Milton Friedman, Irving Fisher, and Greece

Πηγή: New York Times
By Paul Krugman
July 7 2015


I continue to be amazed by how many people regard debt relief and devaluation as wild-eyed radical ideas; of course, it matters most that so many influential people in Europe share this ignorance. Anyway, for the record (and for my own future reference) I thought it would be helpful to post what Milton Friedman and Irving Fishe rhad to say about the Greek disaster. OK, they weren’t writing specifically about Greece — Friedman was writing in 1950, Fisher in 1933. But their analyses ring truer than ever.

First, Friedman (why oh why isn’t there a full electronic copy of this essay online?):



That tells you everything you need to know about why “internal devaluation” has been such a costly strategy — and why the ECB’s failure to move aggressively early on to achieve and if possible surpass its 2 percent inflation target was a major contributing factor to this disaster.

Then Fisher on why austerity hasn’t even helped on the debt:

The basic story of the European periphery — not just Greece — is one of a poisonous interaction between Friedman and Fisher, which has produced incredible suffering while failing to reduce the debt/GDP ratio, which even in star pupils like Ireland and Spain is far higher than when austerity began; the only success has been in suffering long enough so that some growth has finally resumed, and they can call it vindication.

The bizarreness of the whole thing is how flaky, speculative ideas like expansionary austerity became orthodoxy, while applying the economics of Fisher and Friedman became heterodoxy bordering on Chavismo.

Greece Internal Devaluation Update

Πηγή: The Wall Street Journal
By Matthew Dalton
April 23 2013

Without the tool of currency devaluation, the euro zone is hoping “internal devaluation” can restore competitiveness to the bloc’s periphery. What’s that?

It’s an economy-wide fall in wages and, more broadly, prices. Officials have been careful not to say the “D” word – that’s “deflation” – but Europe’s policies call for a period of deflation in euro-zone countries with the worst competitiveness problems.

The prime example is Greece. As the International Monetary Fund said in its last report on Greece:


Large external liabilities ultimately require large trade surpluses in order to service them, and achieving these surpluses requires a more depreciated level of the real exchange rate. In a currency union the depreciation has to be achieved largely through deflation, which necessitates a larger negative output gap.

So, how has the deflationary process been playing out in Greece? Not too well. There has been a sharp drop in Greece’s nominal gross domestic product (that’s the one that doesn’t adjust for inflation), which the IMF now projects will have fallen more than 20% by the end of this year since 2008.

Yet annual consumer-price inflation has remained positive for most of Greece’s battle with the crisis (yes, this partly due to tax increases adopted as part of Greece’s austerity program, but still…)

Then look at Greece’s sharply falling labor costs:



(The above chart only has actual labor-cost data through the third quarter of 2012, but indications Greek wages continued to fall in the fourth quarter and possibly after.)

This portrays an economy in which ordinary people have seen their purchasing power crushed by a combination of still rising prices and falling wages. Businesses haven’t been passing through lower labor costs into the prices they charge consumers and other businesses.

The IMF and euro-zone authorities have blamed Greece’s inflation on still-powerful oligopolies in the Greek economy that don’t feel competitive pressure to cut their prices. That’s why overhauls intended to break up these oligopolies are now such a key part of Greece’s bailout program.

The latest inflation data give an indication that some of these measures may be starting pay off. In March, Greek consumer prices actually fell 0.2% from February. Compared with a year earlier, however, inflation was still 1%.

The contrast between the small monthly decline and the persistent annual rise underlines that the road to internal devaluation in Greece likely remains long and hard.