Thursday, 20 October 2011

The Economist

The Economist in its "Economics Focus" column this week features Jacopo Ponticelli's and my work on unrest and austerity... as well as my earlier paper on Latin America, making a related point -- the more you cut, the higher the level of unrest will be. 

Wednesday, 12 October 2011

What's Greek for "Erfüllungspolitik"?

Today came the news that Greece (again) missed its deficit targets, with the red ink growing in September. Slow growth is typically blamed, and surely austerity doesn't help much in stabilizing growth. How do we make sense of the grim determination paraded around by the Greek government, and round after round of austerity? One interpretation says - it just can't be done, the cuts are too much for growth and tax collection plummets with GDP. The other interpretation thinks of the current posturing by the Greeks as theatre: Look, it really cannot be done, so please spare a few billion euros (insert transfer from the EU/debt forgiveness here).

My money is on the latter interpretation. It's pretty clear that only a small part of the overall fiscal mess can be attributed to slow growth. An inability/unwillingness to go after tax dodgers, throw them in jail, and make them pay (to encourage the others) is more than half the story. I think the Greeks are taking a leaf from the book of another country with monumentally high debts, and then failed to repay them: Germany.

After World War I, Germany was saddled with reparations payments of unspecified magnitude. The politicians charged with running the country's first full democracy didn't like it any better than the right-wing nuts who would have liked to say no, with a good chance to start the war. Their solution? Trying to convince the Allies that it really cannot be done. Taxes went up, inflation was soaring, and still, the Germans didn't manage to generate surpluses, and transfer them successfully to the victors of 1918. The attempt was better than half-hearted, but a good deal less than whole-hearted. It had a name -- "Erfüllungspolitik", the politics of fulfillment. For a country that had just been forced to reduce its army to 100,000 men, it's hard to think of an alternative (which didn't stop right-wing extremists from murdering politicians in charge, such as Walter Rathenau, the then foreign secretary). The cost, for sure, was terrible. By 1923, inflation had destroyed middle class wealth on an unimaginable scale, and output was still below 1914 levels.

And yet, in terms of its primary aim Erfüllungspolitik "worked". By 1924, everyone realized that Germany needed help and a respite. The solution - a big loan from the US - ushered in Weimar's only halcyon years. The Greeks seem hell-bent to demonstrate to the world that they cannot pay, as did the Germans; and they are equally good at destroying their economy along the way.