Wed May 5th, 2010 at 06:46:34 PM EST
The austerity measures being forced on Greece are awful. Even worse, they will not work. Lower wages mean lower demand, which will only depress government revenues, which will add to Greece's deficit.
Nor can a deficit of Greece's size be eliminated by taxing the wealthy alone. Not if only the wealthy of Greece are targeted.
There is an easier way - devalue the currency. Oh, yeah - Greece doesn't have a currency. Why not?
Joseph Stiglitz is losing patience with the euro:
Europe has no way of helping those countries facing severe problems. Consider Spain, which has an unemployment rate of 20% - and more than 40% among young people. It had a fiscal surplus before the crisis; after the crisis, its deficit increased to more than 11% of GDP. But, under EU rules, Spain must now cut its spending, which will likely exacerbate unemployment. As its economy slows, the improvement in its fiscal position may be minimal.
For the eurozone to make sense, all automatic-stabilizer programs - unemployment insurance, labour market training, wage supplements, progressive income taxes - should be in the hands of the EU, not national governments. If Europeans cannot bring themselves to do that, they should abandon the euro. It no longer makes sense to continue this curious half-a-loaf of monetary integration but fiscal and political separation.
As Paul Krugman puts it:
Now that the money is no longer rolling in, those countries need to get costs back in line.
But that's a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates -- e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won't accept inflation, deflation it is.
The problem is that deflation -- falling wages and prices -- is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment.
That is to say, it's not enough to tax the Greek wealthy. You have to tax the wealthy all over the eurozone to fund Greek social programs - basically, you need a continent-wide income tax funding continent-wide social programs. Europe would really need to be a single country, not just have a single currency.
And indeed, this was probably the hope when the euro was introduced - that it would nudge countries towards greater political integration. In that respect, it has failed. The people of Greece are now its first victims.