Sunday, May 13, 2012

Arianna's Greek Fantasy

If you want a native's eye view of the Greek crisis why not turn to America's favorite Greek, Arianna Huffington.  That's what The New York Times did.
When I was growing up, my family was a tiny microcosm of the current Greek economy. We were heavily in debt; my father’s repeated attempts to own a newspaper ended in failure and bankruptcy. Eventually, my mother took my sister and me and left him...

Further austerity was coming, but my mother was clear about one thing: she would cut back on everything except our education and good, healthy food...

As I contemplate the statistics — especially the 54 percent unemployment rate among young Greeks — I think of all the stories behind this appalling data. All the dreams dashed. All the promise unfulfilled. And all the guilt, shame and fear that so often go hand in hand with intractable unemployment and little hope for a better future.

The punitive path of austerity and relentless economic contraction is, not surprisingly, likely to lead to further stagnation in 2013 and cannot be allowed to continue...

Argentina, which defaulted and restructured beginning in 2001, offers a point of comparison. The austerity crowd warned that Argentina would collapse if it stopped pegging the peso to the dollar and defaulted on its debt. There are many differences between Argentina and Greece. But Argentina’s default was followed by a few short months of economic crisis and then many years of steady economic growth — a dramatically different direction than the one Greece is now taking toward a potentially endless path of contraction that is destroying millions of lives and crippling the indomitable Greek spirit.
Er, no Ariana, darling.  Maybe you should check the stats.  Argentina's GDP went from $269 billion in 2001 to $102 billion in the trough of 2002.  That's a decline of over 60 percent.  So far the Greeks have only experienced three years of GDP decline from the peak of $341 billion: 2% in 2009, 4.5% in 2010 and an estimated 3% in 2011, around $290 billion.

In Greece, as the saying goes, they ain't seen nothing yet.  I don't know what Ariana Huffington reckons as austerity, but I'd say that contracting the GDP from around $300 billion to $100 billion in one year, as the Argentines did "in a few short months of economic crisis", counts as something a little worse than Paul Krugman's dreaded "austerity."

The problem for Greece has is that, tied to the Euro, it can't steal money from its people right now and reduce government entitlements by 50 percent.  To do that it needs to cut loose from the Euro and devalue the currency, as Argentina did in the 2001-2002 crisis by converting dollars in Argentine bank accounts to pesos.  People riot in the streets if you cut their benefits, but a devaluation is a fait accompli.  If you look at the chart, Greek GDP will probably decline from the current $300 billion to about $125 billion, one way or another.

The problem for the politicians in a debt crisis is how reduce the weight of government without the people burning the place down.  The best thing is not to create a big government in the first place, but it's now a bit too late for that, for Greece and for many other countries.

On the other hand, you have to hand it to Arianna Huffington.  Her father may have failed in the newspaper biz, but she is doing fine--not in old-fashioned newspapers, but in new online media.

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