Wednesday, August 18, 2010

How Did Fiscal Austerity Reduce Greek Growth?

While all other euro area economies that has published second quarter growth numbers have indicated that their economies are recovering (though at different pace). Greek GDP statistics indicated a continuing and indeed deepening recession, with GDP dropping 1.5% (nearly 6% at an annualized rate) compared to the previous quarter and 3.5% compared to the same quarter last year.

A Der Spiegel article that I found at Mark Thoma's blog blames this on the fiscal austerity program (while also acknowledging that it has been successfull in reducing the deficit). Is that really true?

Yes, it is true, sort of. But the primary reason for this wasn't that the austerity itself directly reduced growth . Instead, the drop in output was caused by the wave of strikes that the Marxist unions launched to protest the reductions in government spending.

But if the unions come to their senses and/or the Greek government takes decisive action to rein them in and stop the strikes, then the Greek economy should recover.

Case in point is the three Baltic countries, which all saw positive growth "despite" their austerity programs.