Posted by: Dirk | January 27, 2015

How to repay Greek debt – have more unemployed?

Today’s New York Times has an editorial on Greece which mentions the major point of the whole debate (my highlighting):

Some of the creditors still seem to feel that a debt is a debt to be repaid in full, and that the Greeks “deserve” punishment for their history of profligate spending and habitual tax evasion. But shrinking an economy by a quarter and throwing more than half the young people out of work — policies Mr. Tsipras has likened to waterboarding — is not the way to enable a country to pay back its debts. Greece needs some breathing room, not only to give Mr. Tsipras a chance to turn the country around but also for the sake of the rest of Europe.

There it is! It is not the case that those arguing against austerity are against repaying the debt – they argue that debts cannot be repaid if less government spending (austerity) and more flexible labor markets with lower wages, longer hours, and less security and benefits (structural adjustment) leads to more unemployment. It should be very clear that – macroeconomically – saving is income not spend. Cutting income is then not a logical strategy to boost savings, quite the opposite!

It would be a very big step forward if in 2015 we can have a debate on growth in the euro zone, because without growth the logical level of government debt for euro zone governments is zero. The debate about Greece should be viewed as a fight between two paradigms on how to repay debt: austerity versus textbook macroeconomics from the IS/LM model. And that model says that in periods of weak aggregate demand you need to push the interest rate down or increase government spending. Austerity says that less government spending will create more incomes. How the gap between less government spending (which cause incomes to fall) and higher incomes is bridged still seems misty. The evidence says the gap will remain.

So, either you chose more government spending, more economic growth and more debt repayment or you chose austerity. That should have been the debate the whole time, instead of Greek taxpayers versus (Greek and non-Greek) bond holders. We had this debate in the economics profession, but somehow it did not get noticed in the press. Perhaps now would be the time.


  1. Of course the argument for austerity is lock tight! It causes the “confidence fairy” to visit the oligarchy (the “job creators”) and stir them to increase investment. Increased savings is not needed because the feudal “Lords of Finance” have all the resources needed if just they were to use them. It is a given of feudalism that the serfs do not need property, assets or savings.

    Use sarcasm lenses when reading.

  2. Previous comment was left by John Lounsbury

  3. Reblogged this on sdbast.

  4. It is obvious then that preference is put on “punish” not on debt payment. This has nothing to do with paying off debts but with punishing even if los of payments will make both sides loose.
    As Varoufakis says: “Holding up to biblical rule; eye for an eye, tooth for tooth, leaves everyone blind and toothless” This is what lenders are doing now, want everyone blind and toothles for the sense of revenge for greek’s profligacy.

    But Northerners provided the defense against loses from greek debts, the debt is not held by banks anymore, it is ECB that printed money to pay them off and now holds that debt. If debt was to be repayed, that money would be destroyed, just as it was created for bailout, if not payed that debt can be just as easily erased. But Northerners just want to use such debt to take more control over Greece, they would not lose anything if they forgive debts and would not get anything if debt is payed off.
    Greek debt is just an accounting fiction.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: