Google+ Badge

Friday, November 2, 2012

Will Greece last the course?

It is a Marathon really, and the odds are that Greece lacks the stamina necessary to stay in the race until the EZ changes policies. Someday, I am afraid, later rather than earlier the core-EZ policy makers will abandon their main policy pivot, namely that fiscal consolidation, and lower debt/GDP ratios, will bring back market confidence. Why? Because as Dawn Holland and Jonathan Portes conclude,
"..when account is taken of the magnified impact of consolidation in a depressed economy, and of the spillover effects of coordinated fiscal consolidation across almost EU countries, fiscal multipliers will indeed be considerably elevated, and the impact on growth correspondingly larger.
The  direct implication is that the policies pursued by EU countries over the recent past have had perverse and damaging effects. Our simulations suggest that coordinated fiscal consolidation has not only had substantially larger negative impacts on growth than expected, but has actually had the effect of raising rather than lowering debt-GDP ratios.." 
In the end, there will be change and Krugman and Co. will , again, be vindicated. Will Greece still be in the EZ when that happens? I tend to side with those who are cagey on this, and one could not rule out  Christian Fahrholz's fears.

The other core belief of Merkel and Co is that the EZ countries should become more like Germany and export their way out of recession. That is a very tall order in the depressed state of the world economy. (you might like to check Stephan Kaufmann's piece in Franfurter Rundschau, Oct.30) 

No comments:

Post a Comment