IFI governance


Austerity in the Eurozone

It's not working

20 April 2012 | Minutes

Seminar at the Spring meetings 2012, 19 April 12

Sponsor: Center for Economic and Policy Research

Speakers: Mark Wiesbrot (CEPR)


Mark Weisbrot


  • Massive cuts in spending (8.9% of GDP within 2 years)
  • Troika projections way off – both on GDP and employment
  • Huge economic costs – 15.8% GDP decline, 21% unemployment, wage cuts; huge social costs in terms of health, suicides, security and violence
  • Strategy: Internal devaluation, but even real effective exchange rate still higher than in 2005
  • Debt-GDP ratio more likely to follow leaked pessimistic scenario – meaning essentially there will be a chaotic default; interest burden is key – 6.8% of GDP; after restructuring goes down to 4% for 1 year, but then above 6% a year again
  • Alternatives: ECB needs to reverse course and allow expansionary fiscal policy; there wouldn’t be much inflation

Lessons from Argentina – Default and exit

  • Banking collapse but only 1 quarter of recession; 63% growth in 6 years
  • Increases in social spending, reduced inequality, 2/3 reduction in poverty and extreme poverty, pre-crisis GDP in 3 years
  • Return to trend growth in 7 years, it was not a commodities boom (exports only 12% of growth)
  • Greece has export sector twice as big as Argentina; more potential sources of borrowing

Eurozone in general

  • Bad growth prospects, spending cuts are harming prospects
  • Unemployment high
  • Interest burden matters most – the ECB could help with this
  • EU crisis is not a debt crisis but a policy crisis

Mahmood Pradhan

  • Despite default and exit – Greece still has a primary deficit
  • There is a debate and discussion of the trade-offs given that the countries need financing
  • Without a Troika programme, the austerity would be tougher
  • Countries need to regain competitiveness, trend appreciation of real exchange rate through 2000s was a clear problem
  • Japan and Greece are very different, Greece cannot raise money domestically
  • Debt burdens are very large in EU, for example Spanish corporate debt
  • Latvia in a similar situation, debt-GDP ratio from 90% to 45%; wages fell 10-25%
  • We work with desires of country authorities in terms of their exchange rate regime
  • Massive cross-border exposures in the eurozone, default and exit could be really disastrous – Argentina style default and exit may not be possible
  • ECB has a larger balance sheet than the Fed – different mechanisms than the Fed, but the ECB is acting


Mark Weisbrot

  • ECB may have large balance sheet, but there is no ceiling on Spanish and Italian bond yields, they could end the acute and dangerous part of the crisis by that intervention
  • Greece could find lenders in the int’l environment – Venezuela, China, for example
  • Hard question is how much of the deficit can you finance by printing money before inflationary impact
  • Greek government shouldn’t care what happens to the rest of Europe
  • Austerity was tough for only 1 quarter in Argentina then austerity was gone
  • EU had bubble growth in the 2000s – it was brought on by private sector over-borrowing
  • US has a bubble burst too – but had stimulus and loose monetary policy
  • Latvia lost 25% of GDP and 10% emigration – huge social costs for restoration of 2.5%
    • Recovery would have been faster if they had devalued; Poland put of eurozone

Jon Serper

  • the policies in Greece are just protecting elites
  • high energy costs mean what for ECB? What about Japan now having trade deficit

Mahmood – Japan problems partly energy, partly tsunami, partly demographic
Larry Elliot – how do you calibrate a programme for euro countries? Esp because there is no external adjustment


  • How much competitiveness can you gain with internal devaluation, you want change in productivity levels
  • These programmes are VERY large with lots of financing, allows longer adjustment time
  • We make an effort to protect social spending; Troika does not make every spending decision though
  • Greece has a problem of implementation of policy, lack of implementation means projections will be wrong

Mark – projections were wrong mainly because of spending cuts shrinking the economy, not because of failed reforms for taxi drivers or some other supply side measures

Werner Pushra, FES – need to discuss Germany’s role in the mess; system was unsustainable from the beginning because of debt burden; Greece was never competitive because German labour costs stagnant, what must Germany do?

Mark – German wages should rise

Mahmood – fiscal policy will not solve adjustment problems

Bob Woodward – role of private financial institutions in this?

Mahmood – LRTO is not just giving money away, there is collateral requirements

Mark – QE means banks are giving a gift here, ECB should be doing this for governments that ran into trouble because of bad behaviour of the financial sector, not just for banks;