Elgar Debates: Lessons from Greece – “Being anti-austerity is not enough”


In his response to Dr. Philippos Sachinidis’ letter last week, Professor Steve Keen outlines the economic problems of austerity and argues that a misdiagnosis of Greece’s economic situation has lead to a Great Depression.


Dear Philippos,

In your letter to me you state that “the effectiveness of the solutions proposed by the new SYRIZA-ANEL coalition government depends, to a large extent, on whether the causes of the crisis have been correctly diagnosed. According to the government, the only challenge facing the Greek economy is inadequate demand”. You then go on to describe their remedies as “traditional national Keynesian policies” focusing on boosting aggregate demand.

I can’t speak for the Greek government, but I strongly doubt that they would accept this as an accurate statement of either their diagnosis or their remedies. Your successor Yanis Varoufakis has long argued that Greece’s key problem is its excessive level of government debt relative to the size of its economy. He also argued that Troika policies which were supposed to reduce this debt in fact depressed the economy by even more than they reduced public debt—thus making the problem worse.

The remedies he recommended prior to joining Syriza involved a number of ways to reduce this debt burden, without breaching current EU guidelines and without needing new EU institutions—the so-called “Modest Proposal” (developed in conjunction with Stuart Holland and Jamie Galbraith), as well as the ending of austerity. The debt reduction proposals couldn’t be raised in the context of Greek-EU negotiations in the first few weeks that Syriza was in power, but they remain in the background. So I don’t accept your characterization of Syriza’s diagnosis or policies.

Since I’m speaking for myself in this debate rather than the Greek government, I’ll start with my diagnosis rather than theirs. Remarkably, it has substantial similarities to yours, since you sensibly consider the impact of the flows of money into and out of the Greek economy from banks, government spending, and international trade. You state that to answer the question “why did national Keynesian policies fail between 2007-2009, at least in the case of Greece?”, one has:

to focus on current account developments. In 2007, the current account deficit was 14% of GDP. What does this tell us? Clearly, expansionary fiscal policy as well as the expansion of private debt [my emphasis] was not boosting the national income leading to the restructuring and modernization of production but mainly involved an increase of imports.

This observation contains the key to understanding why Greece had a crisis. While Greece certainly has its own specific problems—especially with its current account—in general, its apparent boom before the crisis and the crisis itself had much the same cause as in the rest of the OECD: a private debt bubble that burst in 2008.

Private debt grew rapidly before the crisis—on average by more than 10% of GDP per year. This added to the demand generated by the government deficit, counteracting the impact of Greece’s chronic balance of payments deficit of between 10% and 15% of GDP per year (see Figure 1).

Figure 1: Rising debt before the crisis, plunging afterfigure1

Figure 2 shows the aggregate effect: a monetary stimulus to the economy of as much as 20% of GDP in 2006, followed by a staggering reduction of as much as 45% of GDP in 2012-2013. Though the scale of the decline may be exaggerated by some of the government debt rearrangements that occurred in those years, it is still a huge reduction in the money supply in Greece.

Figure 2: From monetary stimulus to monetary contractionfigure2

What has been the impact of this—to coin a Varoufakis-like phrase—“fiscal bloodletting” on the country’s excessive debt ratios? Almost nothing: as Figure 3 shows, private debt has flatlined at about 130-140% of GDP, while public debt has continued to rise.

Figure 3: Flatlining private debt as a percentage of GDPfigure3

The reason for this is that GDP has fallen faster than debt has been reduced, as Figure 4 shows.

Figure 4: GDP falling even faster than debt being reduced

So the EU-ordained frontal attack on government debt hasn’t worked, because it’s also been a frontal attack on GDP as well. Let’s compare that to the USA, where austerity has not been imposed. Aside from the huge scale of the Greek current account deficit compared to the USA’s, the US pre-crisis pattern shown in Figure 5 is very similar to that for Greece: demand was being pumped up by rising private sector debt, on top of a run of government deficits.

But after the crisis, the pattern is very different: the plunge in private sector borrowing was partially offset by a huge rise in government spending. This monetary stimulus to the economy slowed down and then reversed private sector deleveraging. Rather than hitting the depths that Greece plunged, with private debt falling by almost 15% of GDP per year, deleveraging in the USA reached a maximum of 5% of GDP per year and then reversed. By 2012, the private sector was borrowing once more, and it has continued doing so ever since—though not on the scale of pre-crisis borrowing.

