Monday, July 30, 2012
For Greece there is an alternative to austerity – as Argentina proved
July 30, 2012
It has been a bit over four months since the latest bailout of Greece was negotiated. This bailout featured a write-down of most privately held debt in exchange for further austerity measures. It is already clear that Greece will not meet its deficit targets from this bailout, the main reason being that cuts to the budget have led to a much steeper recession than official forecasters had predicted. The Greek government now expects the economy to shrink 7% over the course of the year. That compares to the decline of 4.7% that the IMF projected for Greece back in April.
This was hardly the first time that the IMF and other official forecasters had badly underestimated the severity of Greece's downturn. In April 2011, the IMF had predicted that Greece's economy would grow 1.1% in 2012, after shrinking just 3% in 2011. In fact, Greece's economy shrank by almost 7% in 2011. And, in April 2010, the IMF was projecting that Greece's economy would be on a slow and steady growth path in 2012 after shrinking by just 1.1% the prior year.
Clearly things are not panning out as the IMF and the rest of the troika – the European Central Bank and the European Union – had planned. Budget cuts and tax increases in the middle of a downturn are having exactly the effect predicted by the old economics textbooks: they are reducing demand, slowing growth and raising unemployment. Furthermore, since lower output means less tax revenue and higher unemployment means more payouts for unemployment benefits and other transfers, the austerity imposed on Greece is doing little to even bring down its deficits.