Why austerity failed as a panacea to debt problems in Greece - CNBC Africa

Why austerity failed as a panacea to debt problems in Greece

Special Report

by Thabile Manala 0

Five years of austerity measures have exacerbated the economic decline of Greece bordering it on a humanitarian crisis. PHOTO: BBC

Five years of austerity measures have exacerbated the economic decline of Greece bordering it on a humanitarian crisis.

This is according to Elizabeth Sidiropoulos who is the chief executive of South African Institute of International Affairs.

Sidiropoulos explained that at the end of 2009, it became clear that Greece was insolvent. However, because of its affiliation to the Eurozone and the benefits of borrowing money at very low interest rates, it was able to borrow “trunches” of funds from the Europe Central Bank.

These funds, handed over through a memorandum in the past five years, were on condition that Greece embarks on a reform of the public sector but particularly on the Greek economy.

“There has been a series of policies which have seen pensions cut, that have seen taxes grow and being imposed on things that people previously didn’t have to pay taxes for, which has led to a situation where the economy has contracted by 25 per cent,” said Sidiropoulos.

This has resulted in an unemployment rate comparable to South Africa's and the closing down of about 300 000 businesses. The consequence has been a public sector that really has been decimated.  

“Austerity has not improved the economics in Greece instead it has made it much worse for many people, “ Sidiropoulos highlighted.

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Cobie Le Grange, Partner at Rexsolom Invest, said, if you are a lender to Greece, which is really Europe, than you have one objective which is to get paid. “The best way to get paid is to ensure that there are austerity measures, however from a Greek perspective austerity is not really the right answer when the economy is contracting at long periods per time.”

In speculating a way forward, Le Grange suggested that there could be portions of a write-off of debt where a lender would never receive that money.

Sidiropoulos added, “One of the proposals on the table over the past several months is linking repayments to growth, so the more the economy grows, the more they pay back.”

She further advised that what is needed is some debt write-off which is not politically popular in Europe and measures that allow for reinvestment and recapitalisation of the economy as well. 

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