The Lehmann
Letter (SM)
As the G-8
nations met this weekend it seemed as if the tide was turning from austerity to
stimulus. But there may be more to Germany's demand for repayment than a
simple, "You borrowed the money, now pay it back." Germany and its
electorate want a deterrent. They want to punish Greece and create an object
lesson that will be long remembered.
Germans see
the Greek electorate favoring the left-wing parties who advocate renegotiation,
default and even repudiation. The Greek left-wingers believe that Germany will relent
under pressure and provide an even larger bailout, permitting additional
stimulus. If these parties succeed, then the Germans feel that they will have
rewarded bad behavior and left themselves open to continual extortion.
This morning’s
newspapers carried several stories on the G-8 meeting at Camp David. At issue:
Whether Europe should pursue austerity or stimulus and the consequences of a
Greek departure from the euro that don’t quite capture the spirit of
negotiations.
The New York
Times:
Greek Crisis Poses Unwanted Choices for Western Leaders
The Wall
Street Journal:
Growth Dilemma Dogs
G-8
Greece's
Conservatives Gain Ground
The arguments
regarding Europe may be summarized as follows-
Austerity:
The fringe nations, such as Greece and Portugal, borrowed the money, so they
should repay it. Why should a core nation, such as Germany, assume the debts of
the profligate?
Stimulus: The
fringe nations' pursuit of austerity – as they attempt to repay their debts -
has generated recession. Government reductions in spending combined with tax
increases have reduced aggregate demand. Recession deepens as aggregate demand
shrinks, constricting the tax base and lifting the need for social-welfare
expenditures. This makes austerity self-defeating as it reduces nations’
ability to balance their budgets and repay their debts. Since austerity is
self-defeating, the fringe governments should embark on stimulus by spending
more and taxing less. They can resume austerity and repay their debts with the
return of prosperity.
But
bargaining is more than just issues.
(To be fully
informed visit http://www.beyourowneconomist.com/)
© 2012
Michael B. Lehmann
No comments:
Post a Comment