Greek Austerity

I want to commend to your attention an op-ed by Paul Roderick Gregory at Forbes. In the op-ed he questions whether the austerity that Keynesians are complaining about really explains Europe’s economic doldrums:

The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.

Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.

Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau. Eurostat’s projections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.

As Erber wryly notes: “Austerity is everywhere but in the statistics.”

I think he’s wrong in the particular case of Greece. Greece has, in fact, cut public spending sharply. Greece’s spending is right down where it was in 2006.

Now Greece did increase real public spending from joining the euro to 2006. But that’s not what Mr. Gregory is complaining about and in the case of Greece he’s wrong.

The Greeks really have no choice. As long as they remain on the euro they’re forced to adopt a policy of austerity. The only way they can increase spending is by debt forgiveness and extension of additional credit which in practice means that Germany, France, Holland, and Luxembourg must pay for it. That’s the fundamental flaw in a common currency for countries in drastically different stages of development. It’s been very good for the Germans, though.