Saturday, July 4, 2015

Why So Much Attention on Spending Side of Greek Budget?

There are two economic elements at play in understanding the situation in Greece.  One is the government budget or fiscal element.  The other is the balance of trade element.

You could say that currency, e.g., the euro, dollar, pound, is a third element. Economist Paul Krugman* refers to the euro currency as a "straight jacket" on Greece's economy for the following reasoning related to their balance of trade. A country with its own currency, say the Drachma for Greece, can increase its trade exports if the value of its currency decreases; in this situation, its goods look cheaper to other countries that have higher valued currencies. However, if Greece has the euro as its currency, which cannot adjust downward in an economic crisis, it's economy doesn't have a key tool to right itself when in trouble. Krugman says this is the key problem in Greece right now.

The other economic element is the Greek budget itself. Yet the media has been focused on more austere budgets in Greece, that is, cutting spending. This myopic focus is due to two things. First, budgets shortfalls are open to a simplistic explanation by the establishment media: If your budget is short, then cut spending. But this overlooks he simple fact that budgets have two sides, a revenue side and a spending side; a growing economy can add revenue to a budget. The excessive focus on cutting spending overlooks the fact that budget austerity itself can cause an economy to shrink and reduce the available revenue for the budget.

The second reason for so much focus on the budget-cutting aspect of the Greek situation is that the establishment lenders have pushed an agenda of budget austerity. Krugman believes that the three main lenders understand this could hurt the Greek economy, but that they have an ulterior motive related to their free market ideology; they would like the see a leftist government like Syriza, and its alternative economic views, fail.

With this introduction, read more by Krugman on Greece and these issues (June 29, 2015).

Here's a chilling question posed by Krugman:  What if exits the Euro currency, has a bad year or two, then starts to succeed? Think the establishment would let it succeed?

*  Paul Krugman is the 2008 winner of the Nobel Prize in Economics.

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