In short, the EU and the IMF demanded savage spending cuts from the Greek government. Turns out that cutting in a depressed economy makes the depression worse (despite the wildly optimistic predictions by EU officials, who decided to ignore textbook economics). As a result, Greece now has enormous unemployment, a vastly shrunken economy, and a debt-to-GDP ratio that is only going up despite the huge spending cuts. This is clearly an unsustainable course, something now recognized by the Greek voters. Unfortunately, there appears zero chance that EC and German politicians are going to acknowledge that austerity doesn't work.
>In short, the EU and the IMF demanded savage spending cuts from the Greek government.
Let's also mention WHY those spending cuts were demanded: Because Greece was on the verge of bankruptcy, the interest rates for their bonds were exploding and the EU and IMF had to pump more than 300 billion € into this 11 million people country.
> Let's also mention WHY those spending cuts were demanded: Because Greece was on the verge of bankruptcy[...].
That, while true, leaves out the quite important fact that Greece was only on the verge of bankruptcy because they bailed out their banks. One can nicely see that on charts displaying the debt/GDP ratio: While high for quite a few years, it was more or less constant. The bailout was the one factor that created the explosive dept growth. Now it gets interesting: Whose money was in these banks, invested in high risk/ high yield projects? Mostly investments of european upper class/upper middle class (because small Greece had an even smaller upper class). That's why so many German banks like Commerzbank, Deutsche Bank and the now defunct Hypo Real Estate hold so many Greek government bonds. By bailing out the Greek (and Spanish, Irish etc.) banks the European population indirectly subsidises the risky investments of its own upper class. That's also the reason why the austerity measures are so inconsequential: While pensions get cut and hospitals closed, profiteers like Germany have no qualms to sell German tanks and submarines worth billions of € to Greece (the German submarines alone cost 3 billion) [1].
At least Greece prosecuted the people who were bribed into accepting those ruinous defence contracts. In Portugal he was kicked upstairs and is still in office.
I was talking to someone who knows some of the Whitehall mandarins and he was saying that bond ratings are the primary reason for austerity policies in the UK. Although we aren't actually spending less money, due to the continuing injection of capital into banking, as long as we are throwing the money upwards then our bonds are worth more.
>Turns out that cutting in a depressed economy makes the depression worse
Sure, if you are insolvent but you can still get a hold on some borrowed money your situation is obviously going to get better in the short run. But you are just killing the goose that laid the golden egg, since your economy is dependent on borrowing money.
It's not black or white. On the one hand you have the economist that say that Greece must stop running a public deficit since it may risk a default if creditors believe that the Greek Government will never be able to repay the debt. On the other hand, you have the (neo)keynesian economists that believe that cutting spending during a crisis is a suicide, and therefore paying off the debt is not a priority. Which ones are right? Well, only time will tell.
> As a result, Greece now has enormous unemployment, a vastly shrunken economy, and a debt-to-GDP ratio that is only going up despite the huge spending cuts.
It's not clear how much of these is caused by the austerity measures. If you remember, at the beginning of the crisis most European governments launched public spending programs in order to reactivate the economy. It only made things worse: it did not create long lasting jobs and it only increased public deficit, which in turned also increased their debt obligations.
>This is clearly an unsustainable course, something now recognized by the Greek voters.
Actually, the only "clear" unsustainable course is to keep the economy afloat by increasing their debt. If this is the new normal, they will not be able to keep borrowing forever.
>Unfortunately, there appears zero chance that EC and German politicians are going to acknowledge that austerity doesn't work.
You have to understand that they are choosing the lesser evil. Even if austerity did not work, it still might be better than increasing their debt.
The interest rate is fast approaching zero and yet investment is still flat. No one will take a loan to create a new company or expand an existing one if 30% of the Greek market is unemployed, and therefore incapable of buying anything.
Somebody should ask Paul Krugman the following question: why not ask the US government (or indeed any other) to lend Greece lot's of money. He only ever seems to ask Germany to do so, despite Germany having already lost billions and billions on Greece.
One can ask Yanis Varoufakis the same question.
The reason why they don't is quite easy and also very unpleasant for them.
In short, the EU and the IMF demanded savage spending cuts from the Greek government. Turns out that cutting in a depressed economy makes the depression worse (despite the wildly optimistic predictions by EU officials, who decided to ignore textbook economics). As a result, Greece now has enormous unemployment, a vastly shrunken economy, and a debt-to-GDP ratio that is only going up despite the huge spending cuts. This is clearly an unsustainable course, something now recognized by the Greek voters. Unfortunately, there appears zero chance that EC and German politicians are going to acknowledge that austerity doesn't work.