Greece Over the Brink

Paul Krugman

It has been obvious for some time that the creation of the
euro was a terrible mistake. Europe never had the
preconditions for a successful single currency above all,
the kind of fiscal and banking union that, for example,
ensures that when a housing bubble in Florida bursts,
Washington automatically protects seniors against any
threat to their medical care or their bank deposits.
Leaving a currency union is, however, a much harder and
more frightening decision than never entering in the first
place, and until now even the Continents most troubled
economies have repeatedly stepped back from the brink.
Again and again, governments have submitted to creditors
demands for harsh austerity, while the European Central
Bank has managed to contain market panic.
But the situation in Greece has now reached what looks like a
point of no return. Banks are temporarily closed and the
government has imposed capital controls limits on the
movement of funds out of the country. It seems highly likely
that the government will soon have to start
payingpensions and wages in scrip, in effect creating a
parallel currency. And next week the country will hold a
referendum on whether to accept the demands of the
troika the institutions representing creditor interests
for yet more austerity.
Greece should vote no, and the Greek government should
be ready, if necessary, to leave the euro.
To understand why I say this, you need to realize that most
not all, but most of what youve heard about Greek
profligacy and irresponsibility is false. Yes, the Greek
government was spending beyond its means in the late
2000s. But since then it has repeatedly slashed spending and
raised taxes.Government employment has fallen more than
25 percent, and pensions (which were indeed much too
generous) have been cut sharply. If you add up all the
austerity measures, they have been more than enough to
eliminate the original deficit and turn it into a large surplus.
So why didnt this happen? Because the Greek economy
collapsed, largely as a result of those very austerity measures,
dragging revenues down with it.

And this collapse, in turn, had a lot to do with the euro,

which trapped Greece in an economic straitjacket. Cases of
successful austerity, in which countries rein in deficits
without bringing on a depression, typically involve large
currency devaluations that make their exports more
competitive. This is what happened, for example,
in Canada in the 1990s, and to an important extent its what
happened in Iceland more recently. But Greece, without its
own currency, didnt have that option
So have I just made the case for Grexit Greek exit from
the euro? Not necessarily. The problem with Grexit has
always been the risk of financial chaos, of a banking system
disrupted by panicked withdrawals and of business hobbled
both by banking troubles and by uncertainty over the legal
status of debts. Thats why successive Greek governments
have acceded to austerity demands, and why even Syriza, the
ruling leftist coalition, was willing to accept the austerity that
has already been imposed. All it asked for was, in effect, a
standstill on further austerity.
But the troika was having none of it. Its easy to get lost in
the details, but the essential point now is that Greece has
been presented with a take-it-or-leave-it offer that is
effectively indistinguishable from the policies of the past five
years.
This is, and presumably was intended to be, an offer Alexis
Tsipras, the Greek prime minister, cant accept, because it
would destroy his political reason for being. The purpose
must therefore be to drive him from office, which will
probably happen if Greek voters fear confrontation with the
troika enough to vote yes next week.
But they shouldnt, for three reasons. First, we now know
that ever-harsher austerity is a dead end: after five years
Greece is in worse shape than ever. Second, much and
perhaps most of the feared chaos from Grexit has already
happened. With banks closed and capital controls imposed,
theres not that much more damage to be done.
Finally, acceding to the troikas ultimatum would represent
the final abandonment of any pretense of Greek
independence. Dont be taken in by claims that troika
officials are just technocrats explaining to the ignorant
Greeks what must be done. These supposed technocrats are
in fact fantasists who have disregarded everything we know
about macroeconomics, and have been wrong every step of
the way. This isnt about analysis, its about power the
power of the creditors to pull the plug on the Greek economy,
which persists as long as euro exit is considered unthinkable.

So its time to put an end to this unthinkability. Otherwise

Greece will face endless austerity, and a depression with no
hint of an end.