At their White House meeting last week, U.S. President Barack Obama assured Greek Prime Minister Antonis Samaras of his support as Greece prepares for talks with creditors on additional debt relief amid record-high unemployment.
The U.S. should also endorse a new blueprint for recovery based on one of the most successful economic assistance programs of the modern era: the Marshall Plan.
It is clear by now that the European Union’s policies in Greece have failed. Projections that government spending cutbacks would stop the economy’s free-fall proved to be wildly optimistic. The 240 billion euro ($319 billion) bailout from the euro area and International Monetary Fund has shown little sign of success, and Greece is experiencing its sixth year of recession.
The spending cuts and tax increases, along with the dismissal of huge numbers of public-sector employees, demanded as a condition of the loans and assistance have only deepened the economic pain.
Instead of changing course, however, euro-area economists have responded to bad news by revising their forecasts to reflect lower expectations. Those numbers document a staggering record of mistaken assumptions that has led to today’s failure.
In December 2010, the so-called troika of lenders ― the European Commission, the European Central Bank and the International Monetary Fund ― predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent.
This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24.
Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014.
Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted.
Greece last faced economic ruin immediately after World War II. By 1949, the country was bankrupt, with virtually no industry; transportation networks, farmland and villages had been devastated, and about a quarter of the population was homeless.
Marshall Plan funds allowed Greece to rebuild, start power utilities, finance businesses and aid the poor. And, because social chaos had created an opening for communist and extremist parties, the U.S. hoped the stimulus would stabilize democracy, even as it created wealth.
Like other Marshall Plan nations, Greece experienced growth on a scale it had never known. The astonishing transformation was widely hailed as an “economic miracle,” and the nation continued to surge more than 20 years after the assistance ended.
With that enormous achievement in mind, the Levy Economics Institute has constructed a macroeconomic model of what a Marshall-type recovery plan could do for the Greek economy today. We assumed a modest stimulus from EU institutions of 30 billion euros between 2013 and 2016 that would be directed at public consumption and investment, and particularly jobs.
Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors, the new program would focus on debt forgiveness, and then turn to reconstruction projects to rebuild national infrastructure and create public projects at the local level.
A rebuilding plan could address Greece’s tremendous need to renovate schools, hospitals, libraries, parks, roads and bridges. Forests need to be replenished: Catastrophic fires have led to deforestation. Tourism once accounted for more than 25 percent of the economy; now, extraordinary beach cleanups are badly needed to attract visitors.
University graduates, after having been trained at public expense, are now forced to seek opportunity outside Greece. They could make valuable contributions, introducing information technology and other know-how to the government, health and education sectors.
These efforts could draw an idled, but ready and trained labor force, to construction, education, social service and technology. More employment would increase aggregate demand, which is now severely depressed. In turn, the multiplier effect of these expenditures would increase GDP substantially.
Instead, Greece is applying “expansive austerity.” The idea is based on a contested theory, and the real-world results have been a humanitarian disaster. These policies are lowering demand by reducing incomes, which cuts into tax revenue. The inevitable result is higher deficits and debt-to-GDP ratios.
For comparison, we modeled what we expect to happen in the coming years if Greece stays on its scheduled fiscal diet. The government has consistently been unable to meet troika-mandated deficit-reduction targets, and the lenders have consistently required further cutbacks.
The results of our modeling exercise were clear: Under today’s policies, unemployment would continue to increase, reaching almost 34 percent by the end of 2016. Under a Marshall Plan scenario, the rate would fall to about 20 percent.
Similarly, if Greece institutes the currently planned austerity measures, we calculate that its gross domestic product would reach about 158 billion euros by the end of 2016, compared with 162 billion euros projected for 2013. That would be more than 15 billion euros short of the troika-mandated target.
If, alternatively, government squeezes harder to meet the required deficit-to-GDP ratio goals, the endgame will be even worse: A poor and increasingly out of work population, among other factors, will push GDP to about 148 billion euros, more than 30 percent below its 2008 peak. A Marshall Plan scenario would put GDP a little above the troika’s target.
The first Marshall Plan wasn’t an act of charity or a bailout: It was an effective investment strategy to create a vibrant European economic market and prevent political disintegration. To institute a modern version, we need to revise discredited austerity theories ― or the euro-area institutions that promote them.
By Dimitri B. Papadimitriou
Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College. ― Ed.
(Bloomberg)
