GREECE is in a depression

This looks about right to me – from Economist Free Exchange, which begins with this:

GREECE is in a depression. A real deal, no kidding, bad-as-the-1930s depression. In the second quarter, Greek output contracted again, as it has in every quarter since the last three months of 2008. Real output is now about 17% below the pre-crisis level, and unemployment is above 23%. That’s not quite as awful as America’s great contraction, from 1929 to 1933, when output shrank nearly 27% and unemployment rose to an estimated 25%. But it’s in the ballpark.

The details of this particular depression are obviously a bit different from those of the 1930s contraction. But the themes are the same. The Greek economy clearly suffers from all sorts of real problems—labour market rigidities, overregulation, corruption, etc—but such problems afflict lots of countries without sparking a massive economic implosion. No one has bombed Greece and blown up a fifth of its economic infrastructure. No one has erased the memories of a quarter of the Greek workforce, leaving people unable to speak or type or tend machinery. The Greek economy is imploding for no other reason than that the prices are wrong.

The prices are wrong. When the crisis hit demand fell. People stopped shipping money into Greece to buy its goods or invest in its properties or visit its tourist hot spots. Prices needed to adjust to keep resources employed. If Greece had retained its own currency, falling demand should have led it to weaken, bringing prices down economy-wide. Since it was stuck using the euro, nominal wages and prices had to fall, a slow process, especially in an economy with a highly regulated labour market. And so Greece fell into a deep recession. Capital outflow and recession led to an explosion in debt which shook market confidence. The resulting crisis generated two nasty developments—panic capital outflows and government austerity—which led demand to weaken further. Even if the Greek economy had been much more flexible, wages and prices would have struggled to chase demand downward and adjust sufficiently quickly. Collapsing output and employment were inevitable.

Liaquat Ahamed tells a famous story in his book “Lords of Finance” of the extraordinary tangibility of the tight money of the Depression in the vaults of the Federal Reserve Bank of New York, where piles of gold corresponding to the reserves of various national central banks were kept. The straightjacket of the gold standard led gold to pile up in the some corners of the vault (mostly the one belonging to the Banque de France) and to dwindle in the German and British corners.


So a lot of Greeks are suffering because of bad monetary policy. In this case because of the inappropriate monetary union. The unemployed in the US and UK are also suffering because of bad monetary policy (too tight), but not to the extreme degree of the Greeks.