The Greek government has just unveiled a new fiscal austerity plan. With a combination of tax increases and spending cuts, it aims to get budget deficits down to about 3% of GDP–10 percentage points lower than where it is now.
Everyone is expressing optimism. But while this sort of belt-tightening is necessary for Greece to stay in the EU, it’s going to come at a huge cost.
Greece is already in recession–that’s why its budget problems loom so
large–and the fiscal contraction will only make them deeper.
Meanwhile, the EU will be setting its interest rates to meet the needs
of larger, healthier members (and inflation-hawk bondholders). Tight
fiscal and monetary policy means a long, painful period ahead for the
Greeks.
This is the dilemma that faced Argentina with its
monetary peg to the dollar; ultimately, it led to devaluation and
default. We will see if Greece can whether it better.
