Economists Predict 'No Gain, More Pain' for Greece

If the European authorities are unwilling to abandon their destructive prescription of deeper cuts and continued austerity, Greece should seriously consider a planned default and exit from the euro, according to a new paper by the Center for Economic and Policy Research (CEPR).

"The IMF has consistently underestimated the depth of the Greek recession," said Mark Weisbrot, CEPR Co-Director and lead author of the paper. "At some point, it becomes rational for Greeks to ask, is the euro worth this kind of punishment?"

The paper (pdf) discusses the most recent agreement between the Greek government and the so-called Troika -- the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission (EC) -- which included reducing public employment by 150,000 workers by 2015, cutting the minimum wage by 20 percent (and by 32 percent for those under the age of 25); and weakening of collective bargaining in exchange for a 130 billion Euro package. "All of this," according to CEPR, "will have the effect of reducing living standards for workers and redistributing income upward."

One of the many problems of the austerity push is that it comes from European authorities who look at Greece's situation "mainly from a creditor's point of view," says the report. From the Troika's point of view, it is "not necessarily bad that the adjustment is painful" for the Greek people.

Ideologically/politically, [the Troika wants] a smaller government in Greece, with less regulation, much lower wages, and weaker unions. [...] The IMF lists reducing the size of the public sector as an "essential element" of its program.

Louise Armistead, writing for The Telegraph, says that "Unlike the troika's messy efforts, the CEPR's arguments are clear and compelling." And continues:

Greece has already suffered among the worst losses of output from financial crises in the 20th and 21st centuries, says the CEPR. Even if the economy starts to recover, Greece will have lost 15.8% of GDP since its peak.
Greece is paying crippling interest rates of 6.8% of GDP - one of the highest rates in the world. In the eurozone, only two are above 4% - Italy and Portugal. It seems unlikely that the bailout will bring the interest payments down.

Mark Weisbrot and Juan Antonio Montecino, the authors of the paper, argue that the "most important problem with the commitments that Greece has made to the European authorities is that its fiscal policy is pro-cyclical - that is, the government has been, and is committed to, tightening its budget while the economy is in recession. In 2010-11, the Greek government adopted measures to cut spending by 8.7 percent of GDP. This is comparable to cutting U.S. federal spending by $1.3 trillion."

Greek unemployment hit a record of 20.9 percent in November and the IMF forecasts that it will still be at 17 percent in 2016. Employment as a percentage of the working age population is now less that it was in 1994.

Following Argentina's path the sane alternative?

The authors also look briefly at the alternative of a planned default and exit from the euro, considering that such an outcome might happen in any case due to recurrent crises and continued recession. They look at the case of Argentina, which unsuccessfully tried an internal devaluation with a deep recession from 1998-2001, as a relevant comparison. After default in December 2001 and devaluation a few weeks later, the Argentine economy shrank for just one quarter (a 4.9 percent loss of GDP), but then recovered and grew by more than 63 percent over the next six years.

"Argentina's success after its default and devaluation show that rapid recovery is possible," said Weisbrot. "It was not, as many claim, a commodities boom, or even export-driven growth. Argentina recovered rapidly because it was able to abandon the kinds of destructive economic policies that Greece is following today, and switch to pro-growth policies."

The paper notes that Argentina reached its pre-recession GDP in just three years, while Greece is expected to take at least a decade to reach that benchmark.

An exit from the Euro would not be without risk, the authors acknowledge. They write: "A lot would depend on how skillfully and quickly the authorities could move from the financial crisis that would ensue, to economic recovery. As noted.. it took just one quarter for the economy to resume growth in Argentina after the default/devaluation."

In the case of Greece, there is no way to know in advance how severe the financial crisis, and associated loss of output and employment, would be if the government were to decide to default and exit from the euro. And that is what makes this decision difficult for the government or any political party: on the other side of the equation, it is not known when the Greek economy will begin to recover under the current program. So, although the current program has failed miserably and can be expected to continue to fail in the foreseeable future, there is considerable uncertainty regarding the effects of either choice. And for political leaders, it may be easier to accept the troika's program as though -as the European authorities and most of the media frame it - there is no choice.

But, the idea that default/exit would be a catastrophe on the order of a Great Depression is false. The Great Depression was not the result of any one-time event; it was a long series of bad policydecisions over years. [...] A default/exit would likely bring on a financial crisis, but it would not by itself cause a Great Depression.

And finally, "Given the prognosis for Greece under the current program, and the probability that it will be plagued with recurrent crises and could even end in a chaotic default, a planned default/exit option could very well be the more prudent choice. It should be taken seriously as an alternative."