In mid-2008, Canada went into a recession, but by mid-2009, the country had begun to bounce back. The recovery was weaker than hoped for, but at least the economy grew. Today, more Canadians are in the labour force than before the downturn, and in real terms the economy expanded 12 per cent between the third quarters of 2007 and 2014.
In the United States, the story was similar. It suffered a deeper recession than Canada and a slower recovery – but even so, by late 2009 the U.S. economy was growing again. In inflation-adjusted terms, American gross domestic product was up 8 per cent between the third quarters of 2007 and 2014.
Compared with previous economic recoveries, North America’s postrecession performance has been a disappointment. But compared with the euro zone, where some countries have experienced triple-dip recessions and others have been stuck in a perma-recession, this continent has been nirvana.
You can learn a lot about good policy by watching very bad policy in action. And nowhere has Europe done so much damage as in Greece. The mistakes have compounded, as has the pain. Last week, Greeks elected a new government that aims to overturn a half-decade of failed European policies. These were sold as the cure for a suffering continent, but their main accomplishments have been stagnation and immiseration.
How bad are things in the sickest country in the euro zone? The Greek unemployment rate is 27 per cent. Canada has not seen numbers like that since the Great Depression. GDP has contracted 25 per cent since 2007. One quarter of Greece’s economy has simply ceased to exist, and all the jobs and paycheques along with it.
To put that in perspective, in the 2008-09 recession, the Canadian economy contracted about 4 per cent. A little more than a year later, it had already grown back beyond its prerecession peak. In Greece, the economy began to shrink in 2007 and kept on shrinking until 2014.
It should not surprise anyone that voters in the country that invented democracy decided last week that this state of affairs could no longer be endured. The austerity program imposed on Greece, and on all of Europe, has not worked. A spiral of budget cuts, economic contraction and more budget cuts has left Greece less able than ever to pay its debts. And Greece is not alone.
Yanis Varoufakis, the economics professor, blogger and new finance minister, says that Greece has been put through years of “fiscal waterboarding” and that now is the time to stop the torture. Mr. Varoufakis and his colleagues in the new Syriza party government have been painted as radicals by their critics. But what Syriza is proposing is far more conventional than the repay-the-debt-or-else schemes that the EU has foisted on Greece.
Greece’s public debts now total 175 per cent of GDP. That’s five times the level of Canada’s federal debt. And despite years of austerity, the country is more indebted now than when the crisis started. The reason is simple: The economy is shrinking faster than Athens can cut spending or raise revenues. The more Athens cuts, the more the economy contracts. It’s a vicious circle. It’s also textbook economics. Nobody should be surprised by the outcome.
Greece is actually running a large primary surplus – debt repayment costs aside, Athens is taking in more revenue than it spends on programs and salaries. Greece’s reward – again, this is textbook economics – is that its recession has been turned into a depression.
Syriza is proposing to break the cycle. It wants a large part of the debt written off. That’s what should have happened years ago. Instead, the EU establishment has lined up against debt forgiveness, threatening Greece with all manner of punishments, including expulsion from the euro zone.
It makes no sense. In the private economy, companies and individuals regularly seek bankruptcy protection and renegotiate their debts. Lenders are extra careful about whom they lend to and what their credit rating is, because when borrowers can’t repay, lenders end up sharing the pain.
It happens to countries too. Loans to Latin America were written down in the 1980s. And Germany, which has been so adamant about the need for Greece to repay its debts no matter what, forgets that it benefited from two big instances of debt relief in the 20th century.
Forcing Greece’s lenders to take a partial haircut would allow the country to start over, and start growing again. The same should apply to other struggling European sovereign borrowers, notably Spain. It’s one of the ways to break Europe out of its funk. Most of the continent is heading into Year Eight of recession or near-recession. That’s already about seven years longer than necessary.
The creation of the euro was a terrible mistake. Once the crisis hit, it handcuffed the weaker European countries. Canada has its own currency, its own interest-rate policy, its own central bank – and it can use those tools to undertake its own unique monetary policy. The Bank of Canada did just that last week when it lowered interest rates.
But Greece, Spain, Italy and the rest of the troubled Eurozone countries can’t ease their economic adjustment through a weaker currency or lower interest rates. They no longer have their own currency. Relief has to come from elsewhere.
Europe’s choice is stark: If it doesn’t unwind austerity, the whole European project is going to collapse. The continent is stuck and needs economic stimulus; countries like Germany should be running deficits and the European Central Bank should be doing more to avoid deflation. And Greece needs significant debt forgiveness. Without it, it will eventually default on those debts and leave the euro zone, potentially precipitating another financial crisis. Time isn’t on Europe’s side.Report Typo/Error
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