In 3 years, Greece will be back to crisis: Mark Weisbrot

The International Monetary Fund (IMF) and the European Union (EU) have thrown nearly $1 trillion at stabilising Greece and the weaker economies in the eurozone. But it doesn’t matter how many zeros you put on the end of a bad idea. It’s still a bad idea. “This will not resolve the underlying problem, even in the short run,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research (CEPR), in Washington.

He told DNA that the bailout package will create its own recessionary dynamics, since the main condition attached is that economies with excess debt will start cutting public expenditure. He said that the PIIGS — Portugal, Italy, Ireland, Greece and Spain — could worsen their recessions because their governments are going to have to push through huge and painful austerity programmes. Weisbrot said that what is worse is that they can’t devalue their currencies at the same time to provide some relief to their economies and hope of future growth.

The nearly $1 trillion bailout offered by the IMF and the European Union to stem the sovereign debt crisis has calmed investors worldwide for now, but will it resolve the underlying problem?  
No, I do not believe that it will. In fact, by requiring that any country tapping into these funds adopt pro-cyclical policies — ie  policies that will shrink these economies, as the EU has stated — will make the underlying problem worse. They are prescribing the medieval medicine of bleeding the patient, with the hope that this will work. It won’t.

The projections show that if the IMF-EU programme “works,” the country’s debt will rise from 115% of GDP today to 149% in 2013. This means that in less than three years, and most likely sooner, Greece will be facing the same crisis that it faces today.
In other words, the Greek people will go through a lot of suffering, their economy will shrink and the debt burden will grow, and then they will very likely face the same choice of debt rescheduling, restructuring or default — and/or leaving the Euro.

Will a Greece meltdown impact India? 
It is very hard to tell how — or if at all — it will impact India. If the European Central Bank (ECB) mishandles it like it did last week then we could see the spillover of a financial crisis. There is a lot of uncertainty.

You have said that the tens of thousands of Greeks in the streets have it right, and the EU economists have it wrong because you can’t shrink your way out of recession; you have to grow your way out… 
Well this is pretty much standard Economics 101. In fact, it is basic national income accounting. If the government cuts spending and/or raises taxes in a recession, that will — all other things held constant — make the recession worse.

Since the EU/IMF is not offering a growth option to Greece, is it better off leaving the euro and renegotiating its debt?
Yes, I think that they would be better off doing that than committing to years of recession and economic stagnation. Of course, there are costs to that route as well, and they would have to try to minimise those by organising an orderly transition, preventing the failures of national banks and business as much as possible, rearranging loans and mortgages that involve international borrowing in euros. But Argentina managed such a transition in 2002, under much more adverse initial circumstances, and with no help from outside.

Argentina first tried the “internal devaluation” strategy from mid-1998 to the end of 2001, suffering through a depression that pushed half the country into poverty. It then dropped its peg to the dollar and defaulted on its debt. The economy shrank for just one more quarter after the devaluation and then had a robust recovery, growing 63% over the next six years

I’m not saying that such a decision should be made lightly or casually. But if the EU offers nothing but open-ended recession, and a recovery that does not offer Greece the opportunity to reach their pre-crisis GDP for 8 or 9 years — as current projections indicate — or possible worse, than the option of leaving the euro could very well be the better choice.

As suspected, investors are realising the bailout is adequate to address the short-term problems of Greece & Co., but the long term implications remain unclear. Since the cost of the bailout is not only financial — will the austerity measures hinder EU growth?
Yes, absolutely, for the reasons described above. Of course, the bigger economies, such as Germany and France, could still recover while Portugal, Italy, Ireland, Greece and Spain are stuck in recession. And then there is the possibility of financial crisis, which could happen if the European Central Bank continues to play the kind of brinksmanship games that it played last week. If the PIIGS adopt austerity policies and worsen their recessions, this increases the risk to both the real and the financial sectors of the region.

In Asia, we see risk appetite has further eroded with the release of Chinese data that shows acceleration in inflation and a jump in property prices along with a higher than expected lending. Does this imply that monetary tightening is significantly lagging the pace of growth and inflationary pressure? 
Well, certainly for Europe and the US, which together make up about half the world economy, it is much too early for any kind of monetary tightening, and the central banks there realise that. I think that’s true for most of the world; there is not much in the way of inflationary pressure worldwide that would warrant monetary tightening. China could be an exception, but I’m not sure.