Wednesday September 3, 2014 Search
Weather | Athens
29o C
23o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Joseph Stiglitz rings alarm bell over austerity

By Tom Ellis

Nobel Prize-winning economist Joseph Stiglitz rings the alarm bells in an interview with Kathimerini over austerity measures that are driving Europe into a spiral of ever-deepening recession.

He says that a debt haircut is crucial for Greece, adding that this should involve not just official sector debt, but private creditors as well, and should also be quite sizable if it is to have any real effect.

Stiglitz welcomes the change of stance displayed by German Chancellor Angela Merkel toward Greece, but says that there will have to be a policy shift toward more growth-driven measures in order to help not just Greece but Europe as a whole to exit the crisis.

Stiglitz, who served as chief economist at the World Bank in 1997-2000 and was on the Council of Economic Advisers to US President Bill Clinton in the 1995-97 period, is a well-known critic of “free market fundamentalists” and  international financial institutions such as the International Monetary Fund.

How would you describe this two-and-a-half year crisis that Greece and the eurozone are going through?

The eurozone crisis reflects fundamental flaws in the institutional arrangements of the eurozone, and a flawed diagnosis of the sources of the crisis. Given this, it is not surprising that the responses have been badly flawed, and in some cases have exacerbated the problems.

You have been very critical of the austerity policies that have been chosen.

Excessive austerity has had the predictable (and predicted) effect of inducing depressions and recessions – to the point where all of Europe is expected to have negative growth in the coming year. As GDP has decreased, so too has tax revenue; the expected improvements in fiscal performance have not materialized. The debt-to-GDP ratio increased. That austerity would have these effects should have been anticipated, given the long history of the failures of such measures.

The problems posed by austerity have been exacerbated by the decreased availability of credit – again the inevitable result of the failure of Europe’s leaders to create a viable eurozone banking system.

Do you find the actions of the European leaders not enough?


The current structures are nonsustainable: There will either have to be “more” Europe or less. More Europe would require some form of mutualization of debt, a eurozone-wide banking system, with common supervision, common resolution, and common deposit insurance, and a growth strategy to replace the anti-growth austerity strategy that has dominated for the last two-and-a-half years. While some of Europe’s leaders recognize what has to be done, the pace of reforms is out of synch with the market.

Should and will there be a haircut on Greece's debt and, if so, when? And what would the optimum size of it be?

There should, and almost surely will have to be, a haircut on Greece’s debt, with participation of both official and private creditors. The size will depend on the ability of Europe’s leaders to address the fundamental problems and restore growth.

We have learned from previous restructurings that unless there is a deep restructuring, growth will not be restored, and the country may face another restructuring a few years later – with all the adverse consequences that that entails.

An important part of an effective restructuring may be growth-linked bonds, of the kind that Argentina employed.

Was the bond buyback the right way to go or should other measures have been chosen?

A bond buyback can be an important component of an effective debt restructuring. Creditors voluntarily sell their bonds back at the market price. The desirability of this strategy has been enhanced by the extensive litigation over Argentina’s restructuring, which has cast a pall over the entire sovereign debt market. The only concern is that the buyback program may result in an increase in the market value of the debt, and so the effective extent of restructuring may be insufficient. The buyback program may have to be followed by further restructuring.

Should achieving debt sustainability, according to the IMF analyses, be the basis for the direction of the Greek economy?

The objective of economic policy should be to quickly restore the economy to full employment and sustainable growth. This will require, of course, ensuring that the level of debt is sustainable, and that may mean significant debt restructuring.

In the past, the IMF has often been overly optimistic about future growth paths (when it comes to debt restructurings), and so debt restructurings have not been sufficiently deep. The continuing debt burden has inhibited growth – growth often turns out less than their projections, and another debt restructuring is required down the line. That is why it is important to have a deep restructuring, and to use growth-linked bonds as part of the restructuring package.

How would you describe the turnaround by Europe and mainly Chancellor Merkel with respect to Greece, where she now says the country is doing the right thing?

