By Ruma Dubey
The Greek elections, with Leftist Syriza winning has split a debate wide open – all over again. Fears of moving out of the Eurozone apart, there is growing anxiety that Syriza, which is all for expanding monetary and fiscal policies, doing away with austerity, might just rub orthodox Germany the wrong way.
The largest selling newspaper in Germany, Bild, has already sent out a strong headline immediately after Syriza win – “How many extra billions the Greeks would cost German taxpayers?” This is not mention that all the money given to Greece, majorly by Germany is all in the form of loans, no dole.
Angela Merkel who is probably the most vociferous when it comes to pro-austerity, might not be willing to bend too much for Syriza – she might already be bristling quite a bit after Draghi’s generous money printing drive last week.
Greece's new prime minister, Alexis Tsipras had pledged that he will seek write-down of its huge debt, which currently stands at about $270 billion. But is unlikely that Germany will even listen to his write-down request. The IMF, ECB and European Commission, known as the troika, are the three big lenders to Greece. They might agree to give Greece more time to pay, maybe renegotiate the terms but write-off seems unlikely.
This victory in Greece, will most certainly split wide open the debate all over again – can they afford to relax austerity? Because if they do, others like Spain, Italy and France might demand the same. Greece will face intense pressure in coming weeks to stay the course of austerity and overhauls, if it wants to stay in the euro. And this will bring to fore the question – do austerity measures work?
Let’s take this situation at home. Suppose you have spent money on a huge ceremony at home, the next few months could see you constantly cutting unwanted expenses. But it might not mean taking on another job or cutting down on food.
Or in another home, a DINKS home (Double Income No Kids), suppose a spouse loses the job. Yes, there will be a dip in the earnings but that does not mean the couple will stop paying EMIs. Maybe they might stop eating out frequently, or cut down on shopping or in some cases, do away with the cook or the domestic servant. But it will not be major life-changing alteration of life style!
This is how we might practice austerity at homes when ‘recession’ hits us. But at the end of it, surely most would have noticed a change in the temperament and attitude of the members at home – it would usually be depressed or stressed. Once in a while routine shopping trip might lead to impulsive buying binges; more likely repressed demand let loose. But lift all restrictions and take things back to normal – moods get better and one might work out ways to get out of the tight situation with a more positive attitude.
And the same logic when extrapolated on a macro level seems true. Many countries in Europe imposed austerity measures to cut costs to deal with recession. But in most cases, it just does not seem to be working as more than two years on, most European countries are still struggling.
Austerity in most of the European countries has been in the form of job cuts, higher taxes and cut in Government spending. So they assumed demand and supply to remain same and assumed that merely cutting costs will help put out a better economic picture. This, as we can see has been disastrous. Job cuts have spiraled unemployment, which in turn has cut demand and this meant lower production and thus lower economic growth. Higher taxes have not really resulted in any increase in collections as people have worked out ways and means to avoid tax, most transferring funds to tax havens.
In Spain and Greece, the poverty and misery of people is unbelievable, never seen before in that region. Soup kitchens and charity meals have become critical for many to merely survive. There are those who support austerity measures stating that if there had been no austerity, Greece and Spain would have been out of the EU and unemployment would have been much higher. But it was bailouts which saved Greece and Spain and because of the debt, they had to cut costs.
You cannot fight recession by cutting down demand; what is required is demand stimulation which could give impetus to growth. Europe has tried to tackle the supply side of the issue, without paying much heed to demand. And that is probably the structural change which needs to come in. The US has proven how QE has helped pull back the country back from the brink.
Austerity has proven to be self-defeating and any more austerity at this stage is a big global risk, not a remedy. EU or no EU, austerity must go!