O horrible! O, horrible! most horrible!

13 Jul, 2015 at 22:40 | Posted in Economics | 3 Comments

Greece has 72 hours to implement draconian austerity measures and must place state assets worth 25 per cent of Greek GDP into a fund administered by the European Union just to open talks on a new bailout.

After a 17-hour eurozone summit that ended this morning, Alexis Tsipras, the Greek prime minister caved in to new demands for economic reforms, cuts and guarantees as the precondition to begin negotiations on a third €86 billion Greek bailout.

The Times

Why not just face it — austerity doesn’t work.

When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces the aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues means increased deficits — and calls for even more austerity. And so on.

How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity? Some of the dominant figures in the financial world have had a long-standing scepticism of the economic relations on which Keynes focused which is being emended only now, with reality checks being made in observations of the penalty of the neglect of Keynesian relations …

7ti40If failing to understand some basic Keynes­ian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity – two quite different things …

An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound. For example, having sensible retiring ages, which many European countries do not (a much-needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (a favourite of austeritarians). The compounding of the two – not least in the demands made on Greece – has made it much harder to pursue institutional reforms. And the shrinking of the Greek economy under the influence mainly of austerity has created the most unfavourable circumstances possible for bold institutional reforms.

Amartya Sen


  1. The neoliberal agenda is ending the welfare state and privatizing public assets. I’d say the neoliberal eurocrats are doing a brilliant job of it, taking their cues from US and UK neoliberals since Reagan and Thatcher.

    It’s not only the Western way, but as Margaret Thatcher proclaimed, “There is no alternative.”

    If that sounds like a Mafia don making an offer that can’t be refused, it is supposed to, as the Greek tragedy is meant to illustrate as an example.

  2. The Germans have lost the plot. And they will lose even more.

  3. “How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity?”

    At the back of austerity is greed. Keynes said that the euthanasia of the rentier would proceed as capital was accumulated naturally. Austerity brings huge shifts in wealth and income distribution. This even more skewed wealth and income distribution will advance the euthanasia of the rentier at an even more rapid rate. What the rentier class appropriate from the worker class will burn up on the pyre of untenable capital asset prices.

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