The Post Misinforms Readers About the Greek Crisis

Print
Thursday, 06 May 2010 03:11

A front page Washington Post article told readers that: "The basic problem in Greece, and in the other struggling European countries, is that the government debts have grown as large, or nearly as large, as the gross domestic product, making the government's repayment difficult, if not impossible. The countries' imperiled finances, meanwhile, push up the rates at which they can borrow. (emphasis added)"

This is the sort of assertion that belongs on the editorial pages, not in a news story. There have been and are many countries with considerably higher ratios of debt to GDP than Greece than manage to borrow in financial markets without major problems. The more obvious problem with Greece is that it is in the euro.

This means that when it make budget cutbacks to reduce its deficit, it leads to large falls in domestic output. It has no ability to counteract these declines with expansionary monetary policy or a devaluation that will increase its net exports by making Greece more competitive. Greece's budget austerity therefore risks putting it in a downward spiral, where budget cutbacks further depress GDP, leading to a larger budget shortfall, requiring further cutbacks. Washington Post reporters should understand this situation.