As wrangling and head-scratching continues in Europe about the best course of action on Greece, there seems to be a paucity of contingency planning for the different scenarios that can ensue. In fact, it is not even clear what the European community intends to do about Greece if it does not accept the two-year extension for further fiscal austerity. Does it intend to stop all talks of a third round of aid money and ask Greece to implement further fiscal tightening ? If those opposed to the two-year extension get their way, what does the Greek government intend to do in such a situation ? Clearly, the fact that the government negotiated a two-year extension means that it thinks that immediate fiscal tightening needs to be avoided. However, what if such an immediate fiscal tightening becomes necessary if next week's decision about Greece is one opposed to the two-year extension ?
It seems Greece needs a set of strategies designed to match different scenarios regarding GDP growth ( short-term, medium-term and long-term ), tax revenue fluctuations, willingness of the rest of Europe to lend money under specific scenarios, willingness of the IMF to lend money under specific scenarios etc. The worst-case short-term scenario for Greece is one where no further aid money flows in due to disagreements about the economic merit of such aid, due to the unwillingness of different parliaments to approve aid money etc. It should be possible to avoid this worst-case scenario, where Greece is left completely to itself, if those who have a stake in Greece's future take all possible consequences into account while deciding their actions. For example, European countries need to take into account the fact that leaving Greece to its own fiscal and economic resources in the short-term can trigger a bout of instability that the European economy and the world economy should try to avoid at all costs. Although no one is talking about stopping aid to Greece altogether, Greece needs to create contingency plans for such a situation which can lead to exit from the Eurozone, hyper-inflation, failures of banks in Greece etc.
The ripple effects on banks in the rest of Europe, on the trade volumes of Greece's trading partners etc can be devastating for Europe and eventually for the global economy. Given the possible devastating short-term and medium-term impacts of leaving Greece entirely to its own on Europe and on the global economy, it makes sense to provide the requisite amount of aid to Greece till it reaches the right combination of internal fiscal and economic stability. Short of this worst-case scenario, details like the timeframe of budget adjustments, the combination of taxes and spending levels etc need to be considered. What countries like Germany and France need to realize is that questions like timeframes for fiscal adjustments and for reaching specific debt-GDP ratios are economic questions first and political questions next. At this historic juncture for the European and for the world economy, it will be the height of stupidity for European countries to put politics ahead of economics. German taxpayers and taxpayers in other countries need to be educated by their economists and by their politicians that extending financial aid to Greece from their own money can make perfect economic sense given the integrated nature of the European and the global economy. It is imperative that short-term political considerations are not allowed to cloud sound economic reasoning given the delicate state that the European economy and the global economy find themselves in.
As for the right combination of taxes and spending, this is again an economic question that needs careful analysis based on the country's revenue structure, spending programs etc. Those who may want to put more emphasis on spending cuts and less on tax increases for achieving lower deficits in Greece would do well to realize that the rich, the high income earners and the large-profit-makers should be expected to make some sacrifices for Greece's austerity programs. Greek policy-makers should be able to come up with frameworks where taxes are imposed on employers making good profits and adequate provisions are made for employers struggling to make profits. Letting the burden of austerity fall on the spending side alone can create unwanted economic consequences and socio-economic instability. By not letting tax increases absorb some of the shock of austerity, conditions may get created where large sections of the population are left without basic welfare provisions and where the aggregate demand may change in a way that has adverse effects on the economy. Clearly, the details can be complicated and can vary from country to country. But mere ideological opposition to letting some tax hikes be a part of austerity programs, as opposed to dispassionate economic analysis, can lead to severe problems in the short run and in the long run. Greece needs serious economic analysis in this area. Fiscal projections, GDP projections, sectoral GDP projections etc under different tax-spending combinations and under different external aid combinations need to be arrived at. Given the fast-changing nature of economic developments in Greece and in Europe, no one should expect this to be an easy task. However, it should be possible to make projections that are reasonably accurate and robust. The extent to which Greece is able to come up with good projections about these aspects of the economy may well decide the short-term and long-term economic well-being not only of Greece, but also of the rest of Europe and possibly of the world as well.
by C. Jayant Praharaj ( send comments to [email protected] )
It seems Greece needs a set of strategies designed to match different scenarios regarding GDP growth ( short-term, medium-term and long-term ), tax revenue fluctuations, willingness of the rest of Europe to lend money under specific scenarios, willingness of the IMF to lend money under specific scenarios etc. The worst-case short-term scenario for Greece is one where no further aid money flows in due to disagreements about the economic merit of such aid, due to the unwillingness of different parliaments to approve aid money etc. It should be possible to avoid this worst-case scenario, where Greece is left completely to itself, if those who have a stake in Greece's future take all possible consequences into account while deciding their actions. For example, European countries need to take into account the fact that leaving Greece to its own fiscal and economic resources in the short-term can trigger a bout of instability that the European economy and the world economy should try to avoid at all costs. Although no one is talking about stopping aid to Greece altogether, Greece needs to create contingency plans for such a situation which can lead to exit from the Eurozone, hyper-inflation, failures of banks in Greece etc.
The ripple effects on banks in the rest of Europe, on the trade volumes of Greece's trading partners etc can be devastating for Europe and eventually for the global economy. Given the possible devastating short-term and medium-term impacts of leaving Greece entirely to its own on Europe and on the global economy, it makes sense to provide the requisite amount of aid to Greece till it reaches the right combination of internal fiscal and economic stability. Short of this worst-case scenario, details like the timeframe of budget adjustments, the combination of taxes and spending levels etc need to be considered. What countries like Germany and France need to realize is that questions like timeframes for fiscal adjustments and for reaching specific debt-GDP ratios are economic questions first and political questions next. At this historic juncture for the European and for the world economy, it will be the height of stupidity for European countries to put politics ahead of economics. German taxpayers and taxpayers in other countries need to be educated by their economists and by their politicians that extending financial aid to Greece from their own money can make perfect economic sense given the integrated nature of the European and the global economy. It is imperative that short-term political considerations are not allowed to cloud sound economic reasoning given the delicate state that the European economy and the global economy find themselves in.
As for the right combination of taxes and spending, this is again an economic question that needs careful analysis based on the country's revenue structure, spending programs etc. Those who may want to put more emphasis on spending cuts and less on tax increases for achieving lower deficits in Greece would do well to realize that the rich, the high income earners and the large-profit-makers should be expected to make some sacrifices for Greece's austerity programs. Greek policy-makers should be able to come up with frameworks where taxes are imposed on employers making good profits and adequate provisions are made for employers struggling to make profits. Letting the burden of austerity fall on the spending side alone can create unwanted economic consequences and socio-economic instability. By not letting tax increases absorb some of the shock of austerity, conditions may get created where large sections of the population are left without basic welfare provisions and where the aggregate demand may change in a way that has adverse effects on the economy. Clearly, the details can be complicated and can vary from country to country. But mere ideological opposition to letting some tax hikes be a part of austerity programs, as opposed to dispassionate economic analysis, can lead to severe problems in the short run and in the long run. Greece needs serious economic analysis in this area. Fiscal projections, GDP projections, sectoral GDP projections etc under different tax-spending combinations and under different external aid combinations need to be arrived at. Given the fast-changing nature of economic developments in Greece and in Europe, no one should expect this to be an easy task. However, it should be possible to make projections that are reasonably accurate and robust. The extent to which Greece is able to come up with good projections about these aspects of the economy may well decide the short-term and long-term economic well-being not only of Greece, but also of the rest of Europe and possibly of the world as well.
by C. Jayant Praharaj ( send comments to [email protected] )