January 18, 2012 Leave a comment Go to comments

A couple of years ago (February 2010), I thought I was being really heterodox, when I argued that Greece should be given 7-8 year to consolidate its public finances, because any sharp consolidation plan would push it into recession. The interview was in French, but more or less I said that

The question of timing is crucial. The crisis will be costly, and I find it positive that we ask the question of how to return to a normal state […] My concern is that these austerity measures are implemented too early and too far. Today we have some signs of renewed growth, but unemployment has not decreased […] The will to reduce the deficit too fast seems to me dangerous, even for a country like Greece. Reducing the Greek deficit from 13% to 3% in two years (with the agreement of the European Commission) makes me shudder! This target will not be met, and if it were to be met, it would impose two years of austerity that would knock the Greek economy. This is not the way to lead a county out of the crisis. And it does not solve the the problem of public finances. A country with no growth can not have sound public finances.
We should return to a normal state of affairs, because we would not be able to withstand another attack, in 5 or 10 years; but let’s not be hasty.

This is instead Olivier Blanchard, IMF Chief Economist, in a speech (rather gloomy by the way) that he gave a few weeks ago:

I should be clear here. Substantial fiscal consolidation is needed, and debt levels must decrease. But it should be, in the words of Angela Merkel, a marathon rather than a sprint. It will take more than two decades to return to prudent levels of debt.

More than two decades!! So, what used to be heterodox only two years ago, is today prudent mainstream thinking. This should say a lot about the dangerous times we are living; and should be food for thought for Mrs Merkel and her economic advisers.

One last thing. At around that time, I also had said that Greece would never default, because its peers would never let that happen:

A part les spéculateurs, aucun autre acteur aujourd’hui n’aurait intérêt à une sortie de la Grèce de la zone ou à un éclatement de la zone euro. Les Grecs n’y ont pas intérêt, parce qu’une sortie de la zone euro voudrait dire une dépréciation violente de leur nouvelle drachme, et donc un risque accru de faillite. Les autres pays européens auraient deux problèmes. Le premier serait un effet de contagion : après le pion Grèce tomberaient d’autres pions ( l’Espagne, le Portugal, etc.) . Le second, c’est que la dette grecque est détenue aussi par des institutions financières de gros pays européens, notamment l’Allemagne. Celle-ci ne pourrait pas imposer ce coût à son système financier.

I guess I got that one wrong…

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