"Austerity stagnates an economy".
How did overspending work out for Greece?
[ edit: I'd be glad to discuss substance. The admittedly rhetorical question stands. What is the evidence on overspending and growth? ]
How did overspending work out for Greece?
[ edit: I'd be glad to discuss substance. The admittedly rhetorical question stands. What is the evidence on overspending and growth? ]
Sounds like the Greek government was culpable.
Not blaming the culture of corruption in Greece and not pointing out that the Greek overspending was the root of the problem is disingenuous.
Smearing Syriza, a socialist formation which made the same critique as the above poster, and would never have signed those deals -- for the corrupt actions of New Democracy & PASOK which did is a little bit of intellectual dishonesty.
However, when they joined the EU, many of their indigenous industries weren't competitive with other nations', so they 'specialized' in tourism. This brought in lots of income, but after the financial crisis, the tourists dried up, leaving them with a massive deficit. And of course, their debt ratio went up because of the contraction in revenues.
This is why Greece feels betrayed - they were spending more or less on par with other European nations prior to the financial crisis, but they were basically screwed by the cabal of European politicians and banks, who imposed absurd, punitive measures (which shrank the economy) in exchange for a 'bailout' (which was essentially more debt, on unfavourable terms).
The crisis was a trigger, but not a reason. Public spending in Greece was beyond what it could really afford; when skewed statistics were exposed, it turned out that the actual deficit was 12.7 % instead of 6 % - and this change came in about a month.
Austerity is underspending not thrift.
So what happened? Greece was effectively used to send 5 trillion (with a "t") in bailout money back to the banks big banks of Europe.
This was possible because of the idiocy that is the Euro and the ECB, which removed exchange risk and devaluation risk from across the European currencies. The banks of Europe did a volume convergence trade, effectively betting against their sovereigns that their new debt would have to be bailed out as they became "too big to fail".
Supposedly one of the bankers involved explained the scam like this:
You borrow at one
You buy at ten
You use the spread
To bury the dead
You bank it at four
And repo more
And then go knock
On the ECB's door
I'm leaving out a lot of details, of course. Anybody intrested in Greece and the EU (and the world economy in general) should watch Mark Blyth's very informative overview of how we got here.
https://www.youtube.com/watch?v=B6vV8_uQmxs#t=673
See this more rent talk for a post-negative-interest-rate update, where Blyth observes that Europe is looking a LOT like Japan did during their "lost decade"...
https://www.youtube.com/watch?v=9fP6YSCpm8g
...and this discussion with the former Minister of Finance of Greece, Yanis Varoufakis.
https://www.youtube.com/watch?v=iMk6aVsl8Rs
> austerity
Austerity is always a terrible solution to economic problems, because just about the stupidest thing you can do when the economy is bad is shrink the GDP. There is even a historical record of austerity (approximately) always leading to a smaller, more stagnant economy... and some nasty political shifts towards populism. The politics of austerity are terrible, because it's effectively a class-specific "put option". We are very good at socializing the risks of investment while blaming the lower classes for "overspending".
Unfortunately a lot of people make the mistake of assuming governments see the economy the same way the people or businesses do. This leads to the idea that government debts are zero-sum like personal debt, but the rules change when you are the group that prints the money and sets economic policy.
"This study observes a negative relationship between government debt and growth. The point estimates of the range of econometric specifications suggest a 10-percentage point increase in the debt-to-GDP ratio is associated with 23 basis point reduction in average growth. "
from : Government Debt and Economic Growth – Decomposing the Cause and Effect Relationship
link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2601874