A Greek olive branch for Steve Keen

Published in Business Spectator (Melbourne), 18 December 2014

Last week’s column on the very real possibility of a radical government for Greece (Greece’s presidential gamble could trigger the next eurozone crisis, December 10) provoked a thoughtful response by Steve Keen (The EU must face up to austerity’s failures, December 12). In short, where I argued that the election of an anti-austerity government opens up the risk of a new Greek crisis, Steve writes that austerity is the real crisis.

What may appear to be irreconcilable positions, actually aren’t. Steve may be surprised to hear that I have more sympathies for his positions than he probably suspects.

To be clear, I have nothing to retract from my article. To me there is no doubt that as long as Greece keeps the euro as its currency, the Greeks will be forced to regain competitiveness through an arduous process of internal devaluation. This means cutting costs, wages, pensions, and prices — and this is every bit as unpleasant as it sounds. The Greeks will also need to continue cutting their budget deficits in order to eventually return to capital markets on their own two feet (rather than being carried there by their European partners). And yes, there might finally be a recovery both in economic growth and in employment but as Steve correctly points out, this would come only after a long and painful slump in economic output.

I am not for a minute pretending that such austerity policies are a walk in the park, neither am I arguing that this is what Greece should do. All I am saying is that this is what Greece will be condemned to do as long as it keeps the Euro.

And this is the key: It is not so much evil austerity policies that are crippling Greece but its membership of the eurozone.

It has been plain to see that Greece’s austerity under the euro regime would not go anywhere, and I said as much after Greece’s last election a couple of years ago (New Democracy can’t cure Greece, June 19 2012). Apologies for the long self-quote but this is what I predicted back then:

“So, all that this new government will do is to keep the illusion of Greek reformability within the eurozone alive. But it will not actually turn Greece around, let alone save it. All it will do is burn another few hundred billion euros in the process. And so in a few years’ time, or perhaps even earlier, Europe will face the same problems once again: to cut Greece out of the eurozone — or to prop it up once again with another few hundred billion. The only problem: each time this question is asked the answer becomes more expensive. … None of this will heal the Greek patient, cure its economy or get its unemployed youth back into work. It will just create the fertile soil for a further Greek descent into political and economic chaos.”

Two years on, that is just where we are. Steve is right that the EU’s policies for Greece have been disastrous and that the Greek populace has every right to reject them. But Steve is also right to ask what such a rejection would trigger.

The way I see it, there are three scenarios after a potential Syriza victory:

  • Once in government, Syriza suddenly changes its position and sticks with the imposed conditions of Greece’s bailout packages and grudgingly continues to implement austerity policies.
  • Both Syriza and the EU stick to their respective positions and cause the next big euro crisis. Greece will be forced out of the eurozone in a messy collapse.
  • Syriza and the EU face up to the fact that previous policies have led the country into a dead end and try to find a better alternative.

The first scenario is unlikely since it would destroy all of Syriza’s political capital. The end of austerity is their core demand and they cannot walk away from that once in government. The second option looks much more likely since both Syriza and the EU cannot afford to lose face even if it ends in disaster.

But what about the third scenario?

Perhaps a Syriza victory would finally make some EU leaders realise that the Greek problem cannot be solved without two things: a Greek exit from the eurozone and a (partial) default on its sovereign debt. Yes, Steve, this would still not solve Greece’s private debt problem, which you rightly highlight, but it would be a good start.

So, what a new Syriza-led government and the EU might come up with would be a plan to pull Greece out of the eurozone. Once Greece has its own currency again, it would make it possible to replace the painful internal devaluation process with a proper external devaluation. This would also restore Greece’s international competitiveness but it would achieve that without the disruptions caused by harsh austerity. Greece is in a bad enough state already. What might it look like after the 30 or 40 percent internal devaluation it still needs?

Greece should still try to move its public finances onto a more sustainable path. However, it is clear that with a debt to GDP ratio of more than 170 percent, this cannot be achieved without defaulting on its debt. Such a default is inevitable, whether inside or outside the eurozone, and the sooner it happens the faster Greece can start again.

In doing all of this, Greece should still aim to increase its productivity, reduce red tape and streamline its tax system. Such microeconomic reforms are perhaps the only elements of the currently prescribed bailout conditions that Greece should continue to pursue. In the long run, these reforms are much more important than pure austerity because Greece needs to have a competitive and productive economy — not least to create the hundreds of thousands of jobs they lost over the crisis years.

At the risk of sounding like a broken record, the eurozone is an unworkable construction which will condemn its members to repeated crises like the one first experienced in Greece. It is not too late to end this disastrous experiment.

Having said that, if previous experiences are anything to go by, out of the three available options, European leaders usually pick the least appealing and still manage to make it worse. I am sure Steve would agree.

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