"Greece Is a Victim of German Austerity."
Paul Krugman wants you to think that. But it couldn't be further from the truth. In one of his many New York Times columns on the current eurocrisis, Krugman argues that while there are "big failings" in Greece's economy, politics, and society, "those failings aren't what caused the crisis that is tearing Greece apart." Instead, the Princeton University economist blames the euro and Germany: Greece "is mainly in trouble thanks to the arrogance of European officials," he writes.
If the EU is guilty of arrogance, its sin was one of omission -- not imposing its standards. From 1990 until 2008, Greece ran an average budget deficit of over 7 percent of GDP, failing to comply with the EU's budget ceiling of 3 percent of GDP in any single year. By the end of 2011, its public debt stood at an unsustainable 171 percent of GDP.
The first IMF-EU financial support program, moreover, was probably the softest and most heavily-financed program in history. Incredibly, Greece's public expenditures as a share of GDP increased marginally to 51.8 percent of GDP the following year. Not even Sweden made such large public expenditures. Far from austerity, the program amounted to a massive waste of public resources.
Shockingly, the IMF and the EU have failed to require even elementary liberalization. Greece has the worst business environment in the EU, according to the World Bank's "Ease of Doing Business" index, and Transparency International reports that its corruption is far worse than that of Bulgaria and Romania. The problem isn't that Germany and the EU have been too tough with Greece; it's that they've been too soft.
The second death of Keynesianism is long overdue. Expansionary fiscal policy has not only proved useless, but harmful in the European financial crisis. As former U.S. Treasury Secretary Lawrence Summers pointed out this month, "It is simply wrong to assert that austerity is never the right policy."
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