The Greek economy is now managing “austerity” OK

by on May 14, 2017 at 3:31 pm in Current Affairs, Economics | Permalink

The Greek economy is projected to grow 1.8 per cent this year, against an earlier forecast of 2.7 per cent according to the proposal…

Of course that’s not great, especially with all the catch-up they could be doing (but please don’t assume that all or even most of the output gap represents potential catch-up).  Still, the Greek economy is not shrinking, even though Keynesian fiscal theories predict it should be:

“We accept that there will need to be a 3.5 per cent primary surplus until the end of the [bailout] programme [in 2018] but after that it should come down to something like 1.5 per cent to allow for more capital expenditure to lift the Greek economy.”

Here is the FT article by Kerin Hope and Claire Jones.  I said it before, I’ll say it again: the 2008-2012 period was a very special one, with a very high risk premium (sorry, Scott!) and with massive contractions in bank intermediation in some of the key affected countries.  We draw broader conclusions from it at our peril.

1 Joël May 14, 2017 at 3:41 pm

“Still, the Greek economy is not shrinking, even though Keynesian fiscal theories predict it should be”.

Is that right? From my reading of Krugman’s blog, at the time he was still talking about Economics, it seemed to me that the its is GDP level that should be affected by the primary deficit or surplus (under certain conditions of being near the zero lower bound, etc.). The GDP growth should then be affected, in turn, by the derivative of the primary surplus or deficit. In other words, if the primary surplus is constant at 3.5% of GDP (or any value), there is no reason te expect this to negatively affect growth. On the other hand, during the process of reducing the primary deficit from 10% to -3.5%, the GDP level should have plummeted, and this is what we have seen.

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2 Captain Obvious May 14, 2017 at 5:15 pm

Details 😉 …. ssshhhh don’t spoil the narrative! Otherwise they might call Tyler “mood affiliated” or ” complacent” (the worst insult ever!)

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3 Tyler Cowen May 14, 2017 at 5:59 pm

First, Greece has not been at the zero bound. Second, a big AD shrinkage shouldn’t be giving you 1.7% growth, it might at best get you “less negative shrinkage but shrinkage still.”

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4 Unanimous May 14, 2017 at 6:18 pm

1.7% is a projection. Look at last quarter’s GDP figures.

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5 rayward May 14, 2017 at 4:03 pm

General Patton to his troops: “When you see the whites of their eyes, retreat”. Passenger on the Titanic: “The good news is that we won’t run out of ice”.

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6 Bill May 14, 2017 at 4:26 pm

Greece, and the entire European economy, owes a lot to austerity.

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7 TMC May 14, 2017 at 11:51 pm

True. Has there been once where austerity has hurt an economy? It’s like the 10th time in a row where we are ‘surprised’ the outcome was good. You’d think people wouldn’t be surprised after the 9th.

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8 prior_test2 May 15, 2017 at 1:44 am

Germany, 1930-2, involving this Heinrich-Brüning – https://www.britannica.com/biography/Heinrich-Bruning

Germans are quite aware of the causes of Hitler’s rise to power – a misplaced austerity policy leading to deflation was the immediate cause of Hitler’s successful gaining of the position that allowed him to be become dictator. The longer term one was hyperinflation, which is one reason those disastrous ‘austerity’ policies were implemented at the time.

Depends on how you define destroy an economy, of course.

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9 Joël May 15, 2017 at 12:01 pm

Please try again when you have real figures showing growth in Greece. Meanwhile, First quarter 2017 GDP has been announced, and it is – 0.5% compared to first quarter GDP 2016. Still recession.

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10 Bill May 15, 2017 at 1:29 pm

Joel, Apparently you didn’t get the irony but would have if you lived in Spain, Portugal, France or Italy which still have high unemployment. Tyler focusing on growth rates from a low base is really funny.

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11 Joël May 15, 2017 at 5:47 pm

Sorry. I had a feeling on the back of my mind that your message was ironical and that I was making a fool of myself.

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12 Matthew Young May 14, 2017 at 6:25 pm

The ten year rate jumped to the 40% range in 2012, in other words banking did not even work. They dropped to about 20% in 2013 and Greece and recovery started. They collapsed faster than any legislature could say bailout, but what legislature would say bailout with the ten year above 20%

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13 Jan May 14, 2017 at 8:28 pm

The economy is finally growing a small amount, though less than originally predicted, and this after many years of austerity. This means austerity has worked and Keynesian theory (though not Keynesian economists apparently) is wrong?

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14 TMC May 14, 2017 at 11:52 pm

…after many years of fighting austerity….

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15 Jerry Brown May 14, 2017 at 9:56 pm

My understanding of Keynes is that Keynes thought that capitalistic economies might not always return to full employment on their own without some fiscal and or monetary policy interventions. And that those interventions could speed up a return to more full employment so that an economy wouldn’t have to spend years at levels of high unemployment and recession. Not that Keynes believed an economy could never eventually grow after long and painful deflation and price adjustments caused by high unemployment. The point of policy intervention is to avoid or decrease that period of pain and reduced production.

Is my understanding of Keynes very wrong? Greece has certainly not avoided years and years of very high unemployment and the pain and reduced output that follows from that. And where does growth of 1.7% in 2017 leave Greece compared to output ten years ago?

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16 George Saunders May 14, 2017 at 10:27 pm

Ochre and incarnadine leaves adorned the windshield an autumn quilt, from rock ledge to sea wrack. Inside she was handsome in a carved-Indian, pavonine sort of way; that burnt sienna charm, ah yes pale Beatrice her crimson frock in situ, how she laughed the tender from her sea-waxed lungs.

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17 Scott Sumner May 14, 2017 at 11:54 pm

Don’t you mean “sorry Paul!”? — I’m the guy who says fiscal austerity does not generally slow growth.

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18 ChrisA May 15, 2017 at 1:04 am

Scott – maybe he means that the high risk premium caused the fall in output rather than, contra yourself, falling NGDP caused by the ECB? I struggle to see the difference myself, if the ECB had been trying to keep Greek NGDP increasing, visibly so, I would guess the risk premium would not have been there.

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19 Yancey Ward May 15, 2017 at 1:25 am

Why should we believe the projection of 1.8% after it has already been reduced from 2.7%?

I project that if Greece’s economy shrinks over the entire year, no one will ever mention the 1.8% projection again.

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20 Cooper May 15, 2017 at 1:56 pm

In 2008, Greece had 5 million workers. By 2053, Greece will have only 4.6 million workers.

In 2008, Ireland had 2.2 million workers. By 2053, Ireland will have 2.8 million workers.

https://www.demographic-research.org/volumes/vol32/15/32-15.pdf

Greece’s ten year bond has a yield of 5.7%. Ireland’s 10 year bond has a yield of 0.9%.

The market is still forecasting a non-zero risk of future default by Greece, partly driven by their poor future growth prospects.

If Greece doesn’t figure out a way to close the productivity gap with the rest of Europe and massively expand its future labor force, I don’t see how they can service a debt burden of 175%+ of GDP. Potential GDP growth is going to sink below 1% and they’ll have to run massive budget surpluses forever just to avoid sinking even deeper in debt.

All these conversations about “managing austerity” in the short run miss the point. Greece is still on a road to bankruptcy.

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