Austerity Has Yet To Come To Greece

The idea that austerity is killing Greece is absurd. The problem is the inability to practice austerity.

The idea that deep cuts are pushing Greece to the brink makes for great punditry. But it is a woefully incomplete description of what is really happening. Austerity is not killing Greece. Instead, austerity has yet to come to Greece.

There is no doubt that the plight of the Greek people is real. The government’s draft budget shows that GDP in 2013 will be 22 percent below its 2007 peak. Over eight hundred thousand people have lost their jobs, and unemployment is at 25.1 percent. Private deposits have fallen 35 percent as people and companies tap into savings or send their money overseas. Tax hikes have led to the highest inflation in a decade, further squeezing incomes. Households are suffering with no end in sight. Greece is in the midst of a lost decade.

It is easy to blame austerity for this. But it is also wrong.

Austerity came from the recession, not the other way around. The recession started in mid-2008 and worsened in 2009. Yet government spending rose in both 2008 and 2009. In fact, the recession started during the largest expansion of the state since the 1980s and at a time when government primary spending, or spending excluding interest payments, as a share of GDP was at a historic high. The problem was that despite this stimulus, Greece was not only in a recession but also had a budget deficit that it could no longer finance. That is when austerity started.

From 2009–2011, Greece cut its primary deficit by an impressive €20 billion (down 17 percent). But when you put this number in context, it looks a lot less impressive. Spending had risen by €28 billion in 2006–2009, so after two years of “austerity,” primary government spending as a share of GDP was still higher than in 2007, when the party had just gotten started.

Worse still, the €20 billion adjustment was not as painful as it sounds. Over half of it came from four sources: less public investment (down 39 percent), a cut in weapons procurement (down 84 percent), fewer civil servants due to retirements (down 8 percent) and a doubling in EU finding. These are not tough political decisions. Meanwhile, cuts in wages for civil servants and in social benefits made up just 23 percent of the deficit reduction.

As a result, if one excludes public investment (to control for the recent drop), the state spent in terms of GDP 4 percent more in 2011 than in 2006, the last “normal” year. Since the cuts have been skewed, government spending on wages and social benefits was higher in 2011 than in 2006. Social benefits, in particular, continue to be much higher than their 2006 level, and Greece’s spending on pensions as a share of GDP was the second highest in Europe in 2010. All this mocks the idea that the welfare state is being starved.

The inability to retrench the state to its 2006 level is the reason why the government wants more time and why it keeps raising taxes. Of course, Greece has a chronic tax-evasion problem—no doubt about that. But revenues reached a ten-year high in 2011. All revenue items were at or above 2006 levels due to the extra taxes levied during the crisis. Only thrice before has the state collected more in revenue than in 2011 (while entering the euro zone in 1999–2001). Greece’s fiscal woes are due to out-of-control spending, not abnormally low revenues.

The idea that austerity is killing Greece is thus absurd. The problem is the inability to practice austerity. Greece has slashed public investment, bought fewer weapons, let civil servants retire without replacing them and raised taxes that have pushed revenues to historical highs. It has done all this to avoid antagonizing the consistencies that benefit from public largesse and to avoid reining in a chaotic public sector. Output is collapsing, people are out of work, prices are rising and wealth is evaporating so that the state can keep eating—in fact, eating better than the carefree years of the early and mid-2000s. Austerity has yet to come to Greece.

Nikos Tsafos writes a blog on Greece at www.greekdefaultwatch.com and is working on a book on the Greek economic crisis.

Image: mkhalili