The main problem with European policy makers is that they did not have a Great Depression. At that time, 1930s, individual countries were hit by global recession but the magnitude for the European economy was not considered. As a consequence they did not have any interest in studying it. Anglo-Saxon economists have spent decades to understand the policy errors that after the initial market crash pushed the economy further into recession. The main and only conclusion from those studies is that monetary policy has to remain loose or at least to keep growing at the previous pace. But that is just to keep the economy from going deeper into recession. There is still no consensus on how to pull an economy out of recession – fiscal stimulus, further monetary stimulus, allow the economy to correct itself etc.
However, there is one more conclusion that seems to be pushed aside lately: austerity measures do not work during crisis!! This should be common sense. Yes, in good times it is normal to ask a over indebted government to cut back in expenditure and bring the government finances to a surplus. But in crisis times these measures will deepen the recession, will create an anti-reform sentiment and could even lead to social unrest. Especially when the central bank, i.e. ECB, will implement a tighter monetary policy.
Greece has made grave policy errors in the run up to 2007. So did private companies, especially banks. There were two solutions for both: bankruptcy or total bailout. Instead EC and IMF is trying to force Greece into a program that focuses on tough domestic restructuring of the public sector while still banks are allowed to continue as they were. Anyone tangent to the economic phenomenon understands that Greece needs to reform to move forward. It is just that the timing is terrible wrong.
After 3 years of reforms the Greek economy looks much worse and the prospects are not good. As you can see from the graphs, GDP is expected to fall further, so is total investment while unemployment is expected to rise and inflation to remain anchored above the target for euro zone. But what these or any other economic indicator will never show is the tolerance threshold of a people to tough reforms. The referendum announced yesterday by the Greek Prime-Minister gives a very good indication that we are close to that threshold.
Coming back home in Romania, I am really confused by what our policy makers intend to do. For 9 months this year they were very bullish and boasted about economic growth in 2011 and 2012, totally oblivious to global economic woes. But now all of a sudden the austerity measures implemented in 2010 and 2011 need to be further toughened. Again, totally oblivious to what’s happening in Greece or any other country undergoing austerity programs.
Romanian policy makers should take the time and understand the details of the Romanian economy: its structure, its rigidities, what drives growth, how to reduce volatility in prices and growth etc. Then it should choose the policies that best fit the ROMANIAN ECONOMY. Otherwise we will be still crawling at the bottom of economic growth while trying new ideas developed for other economies.