PrintMay 2, 2010
Economic Policy Protests: U.S. versus Greece
May Day protests in Greece turned violent, with rioters throwing Molotov cocktails and stones at police, who responded with tear gas. Leftists and who the press called "anarchists" smashed shop windows and set up burning barricades in Athens. Demonstrations have been going on for weeks against so-called "austerity measures" being enacted by the bankrupt-government to obtain foreign loans to ward off a financial collapse.
Though Greece has been looking mainly toward its fellow European Union members for help, the International Monetary Fund has also been involved. IMF Managing Director Dominique Strauss-Kahn has been meeting with Greek and EU officials to set the conditions under which a multibillion euro loan can be made.
On April 25, George Papaconstantinou, Finance Minister of Greece, laid out what his government was trying to do to reform the situation:
If you compare the situation now with what happened four months ago, you will see that now we have a budget which is on track which is actually ahead of schedule; and the major problems that have been in our country for a long time-a tax system which leaves out a big part of the population with significant tax evasion, a budget which allows expenditures to rise uncontrollably, a pension system which is not viable medium term-all these are being dealt with.
He also spoke of privatization plans for state-owned enterprises, the opening of the economy to more foreign investment, and greater flexibility in labor regulations. He stressed the need to win market confidence in a "fully sustainable situation in terms of both deficits and the evolution of the public debt." The Socialist government does not, however, want to make more cuts that it has to, which is why the negotiations are dragging on. It will undoubtedly use the riots as leverage in the talks.
The IMF has been demonized by the Greek Left for demanding a reduced budget deficit, which will require cuts in social spending and state payrolls. And the IMF has stressed that it will be making a loan to be repaid, not giving away a grant.
But what else can the IMF do given the nature of the Greek tragedy? The IMF reported in its World Economic Outlook released in April that the structural deficit in Greek government finance was 13.1 percent of GDP. And by structural deficit, it meant the actual deficit minus the effects of the business cycle. The IMF accepts that governments need to run counter-cyclical deficits during a downturn to stimulate recovery, but holds that structural deficits arising from excessive spending during normal operations are harmful to economic growth.
"Among the worst performers were advanced and emerging European economies that had experienced large current account deficits and domestic imbalances" prior to the downturn said the IMF in its report, adding "Coming out even more slowly from the recession will be smaller euro area economies, where growth is constrained by large fiscal or current account imbalances (Greece, Ireland, Portugal, Spain).....In some cases, large deficits need to be reversed promptly to address concerns about debt sustainability (Greece, Ireland, Portugal, Spain)." Current account deficits are driven by trade imbalances where spending on imports is financed by international debt.
The notion held by many professors that perpetual deficit spending boosts the economy is belied by the Greek case. According to IMF data, Greek unemployment has averaged 10 percent during the 1992-2009 period. It is projected to be 12 percent this year.
The United States suffers many of the same maladies as Greece in terms of budget and current account deficits, and an expanding government entitlement sector that is squeezing out productive business. The U.S. data is not as bad as in Greece, but is trending in the wrong direction. The U.S. economy is much larger, allowing it to get away with bad behavior longer, but bad behavior always reduces economic performance. America needs to improve performance if it is to create jobs and put the country on a firm financial footing.
One advantage the U.S. has over Greece is that rallies here protesting fiscal policy are being led by the Tea Party movement calling for "austerity" measures to reduce government spending, not by demonstrators defending irresponsible budgets. American taxpayers waving the stars and stripes are carrying a much better message than Greek mobs waving the red and black flags of socialism and anarchy.
