Harald Uhlig on Greece and fiscal austerity

“Fiscal austerity” is a clever label that somehow has stuck, but I think it is misleading. What has really been going on that Greece has been spending borrowed money, and they kept borrowing at a faster clip than what is sustainable. Suppose you do that as a household. What has to happen? At some point, you need to stop borrowing, you need to live within your means, and you have to either try to repay your debt or default. Everyone would like to spend more than what they receive! And, of course, it limits “growth” if you can no longer do that. But who is supposed to give you the resources for living beyond your means? What gets forgotten with the “fiscal austerity” label is this. Greece is free to borrow as much as they want on private markets, but private markets were no longer willing to lend to Greece. If Europe and the ECB had not stepped in and replaced much of that lost lending, if the debt terms would not have been renegotiated, it would have had a much more drastic effect on fiscal resources in Greece. So, one could argue (and I think it is fair to argue), that the European policies actually were the opposite of “fiscal austerity” compared to the benchmark case of only borrowing on private markets.

The full interview is here, via Garett Jones.  And here is your Greece fact of the day:

The Greek banks might be able to survive [under Grexit] depending on what happens to their liabilities to the Eurosystem but it isn’t encouraging that more than half of their regulatory capital comes from deferred tax assets, which only have value if the banks are profitable and the Greek government has cash to pay.

That is Matthew C. Klein, from a longer post on the pros and cons of Grexit.  And here is my earlier post Is Greece Really Going to Leave the Eurozone?, still a good guide.


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