Paul Krugman: What Happens When the West Imposes Endless Crippling Austerity on a Country

Paul Krugman has long been sounding the alarm about the relentless imposition of economy-hobbling austerity measures on Greece. Now, the worst-case scenario he has warned about seems to be coming to pass, with Greek banks closing and panic spreading. Will anyone learn the right lesson? Doubtful.

He opens his Monday column with this strong statement: "It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits."

But worse than not creating a centralized currency is when a country has to exit it. And that is the decision that is facing beleaguered Greek voters. "Next week the country will hold a referendum on whether to accept the demands of the 'troika'," Krugman writes, "the institutions representing creditor interests — for yet more austerity."

He takes the stance that Greece should vote 'no' and leave the euro. Because they have no choice. Further austerity will ruin them.

Yes, Krugman allows, the Greeks did need to cut back their overspending in the 2000s, but they have done that repeatedly and dutifully raised taxes. The problem is they cut so much spending that their economy simply collapsed. Revenues plummeted. Krugman then connects this with the euro, and why it is unworkable.

And this collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive. This is what happened, for example, in Canada in the 1990s, and to an important extent it’s what happened in Iceland more recently. But Greece, without its own currency, didn’t have that option.

So have I just made the case for “Grexit” — Greek exit from the euro? Not necessarily. The problem with Grexit has always been the risk of financial chaos, of a banking system disrupted by panicked withdrawals and of business hobbled both by banking troubles and by uncertainty over the legal status of debts. That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.

But the troika was having none of it. It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years.

So it’s time to put an end to this unthinkability.