It is obviously welcome. But it needs to be followed by a change in policy – less austerity and more growth, an emphasis on the restructuring of the eurozone arrangements, a recognition that structural reforms within the country take time, and that some structural reforms adversely affect aggregate demand, and with a deficiency in aggregate demand being the central problem, worsen current economic performance.

Do you expect Greece to make it and return to growth in the next months or could it be forced to exit the euro as some predict?

This is as much a matter of politics as economics – of European politics as much as Greek politics. Will Europe be able to make the necessary reforms and change its course of action in a timely way? Will Europe be able to restore growth to itself? Will Europe be willing to provide the assistance required? The costs of Europe’s failures are grave – not only is Greece in depression, but so is Spain, and others are likely to join. The costs are enormous, both in the short and long term: The 50 percent youth unemployment rate is especially devastating. In a period in which skills should be developed, they are atrophying, and disillusionment is setting in. Many of those with skills are leaving the countries – and more would leave were it not for the weaknesses elsewhere in Europe. None of this bodes well for the future. It is not surprising that there are severe political repercussions.

Will Greece be forced to exit the euro as some are predicting?

The cost of leaving the euro would be high. But, unless there is a change in course in Europe, there are high costs of staying in the euro. Unless something happens, the costs will mount, and the calculus of whether the country is better off staying in or leaving may change.

ekathimerini.com , Tuesday Jan 1, 2013 (17:58)  
Politicized archaeology
Moderating expectations
EUs three big problems all linked
A great president
Report points to suspicious clinic charges to EOPYY
A quarter of all the expenses submitted last year by private health clinics to EOPYY, the countrys largest healthcare provider, have been deemed suspicious and in need of further investigat...
New rector seeks to introduce ID checks at University of Athens
One day after his swearing-in ceremony was marred by protests against budget cuts and the expulsion of thousands of so-called eternal students, the new rector at the University of Athens, Th...
Inside News
Helexpo sell-off plan to be ready by mid-October
Helexpo, the state company that organizes major exhibitions such as the Thessaloniki International Fair, is in the last stages of drawing up its privatization plan. Sources say that the prop...
Maniatis talks energy with Washingtons man in Athens
Energy Minister Yiannis Maniatis held a meeting yesterday with US Ambassador in Athens David D. Pearce to discuss possible natural gas supply problems that Europe may face this winter due to...
Inside Business
Grateful Saviola thanks Olympiakos, joins Verona
Former Argentina international Javier Saviola has thanked Greek champions Olympiakos for the "beautiful moments" during his season-long stint in Greece as he left the club to join Serie A ou...
SOCCER
Greece defender Papadopoulos fires parting shot at Michel
International defender Avraam Papadopoulos suddenly quit Olympiakos on Monday to join Turkish club Trabzonspor, and fired a parting shot at Olympiakos manager Michel putting the blame on the...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
RECENT NEWS
1. Helexpo sell-off plan to be ready by mid-October
2. Maniatis talks energy with Washingtons man in Athens
3. Task force to examine cases of extreme taxation, customs issues
4. Hotels hike prices by 10 pct in H1 of 2014
5. Pension system nears breaking point
6. Report points to suspicious clinic charges to EOPYY
more news
Today
This Week
1. Politicized archaeology
2. Rain and storms with hail expected in many parts of Greece
3. Reforms to dominate Greek talks in Paris, debt relief talks later, says source
4. New committee formed to assess progress of deregulation in closed-shop professions
5. Moderating expectations
6. Greece needs private debt overhaul, Piraeus Bank CEO says
Today
This Week
1. Thessaloniki mayor Boutaris sworn in wearing yellow star amid Golden Dawn protests
2. The battle against progress
3. Strong undersea quake occurs off island of Milos, felt in Athens
4. Hardouvelis, ECB executive discuss bank program, stress tests
5. Greek quest for debt relief faces hurdles in Paris
6. Prospect of Greek grand prix back on the agenda; huge investment needed
Find us ...
... on
Twitter
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2014, H KAΘHMEPINH All Rights Reserved.