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Greek Referendum: Just Say No

Greek Referendum - Just Say NoWell, the past two weeks have been interesting: we had the Supreme Court uphold the Obama care law, the Supreme Court siding with the same-sex marriage, and the possibility of the Confederate flag coming down in the Southern states. Then on Sunday, the Greeks decided to say “no” to austerity. I guess the pain of austerity was greater than the pain of facing the unknown which is surely to be more pain. More than likely, Greece will exit the Euro as there doesn’t seem to be any way of improving their situation unless the Germans forgive some of their debt.

I don’t understand why the Germans don’t relate to the Greeks’ position since they’ve been there before, namely before World War II and afterwards. The Germans faced economic misery during the twenties and thirties, and were so willing to get out of it that they voted in Hitler, who ran on an economic plank promising them jobs (at least that is what I remember reading). That isn’t so much different from what the Greeks are going through now: they’ve had 5 years of declining economy and high unemployment. And now the Euro (probably mostly the Germans) want to impose more austerity?

Back in 2010, when the Greeks admitted that their deficits were much greater than they had been reporting, the austerity plan was imposed as a condition of receiving bailout money. It was pretty much: “If you cut your spending and do a better job of collecting taxes, you will be able to raise enough revenue to sustain a surplus which will go toward repaying us. But you have to implement budgetary cuts before you receive a loan from us.” And so five years ago, the Greeks proceeded to cut spending, in the hopes that they can save enough money to pay back. The Greeks did manage to gain some surplus but at a cost of 25% reduction in economic output and high unemployment. And the surplus is really not enough to pay back. What happened was the budget cuts led to a severe reduction in the economy, leading to reduced revenues. At the same time, the size of the debt grew in relation to  the economy because the economy itself was shrinking. All around the austerity plan did not work. Spain and Portugal have the same problem: their austerity plans have reduced their economy, making it harder for them to pay back their debt.

Paul Krugman had a post where he did some calculations of how long under an austerity plan would it take before the Greek’s, or anybody’s, economic situation improve. By his calculations, with the revenues declines under austerity and debt burden increases under a shrinking economy, the turnaround would be in decades. His calculations say austerity does not work. Real life seem to be saying the same.

So now the Greeks are asking for debt forgiveness but the Germans say no, because it would lead to a moral hazard. If they forgive the debt of one country, then all other countries will beg for forgiveness. But I just recently learned (or maybe had to be reminded) that the Germans had almost 50% of their own debt forgiven after World War II. So for the Germans to take the “high” ground and be all moral and upright is rather hypocritical. There have been two articles within the past two days pointing out the history of Germany’s debt forgiveness.

Will the Germans be more humble and understand what the Greeks are saying or are they going to continue to be sanctimonious and hypocritical? We’ll see. This week may indicate whether Greece will exit from the euro and face the scary unknown. But in that path, there may be some hope of a turnaround whereas continuing the austerity plan had no hope.

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