austerity is social injustice. The bail-outs of European banks and investors have been paid with the loss of life chances by millions of common citizens.
  9. Austerity is a geopolitical shot in the foot. It weakens and disunites Europe in the very moment when it is challenged by a resurgent Russia, a refugee crisis in the Mediterranean and a meltdown in the Middle East.
  10. Austerity is historical amnesia. The reconstruction of Germany and France after the war would have been impossible without debt cancelation and the generous aid of the Marshall plan. Germans in particular should remember the tragic Chancellor Brünung who aggravated the Great Depression with ill-conceived austerity policies, paving the way to power for Hitler.

With so much at stake, why isn’t the policy changing? Why ever more ultimatums, calls for further cuts and demands for a primary surplus? Because the austerity ideologues have discovered the holy grail of political communication: Greece. Greece is the poster boy for a country in need of reforms. A weak state, a rampant bureaucracy, corrupt politicians, tax-free oligarchs, vast military spending, and foolhardy debt levels make the perfect case. Nobody, not even the Greeks themselves, are denying that this country needs reforms. On the other side, European taxpayers are right to ask why they have to foot the bill for fiscal brinkmanship and speculative hazard of others. Indeed, it would be interesting to debate which recipes are better suited to treat this patient: Keynesian stimulus or Hayekian austerity, Beijing or Washington Consensus, Syriza or IMF.

However, this is the wrong debate at the wrong time. Instead of the risk of a financial crisis, Europeans fray over subsidies for olive trees. In place of discussing a response to Russia’s challenge, they are counting ammunition for Greek tanks. Instead of standing up to the undermining of democracy, they fray over the pension fund of Greek grannies.

To be clear: of course Greece needs to be reformed, and Europe needs rules by which everyone is playing. But this debate over Grexit is a dangerous diversion, and will lead to flawed responses. This is why the debate needs to be shifted back to the center, the policies of the troika, and its national allies. It is here where the future of Europe will be decided.

MARC SAXER is the Coordinator of the Asia-Europe Economy of Tomorrow project and Director of India Office of Friedrich Ebert Foundation (FES), a German political foundation committed to the values of social democracy. Views expressed here, are his personal views.

6 thoughts on “Greece – The Story of Wrong lessons Learnt: Marc Saxer

  1. Pranjal

    The funny thing about austerity in Greece is that it has hit one of the largest pension programs, which was already long crowding-out genuine cases by lowering the retirement age and sparking off large volumes of voluntary retirement. The genuine cases stand to lose even further, because they also have to bear the responsibility for the unemployed youth and fired workers.

    So Granpa Ionnais will be facing lower pensions due to budget cuts, while looking after Maria and Dimitris, who recently got fired from the local factory that owed German creditors. But do Marxist leaders really care about old people? those lumpen who don’t even create exchange value..

  2. “Austerity” is a typical super-rich driven agenda to further transfer wealth to the “HAVES”. The very concept is oxymoronic from 2 perspectives.

    One, who should be more austere in their spending behavior? Those who are profligates? OR, those who do not have much to spend anyway? IMF-dictated measures are clearly NOT directed at any of those who are profligate! Calls for tax reduction on the rich and the corporations is clearly driven to further enrich the rich. Heil Capitalism, run berserk!

    Two, during times of recession (as had happened triggered by subprime lending) joblessness and shrinking private spending is already hurting the economy, the IMF wants to further cut government programs that are actually counter-cyclical. IMF doesn’t restrict the private sector – specially the Wall Street – from giving out golden parachutes / bonuses to the very executives who started the mess!

    Iceland did precisely the opposite of what IMF recommends / recommends – did NOT cut government spending. AND, most important, brought the rascals – the very private sector executives who created the mess – to book.

    NOT A SINGLE WALL STREET EXECUTIVE HAS GONE TO JAIL (Bernie Madoff being the only exception) despite their criminal offense!

    Everyone seems to have forgotten the roles of “too big to fail” financial institutions who were advising Greece how to manipulate its finances more than a decade back. No one is even talking about how Goldman Sachs (GS) role in masking Greece’s debt back in 2002. Brazenly, through currency swap and other financial manipulations GS helped Greece mask its debt – including “gigantic military expenditures”. Where was IMF then?

    Perhaps, we should investigate IMF and World Bank’s involvement and nexus with the ruling financial elites of the world.

    And, finally, what is IMF doing about the illegal billions stashed away in Switzerland banks? Surely, a few billions (quite likely from some of the Greek lords & barons) can help millions of Greece citizens.

  3. I do agree with you that austerity is nothing but a way to cook and fake things. In the name of austerity some kind of limitations are imposed and those hardly work for nations. At least in case of Greece this true. After austerity measures Greece economy contracted by 25% in just 5 years and unemployment rate rose by around more than 20%. So in case of Greece austerity measures miserably failed.

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