Greek voters should not listen to siren calls of American economists
Non-euro zone states like US and UK, whose banks were also saved, could contribute more
San Juan, Puerto Rico - Governor Alejandro Garcia Padilla addresses the island’s residents last week about the $73 billion debt crisis. He insisted that the people on the island will have to sacrifice and share in the responsibilities for pulling the island out of debt. Photograph: Joe Raedle/Getty Images.
Nobel economics laureate Paul Krugman, in the New York Times, urges the Greeks to vote “No” in the referendum tomorrow. So does fellow laureate Joseph Stiglitz in another article in the Guardian. But is this serious advice, or in reality an unhelpful extension to Europe of an ongoing American polemic?
Krugman says the euro was a “terrible mistake” because he claims it failed to insulate the public finances of the states of the euro zone from bubbles in particular countries, like he says the US system does. In fact, the US only does this to a limited extent and, unlike the EU, it has no general bailout fund for states.
If I recall things correctly, our present collapse in confidence originated in the US, in a housing bubble in a small number of US states, that eventually engulfed the whole world. The US system did not prevent that. Puerto Rico, a US dependency in the dollar zone, has got itself into a Greek-style debt trap without the US monetary union, which is much older and stronger than the EU one, being able to prevent it.
Krugman says that “most of what you hear about Greek profligacy is false”.
He makes this bizarre claim on the basis that Greece has made cuts and tax increases since 2010. He completely ignores the profligacy, poor tax collection, and debt accumulation that went on for decades before that, when Greece erected a completely unsustainable pension regime on the strength of borrowed money. He says that, since 2010, the Greek economy has collapsed because of “austerity”.
He fails to outline what the Greeks might have used for money since 2010 if, as he seems to advocate, they had continued with their previous “non-austere” spending policies. They would not have been able to borrow the difference on commercial markets. Where would they have got the money?
Just because a country is in the euro zone it does not mean it can have an unlimited call on the taxes or loans of other euro members.
While there is more to do, like euro area-wide deposit insurance, the EU has remedied many of the initial design flaws in the euro, something Krugman does not acknowledge . He says that “even harsher austerity is a dead end”, as if cuts and tax increases were all that the EU has been urging unsuccessfully on the Greeks.
Greece needs to move its human resources out of unproductive activities into areas that will earn money from abroad and the EU reforms will assist that.
Stiglitz, in his Guardian article also calls for a “No” vote, but is more extreme.
He claims the euro zone was “never a democratic project”. He seems to have completely forgotten the Maastricht Treaty, which created the legal basis for the euro, was approved by the elected parliaments of every state currently a member. It was approved in referendums in several countries, including France and Ireland.
Furthermore each of the eurogroup finance ministers, who make all the key decisions, represents democratically elected governments.
Greece was not forced to join the euro in the conditions, and at the time, that it did. This was a free choice of the Greek government. Now, governments everywhere would sometimes like to repudiate some decisions of their predecessors, but if that luxury is to be afforded it would destroy the basis for credit and inter-state relations.
He makes a more substantial point when he says a good deal of the money, lent to Greece by taxpayers of other EU countries and the International Monetary Fund, has gone to help them pay debts they owe to private creditors. But he fails to point out that, unlike those of Ireland and Portugal, Greece’s private creditors have been obliged to take a haircut.
It is true the money from the EU has been used in part to repay banks money they put into Greek government bonds. Some of these banks were indeed French and German. But some were from outside the euro zone altogether, including from Prof Stiglitz’s own country and from the UK, in one of whose newspapers he is writing.
Back in the 2010/2012 period, thanks the crisis which started after Lehman Brothers went south, there was a legitimate public interest, a public good, in preventing a run on any of these banks.
There remains a justifiable argument, however, that it was unfair the taxpayers of a few countries should now be bearing a disproportionate share of the cost of this public good, which the whole world has enjoyed. Yes, the taxpayers of the rest of the euro zone should, in moral terms, bear more of the burden. But if that is so, so also should the taxpayers of non-euro zone countries like the US and the UK, whose banks were also saved when Ireland, Greece and Portugal got help .
Why should German taxpayers, whose personal incomes have grown more slowly than elsewhere in Europe, and who face substantial extra costs in the near future due to ageing, be the focus of all the wrath?
Safe distanceProf Krugman
There is, I believe, an argument for a comprehensive debt conference to consider whether the burdens of dealing with the aftermath of the Lehman collapse have been fairly distributed between the governments of the world.
But the convening of any such conference, and eligibility for any help from it, should be something that might happen five years from now. It should be conditional on growth-promoting reforms and budget-balancing, already having been fully implemented by governments seeking debt relief from it.
Perhaps a third party might put such a proposal forward, as a way of getting out of the terrible situation Greece is bringing upon itself.
John Bruton is a former taoiseach