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Home Publications Blogs Beat the Press Austerity and Growth Are Contradictions: Tell the NYT

Austerity and Growth Are Contradictions: Tell the NYT

Tuesday, 20 September 2011 04:58

The NYT missed much of the story in its report on the likelihood of a default by Greece. One of the main factors exacerbating the plight of Greece and other heavily indebted countries in the euro zone is the relatively contractionary policies pursued by the European Central Bank (ECB), ostensibly to fight inflation.

If the ECB had a more expansionary monetary policy, the additional growth would increase tax collections in Greece and other countries. It would also reduce payments for unemployment benefits and other transfer programs.

In addition, an easier monetary policy would reduce the interest burden on heavily indebted countries. For example, if the ECB followed the example of the Fed, the Greek government would be able to borrow at a near zero interest rate.

Finally, if the ECB allowed the inflation rate in the euro zone to rise to 3-4 percent it would facilitate the necessary adjustment process that would allow Greek goods and services to become more competitive in the euro zone. If prices and wages in the euro zone were rising at a slightly faster pace then Greece can improve its relative position by keeping its wage and  price growth near zero.

By contrast, with very low inflation, wages and prices in Greece must actually decline for it to increase its competitiveness. It is very difficult and costly to bring about this sort of deflation. It usually requires many years of high unemployment. 

The NYT neglected to mention these ways in which the policies of the ECB have contributed to the crisis in Greece and other heavily indebted countries.

Comments (2)Add Comment
Austerity and Growth: A Fallacy of Composition
written by izzatzo, September 20, 2011 6:43
Austerity and Growth Are Contradictions

Exactly. When one person practices austerity it constitutes efficiency via cost reductions and increased productivity that makes everyone better off.

But when everyone does it, it evolves into a form of socialism known as Communist Competition that drives resources to their lowest valued use.

Be a good capitalist and do your part to jump start the economy with more waste and inefficiency by joining with others to increase costs and reduce output for everyone.

Be free. Be like Greece.

Stupid liberals.
written by skeptonomist, September 20, 2011 9:18
"the Greek government would be able to borrow at a near zero interest rate."

Not true - ECB rates have been pretty low but some European countries can only borrow at high rates. Maybe Dean means that if Greece had its own central bank it could keep rates low, but there is no guarantee that a Greek central bank would be any better than the ECB - that it would not follow the same policies or even crazier ones (like Iceland's). At this point Greece has an acute problem with debt and changes in central-bank policy are not going to assuage its creditors. It is apparently headed either for another bailout or default.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.