In the land of Ulysses and gyros, far away from Washington D.C., and outside the minds of Americans, a new prime minster was elected. Greece elected Alexis Tsipras, a socialist from the Syriza party. A small country in the European Union and member of the Eurozone made a statement: enough with austerity!
Since 2008, when Wall Street's excesses caused the Great Recession, the world economy has struggled. At the height of the crisis, some Eurozone members --Greece, Spain, Portugal, and Ireland -- were facing bank runs and liquidity problems. Debt buyers were skeptical; yields started to rise. Greece had it the worst, and with structural deficiencies, like corruption, unfunded government benefits, and crippling labor laws, a default seemed imminent.
To calm the markets and prevent a contagion in the Eurozone, the "Troika" (European Central Bank "ECB", European Commission, and International Monetary Fund) injected loans into Greece. The loans came with conditions -- spending cuts, tax increases, and economic reforms. Other Eurozone members entered into similar arrangements.
By most statistical measures, austerity has failed. The Eurozone continues to drag after seven years. There has been slow growth, and little hope. Unemployment in Greece is 26%. Across Europe, young adults face similar levels of unemployment. Deflation also threatens the economy. As prices fall, businesses will cut wages and capital expenditures, which will lead to slower growth and higher real debt.
Although the ECB has announced quantitative easing, which had great success in the United States, it isn't enough. The problem lies with insufficient demand. Households and firms do not have the financial means to speed up the recovery. Governments must spend more to spur economic activity -- and they have not.
In Europe, there is an ideological impasse between creditor and debtor nations. Germany, the largest economy in the Eurozone, has indicated that it does not want to spend its tax dollars to enable Greek irresponsibility.
The Eurozone faces real challenges because they are a union, unwilling to act as a union -- similar to the disjointed government of the early United States that prompted the constitutional convention. Until Eurozone states find that their fate is intertwined, there will be uncertainty.
Nevertheless, austerity policies have done real harm. Republicans, here in the United States, should take note. On a micro level, it makes sense to tighten the belt. If a household or firm borrows too much, it will go bankrupt. However, on a macro level, if everyone cuts back at the same time, including the state, there will be a depression.
Moreover, the United States is an investment haven. Deficit and debt obsession is misplaced because the United States can borrow at extremely low costs, and servicing its debt would be easy. Capital investments will pay for itself because when the GDP increases, the debt to GDP ratio will fall. But, Americans would be much better off -- instead of facing the depression across the Atlantic.
Our country has leaders akin to Germany's leaders. They accost government spending in difficult times. They praise "responsibility" like deficit reduction. Again, as discussed at length, those policies do not work. Austerity negatively affects real people, with real hardships.
We, as Americans, should send a message to Washington D.C. Like the Greeks, we should abdicate failed austerity policies, and push for investments in infrastructure, education, and clean energy. Our message is simple: spend more, don't import austerity.
