by Paul
Krugman
It has been
obvious for some time that the creation of the euro was a terrible
mistake. Europe never had the preconditions for a successful single
currency — above all, the kind of fiscal and banking union that,
for example, ensures that when a housing bubble in Florida bursts,
Washington automatically protects seniors against any threat to their
medical care or their bank deposits.
Leaving a
currency union is, however, a much harder and more frightening
decision than never entering in the first place, and until now even
the Continent’s most troubled economies have repeatedly stepped
back from the brink. Again and again, governments have submitted to
creditors’ demands for harsh austerity, while the European Central
Bank has managed to contain market panic.
But the
situation in Greece has now reached what looks like a point of no
return. Banks are temporarily closed and the government has imposed
capital controls — limits on the movement of funds out of the
country. It seems highly likely that the government will soon have to
start paying pensions and wages in scrip, in effect creating a
parallel currency. And next week the country will hold a referendum
on whether to accept the demands of the “troika” — the
institutions representing creditor interests — for yet more
austerity.
Greece
should vote “no,” and the Greek government should be ready, if
necessary, to leave the euro.
To
understand why I say this, you need to realize that most — not all,
but most — of what you’ve heard about Greek profligacy and
irresponsibility is false. Yes, the Greek government was spending
beyond its means in the late 2000s. But since then it has repeatedly
slashed spending and raised taxes. Government employment has fallen
more than 25 percent, and pensions (which were indeed much too
generous) have been cut sharply. If you add up all the austerity
measures, they have been more than enough to eliminate the original
deficit and turn it into a large surplus.
So why
didn’t this happen? Because the Greek economy collapsed, largely as
a result of those very austerity measures, dragging revenues down
with it.
And this
collapse, in turn, had a lot to do with the euro, which trapped
Greece in an economic straitjacket. Cases of successful austerity, in
which countries rein in deficits without bringing on a depression,
typically involve large currency devaluations that make their exports
more competitive. This is what happened, for example, in Canada in
the 1990s, and to an important extent it’s what happened in Iceland
more recently. But Greece, without its own currency, didn’t have
that option.
So have I
just made the case for “Grexit” — Greek exit from the euro? Not
necessarily. The problem with Grexit has always been the risk of
financial chaos, of a banking system disrupted by panicked
withdrawals and of business hobbled both by banking troubles and by
uncertainty over the legal status of debts. That’s why successive
Greek governments have acceded to austerity demands, and why even
Syriza, the ruling leftist coalition, was willing to accept the
austerity that has already been imposed. All it asked for was, in
effect, a standstill on further austerity.
But the
troika was having none of it. It’s easy to get lost in the details,
but the essential point now is that Greece has been presented with a
take-it-or-leave-it offer that is effectively indistinguishable from
the policies of the past five years.
This is, and presumably was intended to be, an offer Alexis Tsipras, the Greek prime minister, can’t accept, because it would destroy his political reason for being. The purpose must therefore be to drive him from office, which will probably happen if Greek voters fear confrontation with the troika enough to vote yes next week.
But they
shouldn’t, for three reasons. First, we now know that ever-harsher
austerity is a dead end: after five years Greece is in worse shape
than ever. Second, much and perhaps most of the feared chaos from
Grexit has already happened. With banks closed and capital controls
imposed, there’s not that much more damage to be done.
Finally,
acceding to the troika’s ultimatum would represent the final
abandonment of any pretense of Greek independence. Don’t be taken
in by claims that troika officials are just technocrats explaining to
the ignorant Greeks what must be done. These supposed technocrats are
in fact fantasists who have disregarded everything we know about
macroeconomics, and have been wrong every step of the way. This isn’t
about analysis, it’s about power — the power of the creditors to
pull the plug on the Greek economy, which persists as long as euro
exit is considered unthinkable.
So it’s
time to put an end to this unthinkability. Otherwise Greece will face
endless austerity, and a depression with no hint of an end.
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