May 26, 2015
Varoufakis uses a good argument in the wrong way. He wants Greece to relax its government budget, using other countries’s money. The opposition to this strategy has little to do with being Keynesian or not.
The Greek Finance minister Yiannis Varoufakis has spent the last years trying to convince the public opinion that the Troika’s austerity plan must be rejected once and for all. Yesterday he published another article on Project Syndicate making this point.
A couple of self-evident truths
Once expenses are higher than revenues, the budget of a government turns into a deficit. The gap is usually filled by borrowing money or use cash reserves. Greece is in the middle of a liquidity shortage, with no cash at hand and the impossibility to borrow from private investors.
The only alternative to a balanced budget – a primary surplus – is to knock at the Troika’s door and ask for extra funding. That is, translated into English, Tsipras and Varoufakis want to loosen the Greek government’s budget with money from other EU countries. In the previous two bailout programmes the Troika has already given Greece more than 240 billion Euros (and an enormous debt relief as been applied, 66% of Greece’s GDP in 2012). Isn’t it enough?
Varoufakis uses a good argument in a wrong way
There are two problems related to the Greek debt: the liquidity shortage and the perspective of debt’s sustainability (solvency). Germans are focused on the former issue, allowing no more money to be poured into the Greek’s coffer without a solid budget plan. The plan should guarantee Greece will have enough cash in the next years, that is, will have a primary surplus. The mystery is finally solved (mentioned by Varoufakis at the end of his article). This is why the Troika, with Wolfgang Schäuble in the frontline, are so obsessed about fiscal consolidation. They do not want to be asked for money anymore.
On the other hand, Varoufakis is right. Hash fiscal consolidation is definitely a drag on growth, at least in the short term. In Greece the public sector was making a large part of the economy and brutal cuts had the immediate effect of shrinking the national GDP. The private sector will take time to fill in the space left by the downsizing of the public sector. But what about the long-term? This question is much harder to answer and, I must say, Mr Varoufakis never convinced me on this point. The correlation graph with 2009-2012 data is definitely not a proof. In the field of economics the debate on austerity is still ongoing and empirical evidence is not supporting only one side of the battle (some references here and here).
Bottom line: a primary surplus is a must
The German government has repeatedly made clear that Greece is not obliged to take their money and they are not obliged to give. Public opinions in some European countries are particularly concerned over giving additional funding to Greece without ensuring they are doing their part. The problem is finding an exact definition to the concept of “doing their part”. Haven’t they done enough? The fiscal adjustment Greece underwent in the last years is impressive, but let’s pay attention: it all depends on the starting point. Inefficiencies, corruption and abuse of public employment might have been so high in 2009 that Greece has still a long way to go.
Here is a more conciliatory position. We must ask Greece to ensure a primary surplus and leave them the choice on how to consolidate their public finances. Yet, Greece’s proposal must be credible. The (former) IMF Chief Economist, Olivier Blanchard, has warned today that the measures proposed by Tsipras and Varoufakis are not enough to make it happen. The game of chicken continues.