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

[DrBob]

I confess I am mystified by the action of the EU. I’m in agreement with Krugman. The evidence is irrefutable. Keynes was right, austerity doesn’t work. With each successive austerity measure the economy of Greece has shrunk further into Depression, resulting in lower revenues and the need for even more austerity.

By contrast, Iceland simply defaulted. They allowed their irresponsible banks to fail, jailed their bankers, and recovered very quickly.

German banks lent lots and lots of money to Greece because they could earn a higher interest rate. Why could they earn a higher interest rate? Because Greece was more risky. That loaned money in turn got spent buying lots of goods and services from Germany, because it’s hard for small Greece to compete with large Germany in manufacturing. This made German banks and Germans more wealthy.

Then, when the collapse hit, Greece couldn’t meet its debt payments. At that point, they should have defaulted on the German bank loans. The lesson would have been that if you want to get a risk premium on interest rates, that means that you have to do your homework before loaning money and you have to accept the risk. Instead, Germany bailed out their irresponsible bankers by loaning money to Greece to pay off the German banks.

Now the German government holds the risk, and they essentially want to confiscate part of Greece to pay it off, further enriching Germany, and pushing Greek citizens further into depression and poverty. That in turn will lead to radicalism, violence, risk of revolution, a re-alignment of Greece with Russia and a lack of willingness or ability by Greeks to be a bulwark against bad people from the Middle East crossing into Europe.

All of which will in turn hurt Germans and Germany in the end.

The foolishness is breathtaking. Irresponsible German banks should have gone bust, their directors personally liable for not overseeing the banks’ portfolio. Europe should have behaved counter-cyclically by investing in Greece during the downturn. The result by now would have been a Greek recovery and a happy, prosperous Europe.