Greece and the Limits of Anti-Austerity

CAMBRIDGE – Is austerity dead? At last month’s G-8 meeting at Camp David, the German-led austerity program for the eurozone’s troubled southern members ran up against substantial resistance. Likewise, France’s recent presidential election bolstered those who argue that Europe must grow its way out of its debt-heavy public sector, rather than aim for immediate fiscal orthodoxy. And there is no guarantee that Greece’s newly elected center-right New Democracy party, which favors honoring the country’s bailout terms, will be able to form a majority government.

The United States, by contrast, has pursued expansionary and growth-oriented macroeconomic policies since the 2007-2009 financial crisis, despite massive budget deficits. Thus far, judging from the modest recovery in the US versus non-recovery in Europe, American policy accommodation is performing better than European austerity.

But simply choosing between expansion and austerity is not the whole story. Macroeconomic policies interact with on-the-ground microeconomic realities in subtle but powerful, rarely remarked-upon ways. Simply put, Europe’s microeconomic structure makes the same growth-based macroeconomic policies less effective in the European Union than in the US.

Here’s why: macroeconomic easing, by lowering interest rates or otherwise pumping money into the economy, aims to increase economic activity. With more money moving around, businesses rehire employees and ask existing employees to work more hours. Entrepreneurs considering whether or not to start a business decide to proceed, and their bank lends them the money to make the new business viable.