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Published on June 21st, 2012 | by Catch 21
Image © [caption id="" align="alignnone" width="566"] Recent strikes in Athens © odysseasgr[/caption]   So Antonis Samaras’ New Democracy party has finally managed to form a new coalition government with the Democratic Left and PASOK, everybody breathes a sigh of relief, and the Greeks will continue to have to put up with crippling yet necessary austerity measures in order to eventually save the euro; after all it was their laziness and profligacy which led to this whole mess in the first place, right? This view, often lurking behind politicians’ calls for action and the now familiar media headlines, has been widespread in mainstream media coverage of the crisis. It is attractive, lays the blame efficiently at the door of the Greeks and offers austerity as a way out of the crisis. It is also wrong. The recent Athens elections were frequently framed by the New Democracy party and by European leaders as a choice for the Greeks between staying in the Euro or causing economic meltdown by not playing ball. The narrow conservative victory and resulting coalition, while still in a fragile condition, has been hailed as a positive assertion by the Greeks that they want to stay in the Euro. Yet we must not forget that the radical left opposition Syriza also vehemently stated their desire to stay in the Euro; what really upset them were the severe conditions attached to the bailout that required a budget deficit reduction to just over 2 percent of GDP by 2014. An austerity of such vicious terms has been given credence and weight by the widely accepted German view of the crisis: that we shouldn’t give in on the terms of the bailout because quite simply the fault lies with Greece for its predicament. And Germany are still publicly refusing to budge from this position despite new calls for flexibility. Angela Merkel on the sidelines of the G20 in Mexico said: “The new government must stick to its commitments.”  This is a view shared by many across Europe. However, Francesco Saraceno, an Italian economist at the Paris-based OFCE (French Observatory on Economic Conditions) challenges the assumption that it was fiscal profligacy by the Eurozone periphery countries that led to their current predicaments. The established “Berlin” view of events blames continual high current account deficits and overspending by southern European countries which then weakened the single currency framework. In their book, tighter rules on debt and spending are the only answer to the current problems. It is true that many in the Greek government were extremely irresponsible and for years Greece did “cook the books”, but Saraceno disagrees that this kind of fiscal irresponsibility was the real cause of the crisis. Instead he argues that the root cause of the Eurozone predicament came from the very act of monetary union itself between countries with highly heterogeneous economies. This then triggered inevitable capital flows from rich countries to poorer southern countries. In other words, excessive private sector borrowing in the periphery countries was financed by excessive lending from the core. Fiscal discipline and desperate cuts in spending could only slow the inevitable. The implication of this ‘global imbalances’ view is that leaders could have done little to prevent the resulting high levels of debt that are now causing such trouble. And Saraceno is not the only one to question the current solutions on the table. Economists Simon Wren-Lewis and Brad de Long, among others, have long been criticising Europe’s flawed hope in austerity. The UK Shadow Chancellor Ed Balls, in his rallying call against the prevalent view, came up with the rather inventive new term of “Camerkozy” politics to denote Europe’s special blend of austerity politics. Recent plans gaining support at the G20 summit include buying sovereign debt to ensure cheaper borrowing costs for Spain and Italy, although the final communiqué doesn’t offer any concrete proposals yet. These are necessary steps, but the debate surrounding the basic premise of austerity must be opened up so that drivel such as this from Professor Niall Ferguson can be debunked for what it is. So let’s hear a little more from the other side of the crisis. It is rare to hear why Greeks are so angry from their point of view.  Radical left Syriza received close to 30% of the votes, with around a third of 18-34 age bracket rejecting the status quo; and with good reason. A blameless generation of young people with no opportunities are now having to shoulder the blame for the rest of Europe. They take to the streets because they feel they have no other option. As the Greek bailout negotiations cause much foot-dragging from Germany bear in mind that there are two sides to this story.

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Greece: A tale of two crises

Recent strikes in Athens © odysseasgr

 

So Antonis Samaras’ New Democracy party has finally managed to form a new coalition government with the Democratic Left and PASOK, everybody breathes a sigh of relief, and the Greeks will continue to have to put up with crippling yet necessary austerity measures in order to eventually save the euro; after all it was their laziness and profligacy which led to this whole mess in the first place, right?

This view, often lurking behind politicians’ calls for action and the now familiar media headlines, has been widespread in mainstream media coverage of the crisis. It is attractive, lays the blame efficiently at the door of the Greeks and offers austerity as a way out of the crisis. It is also wrong. The recent Athens elections were frequently framed by the New Democracy party and by European leaders as a choice for the Greeks between staying in the Euro or causing economic meltdown by not playing ball. The narrow conservative victory and resulting coalition, while still in a fragile condition, has been hailed as a positive assertion by the Greeks that they want to stay in the Euro.

Yet we must not forget that the radical left opposition Syriza also vehemently stated their desire to stay in the Euro; what really upset them were the severe conditions attached to the bailout that required a budget deficit reduction to just over 2 percent of GDP by 2014. An austerity of such vicious terms has been given credence and weight by the widely accepted German view of the crisis: that we shouldn’t give in on the terms of the bailout because quite simply the fault lies with Greece for its predicament. And Germany are still publicly refusing to budge from this position despite new calls for flexibility. Angela Merkel on the sidelines of the G20 in Mexico said: “The new government must stick to its commitments.”  This is a view shared by many across Europe.

However, Francesco Saraceno, an Italian economist at the Paris-based OFCE (French Observatory on Economic Conditions) challenges the assumption that it was fiscal profligacy by the Eurozone periphery countries that led to their current predicaments. The established “Berlin” view of events blames continual high current account deficits and overspending by southern European countries which then weakened the single currency framework. In their book, tighter rules on debt and spending are the only answer to the current problems. It is true that many in the Greek government were extremely irresponsible and for years Greece did “cook the books”, but Saraceno disagrees that this kind of fiscal irresponsibility was the real cause of the crisis.

Instead he argues that the root cause of the Eurozone predicament came from the very act of monetary union itself between countries with highly heterogeneous economies. This then triggered inevitable capital flows from rich countries to poorer southern countries. In other words, excessive private sector borrowing in the periphery countries was financed by excessive lending from the core. Fiscal discipline and desperate cuts in spending could only slow the inevitable. The implication of this ‘global imbalances’ view is that leaders could have done little to prevent the resulting high levels of debt that are now causing such trouble.

And Saraceno is not the only one to question the current solutions on the table. Economists Simon Wren-Lewis and Brad de Long, among others, have long been criticising Europe’s flawed hope in austerity. The UK Shadow Chancellor Ed Balls, in his rallying call against the prevalent view, came up with the rather inventive new term of “Camerkozy” politics to denote Europe’s special blend of austerity politics. Recent plans gaining support at the G20 summit include buying sovereign debt to ensure cheaper borrowing costs for Spain and Italy, although the final communiqué doesn’t offer any concrete proposals yet. These are necessary steps, but the debate surrounding the basic premise of austerity must be opened up so that drivel such as this from Professor Niall Ferguson can be debunked for what it is.

So let’s hear a little more from the other side of the crisis. It is rare to hear why Greeks are so angry from their point of view.  Radical left Syriza received close to 30% of the votes, with around a third of 18-34 age bracket rejecting the status quo; and with good reason. A blameless generation of young people with no opportunities are now having to shoulder the blame for the rest of Europe. They take to the streets because they feel they have no other option. As the Greek bailout negotiations cause much foot-dragging from Germany bear in mind that there are two sides to this story.

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