On January 25, 2015 the New Democracy government led by Antonis Samaras lost its bid for re-election. Meanwhile, its coalition partner, PASOK, received less than 5% of the vote, despite having been the largest party in recent decades and in government for over half of the last 40 years. They were voted out after presiding over the worst peace-time economic collapse ever in an advanced economy. The statistics are staggering and reflect great levels of both suffering and lost opportunity for a skilled generation of young adults. With an economy losing over a quarter of its capacity in six years, unemployment of 26%, youth unemployment over 50% and the emigration of many university graduates. Despite the colossal failure of their administration, it is hard to imagine that Messrs Samaras and Venizelos wanted so many young graduates to head for Melbourne or middle-aged adults scrounging through dumpsters for food.
In thinking about the causes of the current Greek suffering, I am reminded of an excellent paper given by Charles Read on the role of monetary policy in Irish Famine Relief in 1846-1848. As it is available online, I would highly recommend that people read it. (Read’s paper begins on PDF 73) Read effectively argues that the British government of the 1840s was a victim of the macroeconomic trilemma, whereby government policies are limited. For reasons connected to the dynamics of currency, the trilemma explains that governments are effectively limited to choosing any two of the following three policies: fixed exchange rates, free movement of capital and trade, and discretion over levels of spending. The British government of the mid-1840s was ideologically committed to fixed exchange rates through a gold standard and to free trade.
In 1846, Ireland was an impoverished portion of the United Kingdom, with many people living in abject poverty in rural areas. Those same people were dependent upon the potato for food, and a blight in 1846 caused the crop to fail. The government of Robert Peel initially instituted relief policies to provide food to affected areas. These policies were generally supported in England, including by establishment newspapers such as The Times. However, the gold standard and free movement of capital required continued balanced budgets to avoid a run on the pound, and possibly defaulting on a large government debt incurred during the Napoleonic Wars. In the midst of an economic downturn in April 1847, a parliamentary bill to extend Irish relief led to a brief run on the pound and rising interest rates. The government could not run continued deficits and largely ceased famine relief in order to keep itself solvent. Overall, the famine killed over a million people and led a million more to emigrate. Most of the excess mortality and migration of the Irish famine occurred after May 1847 and was as much a victim of the gold standard as the potato blight. The gold standard and free trade were not compatible with famine relief in 1847, while Prime Minister John Russell in London could not conceive of abandoning either for the sake of deficit spending.
In many ways, Greece is currently the victim of the macroeconomic trilemma, as a member of the Euro. The Euro is not a fiscal union, leaving member-states nominally independent and responsible for their own social spending. As a currency union, it has essentially fixed Greek exchange rates at their value on January 1, 2001. Meanwhile, the free movement of capital and goods between member states is a key component of the European Union. These two policies allow money to flow easily between members, but include two elements of the trilemma. The same easy flow of money that benefits trade in normal times, can mean bank runs, capital flight and rising interest rates in bad times. The also limit the ability of governments to deficit finance to help poor people in recessions, while fixed interest rates prevent the devaluations which would make Greek manufactured goods competitive again. The Samaras government was ideologically committed to both the Euro and European Union, which effectively constrained their ability to provide social services or invest in economic developments after 2008. The resultant cuts in social spending, government services and tax raises known as austerity, crippled the Greek economy. These policies exacerbated a severe economic downturn and turned it into six years of continual economic decline. Like Russell before them, austerity would not have been imposed if they thought the macroeconomic circumstances allowed it.
The circumstances of Ireland in the late 1840s and Greece in the early 2010s bear many similarities. The largest difference is scale, since poverty, hunger and a lack of opportunity in a formerly advanced economy are very different from the outright starvation and disease that afflicted so many in western Ireland. However, both reached the severity they did due to macroeconomic priorities that prevented discretion in government policy. Simon Wren-Lewis has previously compared the the Irish famine and Eurozone crisis, with an emphasis on cultural stereotypes in London or Bonn that allowed policy makers to disregard suffering in Athens and Galway. Hopefully, the policy dangers of such attitudes and fixed exchange rates will be learnt and policies adopted that don’t repeat such suffering.