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Latest Agreement Won’t Resolve Greek Crisis, Likely to Make it Worse, CEPR Co-Director Says
European Authorities Pushing Greece Deeper Into Recession, Toward Default and Exit from Euro
WASHINGTON - February 21 - Washington, DC - The agreement between the European authorities and Greece won’t resolve Greece’s economic crisis and is likely to make it worse, said Mark Weisbrot, economist and Co-Director of the Center for Economic and Policy Research (CEPR).
“The European authorities seem more intent on punishing Greece than helping the economy recover,” said Weisbrot. “For two years now they have been pushing the Greek economy into recession, and there’s still no light at the end of the tunnel.”
Weisbrot noted that the IMF has had to lower its projections for Greek GDP by an enormous 7 percent of GDP in less than two years. Most of this downward revision has been in just the last five months.
A leaked document reported last night by Reuters and the Financial Times contains a “sustainability analysis” prepared for the European Finance Ministers. It portrays a grim scenario with explosive debt and Greece needing “about €245bn in bail-out aid, far more than the €170bn under the ‘baseline’ projections eurozone ministers were using.”
“Given the underestimation of Greek losses so far, and the recessionary impact of budget tightening, mass layoffs, a 20 percent reduction of the minimum wage, and other austerity measures – I think the pessimistic scenario outlined in the leaked document is a very plausible scenario,” said Weisbrot.
Weisbrot also pointed out that the European authorities’ strategy of “internal devaluation” is not working even on its own terms. The ostensible purpose of Greece’s prolonged recession is to lower labor costs in order to lower the country’s real exchange rate and increase Greece’s international competitiveness. But Weisbrot noted that “after four years of recession, with unemployment rising from 6.6 percent to a record 20 percent, Greece’s Real Effective Exchange Rate (REER), according to the IMF, is higher than it was in 2006.”
The IMF is projecting that Greece will still have 17 percent unemployment in 2016.
“The bottom line is that you can’t shrink your way out of a recession – you have to grow your way out. What they are doing to Greece really makes no economic sense. At this point, it looks like the economy would do better if Greece were to exit from the euro, as opposed to enduring indefinite recession and stagnation, extremely high and persistent unemployment, and increasing poverty. The European authorities are certainly pushing Greece toward the exit and default option.”
A more detailed paper on the Greek economy and crisis will be published by CEPR tomorrow at www.cepr.net.