Doomed to fail: Second Greek bailout deal won’t last, says CEPR

Mark Weisbrot, co-director of the Centre for Economic and Policy Research, a Washington DC-based think tank, says the deal struck with Greece this week will only worsen the situation.

The European authorities seem more intent on punishing Greece than helping the economy recover.

For two years now they have been pushing the Greek economy into recession, and there’s still no light at the end of the tunnel.

The IMF has had to lower its projections for Greek GDP shrinkage by an enormous 7 percent of GDP in less than two years. Most of this downward revision has been in just the last five months.

Given the underestimation of Greek losses so far, and the recessionary impact of budget tightening, mass layoffs, a 20 percent reduction of the minimum wage, and other austerity measures – I think the pessimistic scenario outlined in the leaked document is a very plausible scenario.

The ostensible purpose of Greece’s prolonged recession is to lower labor costs in order to lower the country’s real exchange rate and increase Greece’s international competitiveness. But after four years of recession, with unemployment rising from 6.6 percent to a record 20 percent, Greece’s Real Effective Exchange Rate (REER), according to the IMF, is higher than it was in 2006.

The IMF is projecting that Greece will still have 17 percent unemployment in 2016.

The bottom line is that you can’t shrink your way out of a recession – you have to grow your way out. What they are doing to Greece really makes no economic sense. At this point, it looks like the economy would do better if Greece were to exit from the euro, as opposed to enduring indefinite recession and stagnation, extremely high and persistent unemployment, and increasing poverty. The European authorities are certainly pushing Greece toward the exit and default option.

 

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