Reply To: Austerity has failed. An open letter from Piketty to Merkel

[Arcus]

Yeeeeeaaah… Trying to insult and shame the largest creditor may not be the best way to gain concessions, especially with a horribly flawed historical comparison. If the austerity measures were not merely about increasing taxes and tax collection, cutting pensions, and reducing a bloated public sector, but included terms such as stringing up their past leaders by the neck, lose 10% of their territory, have their country cut in half, 50 years of military occupation, and make 20% of the population into refugees, then there may have been a point in there.

Anyway, back on planet Earth there is no way for Greece to avoid austerity. The peoples of the other European countries have already given the Greeks €1000 each and don’t want to contribute more unless the Greeks reform their country, which includes austerity. The other option is for the Greeks not to reform, which will lead even more austerity than option 1.

As for austerity having failed, Ireland, Latvia, Lithuania, Spain, Portugal, and the UK have all cut state budgets and all are today growing at a healthy clip. So why haven’t it worked in Greece? I’ll let Olivier Blanchard explain:

Critique 3: Growth-killing structural reforms, together with fiscal austerity, have led to an economic depression
Given the dismal productivity growth record of Greece before the program, a number of structural reforms were seen as necessary, ranging from a reform of the tax administration, to reduced barriers to entry in many professions, to reforms of pensions, to reforms of collective bargaining, to reforms of the judicial system, etc.
Many of these reforms were either not implemented, or not implemented on a sufficient scale. Efforts to improve tax collection and the payment culture failed completely. There was fierce resistance to open closed sectors and professions. Only 5 of 12 planned IMF reviews under the current program were completed, and only one has been completed since mid-2013, because of the failure to implement reforms.
The decrease in output was indeed much larger than had been forecast. Multipliers were larger than initially assumed. But fiscal consolidation explains only a fraction of the output decline. Output above potential to start, political crises, inconsistent policies, insufficient reforms, Grexit fears, low business confidence, weak banks, all contributed to the outcome.