Paul Krugman: How Austerity Madness Was Dealt a Crucial Blow this Week


Paul Krugman takes a contrarian view of the deal the new Greek government reached with its creditors earlier in the week. The deal was widely derided on the left as a disaster,  a “surrender” on the part of Syriza, the new ruling coalition in Athens.

Krugman does not agree. "On the contrary," he writes in Friday's column, "Greece came out of the negotiations pretty well, although the big fights are still to come. And by doing O.K., Greece has done the rest of Europe a favor."

Here's his analysis:

To make sense of what happened, you need to understand that the main issue of contention involves just one number: the size of the Greek primary surplus, the difference between government revenues and government expenditures not counting interest on the debt. The primary surplus measures the resources that Greece is actually transferring to its creditors. Everything else, including the notional size of the debt — which is a more or less arbitrary number at this point, with little bearing on the amount anyone expects Greece to pay — matters only to the extent that it affects the primary surplus Greece is forced to run.

For Greece to run any surplus at all — given the depression-level slump that it’s in and the effect of that depression on revenues — is a remarkable achievement, the result of incredible sacrifices. Nonetheless, Syriza has always been clear that it intends to keep running a modest primary surplus. If you are angry that the negotiations didn’t make room for a full reversal of austerity, a turn toward Keynesian fiscal stimulus, you weren’t paying attention.

The question instead was whether Greece would be forced to impose still more austerity. The previous Greek government had agreed to a program under which the primary surplus would triple over the next few years, at immense cost to the nation’s economy and people.

Why would any government agree to such a thing? Fear. Essentially, successive leaders in Greece and other debtor nations haven’t dared to challenge extreme creditor demands, for fear that they would be punished — that the creditors would cut off their cash flow or, worse yet, implode their banking system if they balked at ever-harsher budget cuts.

And this is precisely where the new Greek government showed a lot more backbone in the negotiations than the previous one. In fact, Greece won new flexibility for this year, a luxury the embattled nation has not had for quite a while. The creditors not only did not pull the plug, they gave them financing for the next few months. Sure, there are big battles looming in the future, but for now, "the Greek government didn’t succumb to the bum’s rush, and that in itself is a kind of victory," Krugman writes.

The coverage about the agreement has been nearly uniformly negative, however. Some of that is justified: Syriza left in place some privatization of public assets, labor market regulation and promised to crack down on tax evaders, although that last one does not exactly sound like a terrible leftist defeat. Krugman:

Still, nothing that just happened justifies the pervasive rhetoric of failure. Actually, my sense is that we’re seeing an unholy alliance here between left-leaning writers with unrealistic expectations and the business press, which likes the story of Greek debacle because that’s what is supposed to happen to uppity debtors. But there was no debacle. Provisionally, at least, Greece seems to have ended the cycle of ever-more-savage austerity.

Meanwhile, there were some positive signs in the rest of Europe, and Krugman thinks they may have Greece to thank in some small measure. There are some signs that the continent is emerging from its austerity madness, and just in the nick of time. Example: the European Commission has decided not to fine France and Italy for exceeding their deficit targets.

We should all be rooting for Greece to keep calm and carry on. The rest of the world's economy may depend on it.

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