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FACTDROP: As Greece struggles economically, critics question whether austerity works
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1/15/2012

As Greece struggles economically, critics question whether austerity works



Πηγή: TwinCities
By Anthony Faiola (Washington Post)
Jan 14 2012

ATHENS - Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as the Greek economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work?

Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals face acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping.

Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending, the biggest driver of the economy, has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees.

"Conditions have deteriorated so dramatically that doctors in this country now believe that the Greek crisis is no longer just a financial crisis but a humanitarian crisis," said Dimitris Varnavas, the president of the Federation of Greek Hospital Doctors' Unions.

The economic pain here is intensifying the debate over how to fix Europe's fiscal woes, potentially influencing U.S. policymakers as they chart their own course to cut the deficit.

Greece, proponents of austerity say, has no one to blame but itself. After a decade of excessive borrowing and spending, evidence emerged in late 2009 that Greek officials had lied about the extent of the country's whopping deficit. That lighted the first embers of the European debt crisis, touching off a firestorm of investor panic that spread across Europe and is now jeopardizing the global economy.

European powers led by fiscally conservative Germany have been insisting that Greece correct years of mismanagement by enacting swift waves of cuts and other major economic reforms to regain the confidence of investors and ensure the integrity of the euro. Slashing the deficit quickly is essential to ushering in a sustainable future, they have argued, and the resulting social pain is necessary to impress on Greek politicians and society that such excesses should never happen again.

Fueled by borrowing and overly generous government handouts, Greek living standards, they argue, became artificially high. As the standard of living and average wages here now shrink dramatically, supporters of quick cuts say, Greece will also become more globally competitive. Greece is set to negotiate a second, more sweeping bailout (worth $175 billion) that could bring more cuts, force a reduction of wages in the private sector and compel the country to make good on promises to slash tens of thousands of public-sector jobs.

But increasingly, critics of the quick-cuts theory are pointing to the worsening recession here as evidence that the medicine is killing the patient, with the nation's sharp, sustained decline leading some economists to suggest that the country has already entered a more serious depression. Some are calling for more-staggered cuts, an increased focus on modernizing the economy, and tax incentives, as opposed to recent tax increases, that could spur growth or at least ease the downturn.

"This idea of cut, cut, cut and tax, tax, tax is not going to work," said Antonis Papagiannidis, an economist and editor of Greece's Economic Review. "It has sent Greece into a depression with no end in sight. They want milk, but you don't get milk by killing the cow."

In May 2010, Greece pledged to meet tough targets to cut its deficit as part of a bailout deal with the European Union, the International Monetary Fund and the European Central Bank. But it resoundingly missed those targets in 2011, in part because the Greek economy went into a nose dive, estimated to have shrunk by nearly 6 percent, or twice as much as initially predicted. That happened despite the fact that the government actually put into effect less than a quarter of pledged measures, suggesting, critics say, that a fuller embrace of the austerity would have been far more socially damaging.

Greece agreed to stringent bailout terms to avoid a catastrophic debt default that could force it to exit the euro, an event that would probably increase the immediate hardship here but potentially set the stage for future growth. But skeptics caution that a default may happen anyway. Some economists are already suggesting that more cuts this year would force Greece into another economic contraction that would be far worse than the current estimates of a 3 percent drop this year. That could cause the government to again grossly miss its agreed-upon deficit targets, triggering a standoff with its lenders, who have suggested they would cut Athens off from rescue funds if it does not fulfill its pledges.

Greece is no newcomer to economic chaos. After decades of budget crises and high inflation, stabilization came with the adoption of the euro a decade ago. Using its new, solid currency to access record-low interest rates, Greece proceeded to rack up a massive national debt of roughly $442 billion, or $40,000 for each of Greece's 11 million citizens.

The current cuts, critics say, are exacerbating a growing social crisis here, particularly in public health. A rising tide of unemployed Greeks have lost their private health care coverage, leaving them turning to public hospitals left dangerously understaffed by hiring freezes. Suppliers are cutting off shipments of syringes, catheters, gauze and other medical materials because of the government cash crunch.


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