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by SamAtt
5780 days ago
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I disagree. Nothing was going to create immediate improvement in Greece so they were going to be in this mess no matter what they did. No one is going to invest in Greece right now regardless of how much the Government spends. So I don't see how the austerity cuts are "causing" this. They are clearly not helping yet either but keep in mind the current cuts were only enacted in May of this year. What the government is trying to do is send a message to the world that they'll be prudent with their finances from this point on. That's why they've gone above and beyond what was required of them as far as austerity cuts go. It's a long term strategy that will hopefully draw private investment back to Greece in the future. |
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I do not understand why increasing Greek debt is supposed to be a solution to a crisis of overindebtedness. The conventional solution to debt crises is reducing the size of debt relative to GDP. The problem with Greece is that the country is stuck in deflation. It's GDP is contracting and that is making it even harder to pay off its debt. So the situation is getting worse because the government is pulling money out of the economy.
The more insidious problem with your proposed solution as I understand it is that investment is not highly responsive to interest rates in a liquidity trap. Keynes was the first one to talk about this. He has been proven empirically right: people don't borrow for a host of reasons in protracted economic slumps. This is why Japan can have a nominal interest rate of effectively zero for a decade and yet the private sector hasn't invested enough to create much growth.
The solution for Greece is fairly simple: debt restructuring to reduce its debt burden relative to GDP, so that the government doesn't need to plunge the country into deflation by pulling money out of the economy. France and Germany seem to prefer forcing economic contraction on Greece since this avoids their bondholders taking a cut or opens them to accusations of being soft on Greece. I'm not sure what the best balance of interests here is in part because I don't know how bad it really is in Greece, but however the distributional politics play out, I don't think your post makes much economic sense. So I'm not sure if I'm missing the picture, or if you're trying to get at something else.