Europe: Austerity Cuts Cause Protests but No Growth

Greece and Spain have been engulfed in anti-austerity protests over the past two days as citizens express their concerns over the cuts being imposed on those nations by their lenders. These protests, which always start peacefully and then become violent, are unlikely to have any major impact on the actual bailout negotiations. I continue to believe that the unease being expressed by these citizens is not singularly about the proposed austerity measures but rather about the unequal imposition of these measures i.e. the financial professionals who contributed to this mess aren’t being asked to pay the same price as the ordinary citizens.

Greek Prime Minister Antonis Samaras is negotiating $15 billion in cuts in order to get $40.7 billion in funds from the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission (EC). Athens’ position is that unless it gets these funds, it will become insolvent. This, therefore, gives the lenders a great bargaining position. However, what could the lenders do if Greece did become insolvent? Zimbabwe tried the same thing a few years ago and, while it went through some lean years, it seems to be doing much better and the lenders aren’t complaining; Argentina is another such example. The question, then, is whether going insolvent would be such a bad thing and whether this argument would strengthen Greece’s bargaining position.

Without a doubt Greece needs to change its way of thinking – its retirement and pensions plans were way too generous, its government subsidies too high, and its work ethic partially non-existent; no one ever went to Greece and came back talking about the great Greek work ethic, rather everyone always talks about how the Greeks have a great lifestyle and how they know how to enjoy their lives. Well, that comes at a price that someone has to pay and part of this price should be paid by Greek citizens. However, the price should also be paid by those who encouraged this behavior. Greek and Spanish citizens are like drug addicts and they are concerned that the drug pushers i.e. bankers and policy professionals are not being held accountable for their actions. This is a legitimate concern and one that crosses multiple continents as folks in the US have the same questions and worries.

On top of that, citizens and a number of economists have expressed doubt about how such deep austerity measures would help an economy recover? These measures are great at ensuring that lenders get their principle and interest back but they don’t support economic growth and by demanding these steps, the IMF, ECB, and EC are, ironically?, acting like private sector banks and not multilateral economic institutions. Obviously, this is a question of perspective since Greece, Spain, and other such countries need to institute spending cuts but the argument isn’t about the cuts but about their severity and impact on national and regional growth. Lenders should be concerned about citizens such as “Anna Afanti, 50, a secondary school teacher,” who said that “I should have left this country a long time ago. Now I’m stuck here.” Economic growth doesn’t come when people start leaving an area, just ask Detroit.