Between deflation and onerous tax hikes, it’s never going to happen.
The government is now committed to whack back the public sector, including pensions and popular social benefits; to raise consumption taxes to record highs; and to promote tax reform, in an effort to shrink the enormous black market, reduce tax evasion and increase government receipts.
Some influential economists, however, fear that such harsh measures risk killing the patient, even as they see the intensity of Greek pain as a serious warning to other countries that use the euro to get their own economies in order before the currency union itself is undermined by rampaging market speculation.
This new wave of austerity also risks pushing the entire European Union into a period of artificially low growth just as economies are trying to recover from the recession of last year, caused by the huge housing and banking crisis that started in the United States. Negative or low growth will increase already sizable unemployment and put new pressure on government spending, as well as on the banks themselves, and make it harder for everybody to reduce their debts.
“How can Greece grow out of its debt if there is deflation?” asked Jean-Paul Fitoussi, a professor of economics at the Institut d’Études Politiques in Paris. “Deflation increases the debt burden, so we are following this virtuous circle that is bringing us toward hell. Economics has nothing to do with virtue, which can kill an economy.”
And, as always, there’s this:
Greece must either cut its spending sharply or default on its loans — which would badly damage German and French banks carrying a lot of Greek debt.
That is considered one reason President Nicolas Sarkozy of France has been so quiet on the Greek crisis, Mr. Fitoussi said. The Greek deal “is an indirect way of bailing out French and German banks,” he said. “The French understood this from the start, but Germany didn’t seem to.”
Katinka Barysch, an economist and deputy director of the Center for European Reform in London, said that that realization had hit home in Germany. “It might be unpopular for the Germans and Europeans to bail out Greece, but it will be even more unpopular for them to bail out the banks that owned Greek bonds,” she said.
