Photo: Fox Business News
David Malpass—the president and founder of research and consulting firm Encima Global LLC, former Bear Stearns chief economist, and a former Republican candidate for the U.S. Senate from New York—criticises debates about growth and austerity in the EU in an editorial published last night by the Wall Street Journal.Austerity and economic reforms are not the problem, he argues, but the way EU governments like Greece are going about it is all wrong. Austerity will be growth-positive when governments and not the private sector are forced to absorb the losses.
Malpass points out a number of ways in which the Greek government is blatantly failing to cut back its own expenses and forcing the private sector to bear the burden of losses:
The Greek government has been practicing a particularly aggressive form of antigrowth austerity. While the private sector shrank in 2011, Greece’s government grew to 49.7% of GDP from 49.6% in 2010. To accomplish this bad outcome, Greece’s government increased its value-added tax to 23%—a hidden sales tax so high that no one should be asked to pay it or support it—and created a national property tax that transfers private-sector wealth to the government and through it to foreign creditors.
Meanwhile, Greece’s parliament kept full pay, full benefits, its fleet of BMWs, and a full staff. Greece maintained its sweetheart subsidies for businesses, banks, the army and those who choose not to work. Its sizeable delegations and facilities in Brussels, Vienna, Geneva and Washington are still large, as are the life-time pensions for politicians. Last week, Greek officials suspended work on the sale of government assets, one of the most pro-growth conditions in its IMF program.
Thus calls for a Greek exit from the eurozone are completely counterproductive, Malpass argues, as they would give the government free reign to continuing financing excessive government spending. Meanwhile, a Grexit would impose grave losses on the private sector by immediately cutting it off from international investment and sustaining the uncompetitive policies that got the country into this mess in the first place.
He adds that traders campaigning for a Greek exit have their own personal incentives in mind:
Currency traders are cheering for Greece to exit the euro. That would create currency volatility and, if other countries exit, mega-profits for traders. The cost would be much lower living standards and even bigger government—including the power to print money—for those exiting the euro.
But as the pressure amps up on the Greek government to impose deeper and deeper cuts, it is unclear if Malpass’s arguments have any shot at derailing the clamor for a Greek exit.