Home > Uncategorized > Sustaining our society’s sustainable sustainability requires us to sustainably sustain our sustainable sustainability, sustainably

Sustaining our society’s sustainable sustainability requires us to sustainably sustain our sustainable sustainability, sustainably

Is this the future?

With the Euro-mess in the headlines once again, I think it’s time to ask ourselves once again whether our assumptions about the crisis are true.   I think that my current position puts me at odds with more-or-less everyone.   I’m sure Krugman would disagree.   I know that essentially every conservative economist disagrees.

Still, I’m confident I’m right on this one–admittedly a bold statement, but there it is.  In short, here’s the gist:  Greece is “sustainable”, the Eurozone in its current form is not.   Booting Greece from the Euro and/or austerity will likely make matters worse.  A “solution” would not need to require the transfer of real resources to Greece or the rest of the periphery– that ship has sailed already.   Let’s take these points one at a time.

Is Greece Sustainable?

I say yes.

Let’s consider a counter-factual.   Suppose Greece never joined the Euro (it is still using Drachma for currency).   All other policies of Greece are unchanged–barring of course, although there is no particular need to do so, policy changes implemented specifically as part of the various “bailout” deals.   Would Greece be in financial trouble?   Would Greece’s policy mix have been “sustainable”?

The answer to both questions is clearly “no”.

Without the Euro, any current account deficit that Greece might run would put downward pressure on the Drachma.   This would make accumulating more foreign-currency denominated debts progressively more difficult.   At some point, the process would have to stop and perhaps even reverse.   At the same time, the falling value of the Drachma would make exports cheaper and imports more expensive which would tend to return the Greece to current account balance.

This is true regardless of the tax and spending policies of Greece.   A regime of inefficient taxation is unfortunate in all manner of ways, not least because tax rates must be higher to collect the same revenue–but it is perfectly sustainable.   Inefficiency in tax and spending policies mean dead-weight losses which make a society poorer than they could be… but so what?   There are many poor societies that are “sustainable” (by which I mean “can be maintained indefinitely”).   In particular, “sustainable” does not mean “healthy” or even “optimal”.   North Korea is “sustainable” in a way that the United States is not–which says much more about the god-awfulness of sustainability as a criterion than it says about either the US or the DPRK.   Exponential growth is never be “sustainable”.

The Eurozone Is Not Sustainable

Sustainability may be a terrible criterion, but while everyone is using it and thinking about it, I should also.   Sigh.   This point speaks for itself, though.   Austerity may be bad economics, but it seems to be a political necessity for the Eurozone as a whole. This makes some kind of sense (from a political point of view).   Creditors are mostly Germans and they want to be paid back.   Germany has a great deal of influence in the Eurozone and these creditors have a great deal of influence in Germany.

Similarly, exporting firms in Germany, who sell much of their products in Greece, would be upset over any policy which caused their cash cow to dry up.   It is not at all clear that Merkel would survive, politically, if she agreed to anything to harm these groups.

This means squeezing Greece.   Without the common currency, the “world” would impose “austerity” in Greece by enforcing exchange rate devaluation.   There is a possibility of a sudden stop in these situations,  but generally German creditors could expect to be repaid in this scenario.   German Exporters would be screwed, though.   This is also true if the inflation rate in the Eurozone as a whole would rise, except that in this scenario, German creditors who hold fixed income securities would also be less than happy.

All of this is to say that austerity is the only politically palatable option for the creditor nations of the eurozone.    Except the problem, it seems to me, is that austerity itself is not sustainable.   Exactly how long did the austerians expect the Greek people to suffer through 20-25% unemployment?   I say we’re very lucky to have Syriza and not neo-fascists or communists.

It is politics which is inevitably tearing Europe apart.   Greek and Spanish people don’t vote in German elections, but Germany controls the fate of Greek and Spanish voters.   This is not an inclusive political arrangement.   In fact, it seems rather extractive to me.

There is no need for a real transfer of wealth, but booting Greece from the Eurozone would hurt everyone

This point really requires a post of its own, so perhaps I’ll come back to this this afternoon.

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Categories: Uncategorized
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  1. June 15, 2012 at 1:32 pm

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