Today might go down as the notion that austerity officially died in Europe.It’s clear that Greece’s efforts to solve its debt problem by cutting spending have been a gigantic flop.
Its debt problem is now worse.
The outcome is not surprising. What’s surprising is that people ever believed it would work in the first place. Here’s a post from a year ago explaining exactly what would happen, and it was spot on. The deficit got worse.
So why did people believe in it, and continue to do so?
Basically, because it fits nicely into a moral world. There’s no good economic basis for it, but we like to believe that the solution to a crisis is pain. Greece had a boom, it spent too much, and the only way to get out of that is through years of austere economic misery.
Unfortunately what Greece is getting is austere economic misery, but without the progress in the direction of its goals.
The economy isn’t a fable. Those who get wealth in some unfair way aren’t bound to crash, and those who take a beating aren’t bound to rebound. What’s painful isn’t always good for you.