Fiscal Austerity and Greece

Richard Portes, Professor of Economics at London Business School is Founder and President of the Center for Economic and Policy Research (CEPR), and Senior Editor and Co-Chairman of the Board of Economic Policy. In the interview, Professor Portes discusses the problems of Europe and then specifically drills down into Greece itself. Portes has long been clear that the policy of austerity has been counterproductive and inimical to the growth prospects of the continent. And he goes further, suggesting that the German government in particular (which consistently insists on "following the rules") has been a serial violator of the Stability and Growth Pact, and conveniently forgets its own history when it comes to issues of debt forgiveness.

But Portes also suggests that Greece is a special case, a country that does not lend itself readily to easy reform. There is an ongoing banking crisis, unsustainable debt levels (Portes argues that Greece is fundamentally insolvent and that the EU and its attendant institutions should recognize that fact and work immediately toward some form of sovereign debt restructuring), and institutions by and large remain malfunctioning. So whilst Portes agrees with much of the prevailing sentiment that further fiscal austerity will be counterproductive, he also argues that Greece must relent as well: it must signal its commitment to deep structural reform, particularly in regard to the endemic corruption in public administration, tax evasion, and the complex oligarchic system that links political parties to the media and administration. For Portes, no further fiscal austerity makes sense, but he suggests that Greece could aid its cause by reforming product markets and services that are still oligopolistic, with numerous barriers to entry and, hence competition. A second priority is to modernize the legal framework of property rights, investor protection and corporate governance, as well as a massive reorganization and restructuring of the public administration. These, rather than further wage cuts, are the only way to raise the competitiveness of the Greek economy.

Strong signals are needed to reveal the government’s political will to tackle endemic corruption in public administration, tax evasion, and the complex oligarchic system that links the political parties to the media and the administration. And Europe must respond in kind with significant debt reduction.

[Rob-fxdw]

When an economist talks of deficit of no need for balancing a budget they are talking exclusively about money they or government owes, not money that is owed to them or owed to government. They are talking exclusively about government not needing to balance it's budget but every other individual and corporation having to do so.

They are talking about everyone other than a sovereign government having exclusive rights over all other governments, organisations and individuals who are required by law to balance their finances or be jailed.

They are not talking about politicians failing to account for money. They are making a case for politicians being exempted from financial responsibility. Portes is doing just that.

It is all just one sided views. They talk of creditors and debtors yet assert that creditors lent "irresponsibly" but fail to say that debtors borrowed "irresponsibly". They want to dismiss the action of borrowers as Richard Portes has done.

The basic fallacy of deficits is they are illustrative of poor financial responsibility. If they were not then they would be normal acceptable practice for all institutions. But we know that deficits are nothing of the sort. They are an illustration of institutions or people themselves making the wrong moves with finances like investing in poor return business that people have chosen not to support when allocating their preferences for other goods or services.

Would he be happy if someone cancelled part of his savings because they were someone else's debt? No - he wouldn't.
When the debt is on their side they want it cancelled and blame the lender and when they are the lender they decline.

He talks of law but law that is a side issue to any economic argument being itself a statute. Law is purely a human statute not an economic statute of nature.

He also ignores the fact that Greece has been warned on a number of occasions, did little or nothing about the debt and politicians people elected borrowed more for political purposes, did not change their low retirement age policies or other policies that needed to be addressed.

The historical argument of what they did is that they took the lenders for being fools. They have defaulted before and they have defaulted again after borrowing more. That is the precedent that Portes ignores purely for the sake of his argument.

His answer is "we have to find a better way of dealing with their problems". There is no answer but his failure to allow anyone else to answer by making Greece accountable which he calls "austerity" and speaks out against.

The allegartion taht it was private debt which was responsible for the economic crisis is totally wrong. It could not have been since it was so small (billions) in comparison to government debt which was many Trillions that it could not have caused the problems which subsequently have continued. A mouse compared to the Elephant in the room of government debt.

What it did is illustrate the problem that debt plays in financial affairs (mainly government debt like the debt which was created by the US governent to promote and prop up the housing mortages through Fannie and Fredie and otehrs).

He ignores the fact that the US governemnt alone has created more debt in the last 6 years than in the preceeding history of the whole USA by funding deficits though exapansion of the money supply. Other governments have done similar.

I totally agree with the notion that one should buy out certain interests of industry groups who are unwilling to change but nobody is oing to do that if those interests are the unions backed by certain politicians whowill will just continue to oppose any reforms. That is the evidence that is apparent.
The problem is in te plitical clout of government not individuals. Politicians not essentially private people.

[Rob-fxdw]

The real problem is the Greek situation is their governemnt and their socialist 'large government' which is their policy which the presenter seems to agree with. "Too big to succeed" not " too big to fail" !! All part of their politics which they support by voting in the politicians who promote it.

[hamstergd]

The Greek government spent so much they crowded the private sector out of the credit markets.