Paul Krugman, the renowned US liberal economist and winner of the Nobel Prize in Economics, strongly supports Syriza’s anti-austerity policy. He claims that the Troika, the IMF, European Central Bank, and the European Commission that dictate those austerity policies as conditions of a bailout loan employ policies that are based upon “fantasy economics.”
Krugman points out that the economic predictions that accompanied the arrangement of the loan assumed that the austerity measures would have minimal effects on both growth and employment. While Greece was already in recession when the deal was agreed to in 2010, the assumptions were that there would just be a small contraction in 2011 and that by 2012 the economy would be in recovery mode. Unemployment was predicted to rise to 15 percent in 2012 from 9.4 percent in 2012, but after that was expected to decline.
In reality, the recession did not end in 2011 but accelerated, gathering momentum. Only in 2014 did the economy finally begin to grow and then not by much and from a much smaller base. Unemployment had risen to 28 percent overall and to almost 60 percent for young people.
While the recession may have ended, savage cuts to wages, public services, and pension benefits remain. Public spending has been cut even more than envisaged in the original program and now is 20 percent lower than in 2010. The contraction in the economy has reduced revenue for the Greek government. Taxes are a higher share of GDP than before the program started but then GDP is very much smaller and so the tax take is also reduced. The ratio of debt to GDP is actually getting worse rather than being reduced.
Krugman speaks of the Troika believing what he calls the “confidence fairy,” the view that the reforms and austerity conditions would lead to private sector optimism and investment. At the same time, the Troika had grossly underestimated the negative effects of the austerity policy. This is what Krugman calls the Troika’s fantasy economics.
However, there is another way of looking at the situation. The loan provisions did have the negative effects that Krugman describes. However, from the point of view of capital and investors many of those negative results are actually positive. Increased unemployment means that labor is weak and there is a large pool of labor to be hired at very low wage rates. The program included selling off state assets often at fire sale prices. This was a great boon for capital. The cuts discipline the working class and lower expectations making conditions favorable to capital once the recession ends. The conditions involve many reforms that favor capital. The predictions Krugman complains about may have downplayed negative results in order to make the conditions politically acceptable to the Greek government and the Greek populace. Krugman looks at the negative results of the campaign on the Greek populace and on economic growth. This assumes that policy was designed to produce economic growth and make conditions better for the Greek populace in general. If the aim was to make conditions better for capital and for investors in Greece the negative effects are collateral damage necessary to impose changes in Greece favorable to capital, the reduction of expectations, cuts in government expenditure, privatization of state assets, and weakening of labor and of democratic powers to counter the power of capital.
Krugman is not alone in his critique of austerity programs. Joseph Stiglitz, another US economist and Nobel prize winner, has a critique of austerity programs based upon the premise that austerity programs will reduce demand. Reduced demand in turn will decrease production, leading to lower economic growth or even recession. These results make it even more difficult for countries to pay off their debt as revenues plunge. However, this also allows for even more demands for more reforms favorable to capital in order to receive more bailout funds.
Stiglitz blames the very slow global growth on policies that have lowered demand: The near-global stagnation witnessed in 2014 is man-made. It is the result of politics and policies in several major economies – politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize. It is that simple.
Nowhere is this clearer than in the euro zone, which has officially adopted a policy of austerity – cuts in government spending that augment weaknesses in private spending.
Krugman claims that it is EU officials who have not been responsible in their policies and Syriza should be given a chance to implement its plans. Syriza policies are set out here. Some of the policies would stimulate demand. Krugman thinks that the EU officials should go along with the program. The EU program has no credibility. Krugman argues that the demands of Syriza for debt relief and easing of the austerity program may not actually be radical enough to produce the type of economic growth that Greece needs to be able to finance debt payment and the social programs it needs.
Krugman also notes that Syriza may not be able to do more and remain within the euro zone. About three quarters of the Greek population wants to stay in the zone. However, there is no sign that EU officials are willing to consider writing off some Greek debt or do much in the way of limiting the austerity measures. EU officials worry about other countries in Europe such as Italy and Spain demanding the same relaxation in demands that Greece seeks and therefore are likely to continue to take a relatively hard line on Greece. They may be willing to make revisions that make payments a bit less burdensome to Greece but not much more than that. Even achieving Syriza’s minimal demands might require a Grexit, an exit from the euro zone.