Figure 5: Sectoral money injections in the USA - same scale as Figure 1 
for Greecefigure5

The aggregate picture in Figure 6 shows why the USA has pulled out of the crisis, while Greece—and most of the EU—is still mired in it. The monetary stimulus to the US economy is now back to the scale of 2000-2002, while Greece is still net-negative after a horrendous plunge in 2012-2013.

Figure 6: US stimulus versus EU austerity figure6

An economy can’t grow when its money supply is shrinking; yet that is the main impact of austerity, both directly and via the pressure it puts on the private sector to continue deleveraging. The fact that the US government ran huge deficits—without them leaking into equally huge current account deficits—explains why the USA is apparently over the crisis while Greece and the EU are still in a Depression.

But that doesn’t mean that government deficits are the panacea: America’s deficits successfully ended private sector deleveraging, but as a result its economic recovery is commencing with an unprecedented level of private sector debt—see Figure 7.

Figure 7: US debt levels over the long term

This returns me to my diagnosis of the key problem facing the global economy: excessive private debt, combined with the government conviction—and particularly in the EU—that this debt be honoured, rather than reduced or defaulted upon.

Figure 8: Excessive private debt is a global economic problemfigure8

While private debt remains at the levels shown in Figure 8, any economic revival is going to be short-lived. This has been Japan’s dilemma for a quarter of a century now—attenuated only by Japan’s huge current account surplus. This is the key problem facing Greece today, which austerity and the inability to devalue have compounded.

The Troika’s misdiagnosis of Greece’s woes as being due primarily to excessive government debt has forced a Great Depression on Greece, without the benefit of any substantial fall in its private debt ratio, and with the clear failure of an increase in the government debt to GDP ratio.

The core SYRIZA-ANEL policy that austerity should cease is at least a partial step in the right direction, since the EU obsession with controlling public debt has made the downturn worse without reducing the private debt overhang at all.

But being anti-austerity—let alone “traditional Keynesian”—is not enough. We also need to admit the mistake of allowing private debt to grow without bounds, and then reduce it, as it was during the Great Depression and World War II—but preferably without social calamities on the scale of those catastrophic events. The Greek tragedy is that, thanks to the Troika’s policies, it has experienced the equivalent of the Great Depression without the positive side effect of wiping its slate of private debt.

Yours sincerely,



Read Philippos Sachinidis‘ first letter in this debate here.

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6 Comments on “Elgar Debates: Lessons from Greece – “Being anti-austerity is not enough””

  1. Miranda Xafa Says:

    Philppos is absolutely right: SYRIZA has misdiagnosed the problem as being a shortfall of demand, not supply! The shortfall of supply is THE problem of the Greek economy!


  2. Nick the Greek Says:

    A relatively minor ‘debt-management’ issue threatens to destabilize the West! Because the West is riddled with factions that actively engage, contribute massively towards erosion of Western Civil Societies common understandings of shared common heritage, the fabric from which the West wove it’s cloth, the glue that binds Western democratic adherence towards common civilizational principles first developed in ancient Athens and Rome. Allow that to proceed, I mean, erode the Western worlds cultural-historical narrative. Erode cultural-heritage. Erode Western civil societies common understandings of shared common heritage – now sit back and watch the Western worlds cultural-foundations crumble.

    Western culture, Western civilization – What does it mean to You!

    For the first time ever in the history of the West…Greece is being outcast as being somewhat different, being Maverick, following different path, from path laid down by Euro-Atlantic economic structures of the USA, EU and NATO, collectively known as the ‘West’. Greek (economic) interests diverge from Western ones! Greece cannot develop, progress or go forward in Western fold, on Merkel-Schaubles Austerity diktats which have impoverished the Hellenic Nation and ruined the Greek economy.

    The cradle of Western Civilization is moving East whilst some Eastern-European countries that were once under (CCCP) USSR domination are moving West.

    The West lost it’s way long time ago! The catalyst that binds Western Nations together, to common civilizational (democratic) principles…ideals and core values first developed in ancient Athens and Rome, eroded, their value, their meaning, diminished.

    The West has become dog eat dog place, no longer a place for ‘like-minded’ peoples but a place where fractious groupings engage actively in infighting, and economic warfare against own kind. Proof is the total destruction of Hellenic Republics National economy – Western-Style!



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