η Βαϊμάρη του Αιγαίου

Weimar on the Aegean

Paul Krugman, FEB. 16, 2015

..." You can argue that Greece brought its problems on itself, although it had a lot of help from irresponsible lenders. At this point, however, the simple fact is that Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany — real Greek G.D.P. per capita fell 26 percent from 2007 to 2013, compared with a German decline of 29 percent from 1913 to 1919.

Despite this catastrophe, Greece is making payments to its creditors, running a primary surplus — an excess of revenue over spending other than interest — of around 1.5 percent of G.D.P. And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus, and keep running huge surpluses for many years to come.

What would happen if Greece were to try to generate those huge surpluses? It would have to further slash government spending — but that wouldn’t be the end of the story. Spending cuts have already driven Greece into a deep depression, and further cuts would make that depression deeper. Falling incomes would, however, mean falling tax receipts, so that the deficit would decline by much less than the initial reduction in spending — probably less than half as much. To meet its target, then, Greece would have to do another round of cuts, and then another.

Furthermore, a shrinking economy would lead to falling private spending too — another, indirect cost of the austerity.

Put it all together, and attempting to cough up the extra 3 percent of G.D.P. the creditors are demanding would cost Greece not 3 percent, but something like 8 percent of G.D.P. And remember, this would come on top of one of the worst economic slumps in history.

What would happen if Greece were simply to refuse to pay? Well, 21st-century European nations don’t use their armies as bill collectors. But there are other forms of coercion. We now know that in 2010 the European Central Bank threatened, in effect, to collapse the Irish banking system unless Dublin agreed to an International Monetary Fund program.

The threat of something similar hangs implicitly over Greece, although my hope is that the central bank, which is under different and more open-minded management these days, wouldn’t go along.

In any case, European creditors should realize that flexibility — giving Greece a chance to recover — is in their own interests. They may not like the new leftist government, but it’s a duly elected government whose leaders are, from everything I’ve heard, sincerely committed to democratic ideals. Europe could do a lot worse — and if the creditors are vengeful, it will."