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Home Publications Blogs Beat the Press The Post Misinforms Readers About the Greek Crisis

The Post Misinforms Readers About the Greek Crisis

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.

Comments (23)Add Comment
Forbes: Greece Bailout Plan Represents Triumph Of The Euro
written by Butters, May 06, 2010 10:46
i really appreciated your clarification. this forbes article then is even nuttier:

"By contrast, if Greece still used the drachma instead of the euro, we all know how its fiscal profligacy would have ended: with a major devaluation of the local currency and higher inflation. With a devaluation, everyone would have taken a haircut--including those who earned wages and salaries in drachma (in the public and private sector alike) and domestic or foreign investors locked into earning drachma-denominated interest or investment returns from bank deposits, government and corporate debt, or equities.

But since Greece uses the euro, devaluation is not an option. As a result, Greece's pain will be concentrated in the sector that is causing most of the problem: government. The conditions of the bailout, decided on by the E.U. and IMF, require Greece to freeze government salaries, eliminate bonuses (amounting to two months' pay) and lift the retirement age to 60 for government workers. The aid package also requires Greece to raise its value-added tax to 23% from 21% and also increase some excise taxes, but there will be other large (as yet unspecified) cuts in government spending, too.

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Like many countries, the Greek government relies on borrowed money to balance its books. The recession has made this harder to achieve, because tax revenues are falling just as welfare payments start to rise. It doesn't help that, in Greece, tax evasion is commonplace and pension rights are unusually generous – but, to be fair, using public spending to even out the bumps of the global downturn is what most large developed economies are trying to do right now.
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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.