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Dean Baker: New Leftist Greek Leaders Being “Very Smart” to Challenge German-Imposed Austerity

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Economist Dean Baker discusses last month’s victory of the left-wing Syriza party in Greece. This marked the first election victory in Europe of an anti-bailout party bent on reversing deep cuts demanded by international lenders. Baker praises the initial moves by the new government but warns Greece needs an “exit option” to leave the European Union.

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This is a rush transcript. Copy may not be in its final form.

JUAN GONZÁLEZ: I also wanted to ask you about another country, where new leaders are trying to push back against austerity: Greece. The country’s newly elected left-leaning government has opened negotiations on its bailout package with European partners. It says it refuses to cooperate with the troika of European and International Monetary Fund lenders. This is the finance minister, Yanis Varoufakis.

YANIS VAROUFAKIS: [translated] Our government will proceed seeking the utmost cooperation with the legal institutions of the eurozone and the International Monetary Fund. But with the tripartite committee, the troika, which aims at implementing a program whose logic we consider anti-European, with this committee, which according to the European Parliament is poorly structured, we do not aim to work with.

JUAN GONZÁLEZ: Dean Baker, you’ve written that Greece needs an exit option. Could you explain?

DEAN BAKER: Yeah, just very briefly. Greece has been in a situation where it’s had austerity been imposed on it over the last five years, and its economy has suffered horrendously. The drop in the size of its economy, from its peak to where it is today, is about 23 percent. By comparison, at the trough in the Great Depression, we were down 26 percent, and we bounced back 10 percentage points the next year, and seven years out from the downturn we were above where we were in 1929. Greece is still 23 percent below where it was in 2007. Its unemployment rate is about 25 percent, youth unemployment over 50 percent, massive cutbacks in government services. It really has been hell for the Greek people.

And Germany is really behind this to the largest extent, saying, “No, no, no, you have to stay with the program.” The Greek government, I think they’re being very smart. They’re trying to say, “OK, we’ve got to move away from this. You have to give us room to grow.” And they’re trying to press the case, with obviously Germany being the main party on the other side, at the end of it—I mean, it’s behind the European Union, European Commission, but really it’s Germany. And they’re hoping to get allies among Spain, Italy, France. They’re trying to push that line.

What I was arguing is that they also have to be prepared—and I understand they may not want to say this—they have to be prepared to say, “We’re going to leave the euro.” Now, there’s no doubt, if they were to leave the euro, there would be massive disruption. There would be a period of financial panic. The good side in this story is that the European Union has already wreaked so much havoc on Greece’s economy, it doesn’t have far to go down. And I think that if it were to actually go that route, they would likely rebound fairly quickly—a model here being Argentina in 2001. They broke with their link to the dollar, defaulted on their debt, December 2001. By the fall of 2002, they were growing rapidly. And by 2003, they made up all the lost ground and then some. I don’t know if Greece would rebound quite that quickly, but that was a very impressive performance.

And I think it’s important to hold that out, because that’s something that would scare Germany, not so much because they care about Greece, but if Greece were to do that and rebound, there will be tremendous pressure on Spain, probably Italy, other countries, to also leave the euro, and Germany’s going to be sitting there with a rump eurozone at the end of the day. So I think it’s important there be pressure on Germany that they understand this is not working. It’s not working for Greece. It’s not working for Spain. It’s not working for Europe. They have to move away from these policies.

AMY GOODMAN: In 30 seconds, you were quoted in a piece about Croatia, which has cancelled the debts of its poorest residents. Can you explain, and what we can learn from this?

DEAN BAKER: I don’t know a great deal about that. I was called by a reporter, and I just said, you know, “You do have to worry.” They proposed—I shouldn’t say “proposed,” they instituted a cancellation of the debt to its poorest residents. And in principle, that sounds good. But the point I was making is, well, you have to see how that’s being done, because what that might mean, if people expect it again, no one is going to lend them money. And at the end of the day, that probably is not a good policy. Now, I don’t know the details on it. They may have a way around that. But if we just say cancel debt for poor people, well, they’re never going to be able to borrow again, and you’ve helped them today, not tomorrow.

AMY GOODMAN: Well, it says their debts are absorbed by creditors including local banks, major telecommunication providers, city governments. The move comes as more than 300,000 Croatian citizens saw their bank accounts blocked last summer due to debt.

DEAN BAKER: Yeah, well, I mean, again, that’s going to help them today, but these people are probably going to want to borrow in the future. And if there’s concern on the part of creditors that the government will do this again, then they’re not going to lend them money. I mean, again, I don’t know the specifics. I was arguing for some sort of debt moratorium in the context of the collapse of the housing bubble, because that’s a pretty unique event. We don’t anticipate we’ll have another collapse of a housing bubble, at least not anytime soon. And maybe there was a similar justification in Croatia. But if it’s just “we have a lot of people in debt, let’s cancel their debt,” you may, at the end of the day, not be ending up doing the low-income people a favor.

AMY GOODMAN: Well, Dean Baker, I want to thank you for being with us, economist, co-director of the Center for Economic and Policy Research, author of Getting Back to Full Employment: A Better Bargain for Working People.

When we come back, Johann Hari joins us on Chasing the Scream: The First and Last Days of the War on Drugs. Stay with us.

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