While in the media Greece may be portrayed as lagging behind, they are, on the contrary, ahead: Greece has simply bankrupted a decade or two before the rest of us. If other countries follow in Greece’s lead and grow without making changes in the system, they too will arrive at the same fate. Debt and growth often go hand in hand – countries go bankrupt because they rack up too many debts in attempts to stimulate more growth. For many countries across Europe, a desire for too much growth has brought many to their knees.
Greece and other countries in similar situations should serve as a warning. It is fortunate that Greece has a small enough economy so that unsystematic rescue measures can be taken while the EU takes its time to come up with a solid systematic solution to turn things around. This year’s Fiscal Compact has already been one step in the right direction.
The state of economy often goes misdiagnosed – the economy is not depressed, rather, it is manic depressive. It has a tendency to exaggerate its good times into manias and to spiral down into almost suicidal depressions during bad times. Fiscal and monetary policies have been put in place to help balance out this phenomenon, slowing down GDP growth during stable periods and speeding it up when the economy is turning down.
If Greece and Ireland were head cases in a psychiatric institution, Greece would be the depressive and Ireland the manic. Symptoms of mania in manic-depressive patients often include having overly optimistic readings of present and future prospects, spending more than one can afford, and spurts of creativeness and efficiency. Before the crisis, Ireland was seemingly in a heightened state of mania, overly optimistic and flighty. If Ireland’s bankers had been only half as effective and had invested just half of what they did with about half the optimism, they might not be facing the same troubles that they are today. Ireland is not the only country to have gotten carried away in the midst of its mania, and it is important for European countries to take control of and slow down their manic economic tendencies.
The problem is not the growth itself, but the fact that too much of the growth is debt-induced. In Greece’s case, it is not the lack of growth that has harmed the economy but the means taken in the past to stimulate the ‘growth economy’. By focusing on quick-fix solutions and cures for these economic depressions and manias, the root of the problem does not get treated. In order to get out of this crisis and prevent its recurrence, it is vital to understand how and why this happens, and which responses may produce better end results.
Countries around the world, from Greece to Japan, seemed to have found a magic formula for ‘endless growth’: the deficit. But deficit boosting of the economy actually resembles a highly-addictive drug more than any magic solution to economic woes: at first it seems terrific and lacking disagreeable side effects, but then dependence builds and turns into a full blown-addiction. In the long run, boosting the deficit leads to economic paralysis followed by bankruptcy.
The current consensus seems to be that the crisis was caused by too much debt-induced consumption, by interest rates that were too low during the boom cycle and because of too much trust put into overly-optimistic ratings agencies. And just what has the response been to this? Even more debt induced consumption, even lower interest rates, and big moans when ratings agencies threaten to or decide to downgrade.
While institutions might be going about it the wrong way, stimulation is induced to do just that – to stimulate the economy and to make it grow faster. It’s often said that without stimulation and growth our economies will collapse and an economic Armageddon will follow. So is growth a result of market democracy, or is it a sine qua non of market democracy? Can economies stand without growth, or will they fall apart without it? Do countries produce growth or are they dependent on it? These are some key questions that have yet to be answered.
Almost one hundred years ago Keynes sparked off the debate on whether or not to stimulate the economy by means of government deficit spending. The debate is nearing an end as countries have simply used up all of their debt, just as a drug addict eventually runs out of his drugs. Like an addict at rock-bottom, there must be a slow detox, in this case, a debt-detox, and then a weaning off of the dependence. Like any sort of withdrawal, it will be not be easy and will have adverse short-term effects on growth. Unfortunately, since the economy became used to high levels of debt in good times, the fiscal impulses are now ‘slack’ and do not produce the given effect. For example, if the economy is used to 4% annual deficit, it will perceive a decrease in deficit to 2% as contractionary, not as expansionary, even though the economy is still running deficits. So we come to a paradox: the debt will be growing, yet the economy will not take this as a stimulus, but rather as contractionary fiscal policy and will react with a GDP slowdown.
No magic formula for growth seems to exist. Devaluation is not the answer, as instead of increasing the competitiveness of a given economy, it merely decreases the competitiveness of its trading partners. It is no wonder devaluation policies are called "beggar thy neighbor" policies, and that the devaluation-induced trade wars were motivating factors in the introduction of the euro. Other ‘magic formulas’ governments have attempted to use to stimulate the economy include protectionist policies like implementing tariffs and passing legislative barriers on imports while subsidizing exports. Inflation, another solution, is merely a way of getting rid of debts at the creditor's expense and historical examples have highlighted its downsides. As previously stated, the deficit financing is too addicting. These "easy fixes" at first seem like the answer but turn sour in the long run and come at a high price. There is no magic formula.
To restabilise the economy, European governments need all around reforms. Government overspending should be curbed, the state should be made more efficient, trade barriers should be abandoned, more investment should be made in education and innovation, etc. Simply put, Europe needs to see more supply-side economics. Europeans have put too much focus on demand that the proper role of the government has been forgotten, which is to focus on the supply-side. But in terms of properly stimulating and maintaining growth, there is no magic formula, no cheap fix and no free lunch.
Tomáš Sedláček is a Czech economist and university lecturer. He is the Chief Macroeconomic Strategist at ČSOB, a former member of the National Economic Council of the Czech Republic and an economic advisor to former President Václav Havel. atomsedlacek@gmail.com