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Saturday, January 19, 2013

A six-month break from austerity!

Wow! This report by the Ekathimerini, if confirmed, will really be good news for Greeks! No new austerity measures for 6 months? What a noble gift! Celebrations all over Greece can be expected!

And what a non-selfish gift, too! Or is it perhaps not? Somewhere in the middle of the text I read that this offer was 'also attempting to ensure that Greece and its debt problems do not become a pre-election issue in Germany, which is gearing up for polls in September, sources have indicated'. Aha! 'I can see', said the blind man, took the hammer and saw...

'Austerity' is a relatively new expression. It was not really used before the Euro-crisis began about 3 years ago. In the old days, like during the Latin American debt crises of the 1980s, the expression was 'economic adjustment'. Personally, I think 'economic adjustment' is a much better description of what is necessary than 'austerity'.

The economic adjustment which Greece requires is brutal austerity in the public sector and massive stimulus in the private sector. I certainly cannot prove this but I will make the argument, nevertheless: a good portion of every stimulus Euro which is chanelled through the public sector will end up as waste and/or as private deposits in foreign bank accounts. I doubt that there is any waste or misuse of stimulus Euros when they are chanelled through the private sector. Why? Because private investors do generally make sure that their money is used properly.

Will private investment happen automatically? Probably not. At least not yet. There will have to be some very significant incentives at this stage for private capital to come voluntarily to Greece. To figure out the right incentives, that is the public sector's job. Or rather: that is the government's job.

I cannot emphasize enough the imporance of the 'herd instinct' when it comes to the movement of private capital. Let the story make the rounds that the Greek government is working out tremendous incentives for private investors. If that is done well, a process of foreign investment could begin which then feeds on itself.

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