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Wednesday, 14 April 2010

KEYNESIANISM FAIL - PART 2

Not too long ago, I blogged about the findings of a research paper, which suggested that the Greek economy was beyond Keynesian salvation because we had reached the limits of the capital markets' tolerance.

Back then, my rather naive thought experiment suggested that borrowing an extra, say, EUR3bn would cost 150m more than expected as a result of rising interest rates on our public debt.

Unfortunately, the reality has replicated my thought experiment almost to the letter. As reported here,

"When the first austerity plan was presented, Greece cut public sector wages by a painful 10% causing angry protest and social unrest, although it saved the government EUR650m. But the same austerity plan assumed Greece’s interest cost would be 4.7% and by late February it was paying 6.25%. According to the WSJ, this has blown a EUR700m hole in its budget, more than offsetting the savage public sector wage cuts already enacted."
Note that this has happened despite our announcements of an extremely harsh austerity package. Back when I first posted on the subject there were still people calling for more moderate cuts, and our unions of course were arguing for a complete reversal of such. By the power of the Internet, their words are now immortal.

Implementing austerity works only if you do it decisively and quickly, like pulling out a band-aid. Which is precisely what our 2008-9 Keynesian cushion was.



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