May 10th, 2015
from the Richmond Fed
A comment in a Wall Street Journal (3/23/15, A8) article summarized public debate over the depression in Greece. "The populist rhetoric of many Greek politicians blames the country's economic depression on the terms of the bailout since 2010, rather than on Greece's lack of fiscal discipline in the years up to 2009."
Especially, many Greeks blame the depression on externally forced fiscal discipline, while many Germans blame the depression on a lack of fiscal discipline before 2009. The argument made here is that both views are wrong. The depression comes from the deflation required in order to achieve depreciation in Greece's Eurozone terms of trade. That depreciation in turn is required in order to turn a current account deficit into a current account surplus. However, understanding the problem does not provide a painless solution. Greece could mitigate the extent of the required deflation, but doing so would require structural reform of the economy.
The debate is intense because of criticism that Greece broke the rules of the Maastricht Treaty requiring fiscal discipline. For example, Jose Manuel Barroso, the former president of the European Commission, argued (European Commission 2013):
[O]ne of the reasons we have a rise of unemployment in Greece is because the Treaty was not respected by the Greek authorities and by other countries. We have a Stability and Growth Pact, we have rules and those European rules were not respected by the Greek authorities, so these unemployed people in Greece should be told that the authorities of their country did not respect the Treaties that they have signed....
[T]he biggest lesson of the crisis ... is that growth based on debt is not sustainable.
More succinctly, The Wall Street Journal (3/8/13) wrote:
[C]reating a rigid "Europe of Rules" is exactly the German-led strategy for managing the crisis. Berlin's aim is to perfect the monetary union by ensuring countries adhere to rules designed to prevent future crises by addressing what are seen as the causes of the current one: government overspending and excessive risk-taking by banks.