Tuesday, September 20, 2011

Milking blood

What is going to happen to Greece?  When austerity was embarked upon as a response to the horrendous deficit, critics didn't demur about the need for reform and the reduction of the Greek sovereign debt. However, they argued that austerity at a time of recession was not the way to do it and that the social and economic consequences of austerity programmes in a contracting economy could be dire. Without investment, measures to promote growth and with Greece lacking the ability to adjust their exchange rate, a policy of increasing competitiveness through 'internal devaluation' (reducing living standards) would shrink demand in a time of recession thereby, they argued, raising costs and lowering the income of the Greek state. The resulting sharp economic downturn would end up increasing the deficit. David Blanchflower has called this a "death spiral". Guess what has happened? Spot on. The response - more of the same? Yep, you got that right too.

Why should that be so?  Chris Dillow sees moral and political pressures preventing a number of perfectly feasible solutions, leading to the horrible indecision of European policy makers. I would highlight the extraordinary strength of the ideological belief in the economic consensus in the face of its failure. Larry Elliott, who had long predicted the implosion of both the banking system and the Euro from a social democratic perspective, echoing Vince Cable's war-time rhetoric, remembers Beveridge and calls for a rejection of the dominant model of political economy, something that Cable eschews:
Our political masters should look at the current benighted state of Britain and conclude that it is time to start planning for a post-crisis world. They need to accept that the model of the past quarter-century was unfit for purpose. That's what Beveridge concluded in 1942. He would come to the same conclusion today.
Across Europe, the mainstream left has conspicuously failed to construct and articulate alternatives, offering little hope for change. They have failed the most important political challenge presented to them for a generation. In the meantime, ordinary Greeks are in despair and social pressures mount.

I think back to the 80s. Then the debt crisis belonged to the developing world. It didn't seem to matter so much to the wealthy nations in those days and rarely found its way to the front pages or produced embarassing political rhetoric at party conference time. The solutions that the IMF imposed were the same as the ECB are insisting on today. The writer, Susan George, published a powerful book on it, A Fate Worse than Debt, and made a TV documentary of the same name. I remember the end of the film. It featured an interview with Julius Nyerere.* He concluded,
You know, there is a limit to the cow. The cow only has so much milk. You can't go on milking the blood, you'll be in trouble. And at present, they're really milking blood from the South. These countries can't pay it - so they'll collapse.
 Just how much milk is left in the Greek economy? 

*Transcript here

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