If that man spends all the money he earned on the purchase of a new car imported from Japan, the government has stimulated the Japanese economy and not the American one (except, perhaps, for some employees at car importing firms). If, on the other hand, that man spends all his money on purchases from an American supplier who, in turn, makes all of his purchases from American suppliers, and so forth…, well, then it is a stimulus for the domestic economy.
This simple example shows that it is very irresponsible to simply hammer in the headlines of stimulus versus austerity. It all depends on what stimulus money is spent on and where austerity hits. Thousands of businesses have closed in Greece since the beginning of the crisis. To make a purely theoretical example out of this: if all these business had been selling imported stuff and if all the resources set free could have been redeployed in new businesses involved with new domestic production and exports, this would have been the most perfect example of “creative destruction”. Obviously, reality turned out different from theory.
Some argue that the Eurozone must become a transfer union so that economies like that of Greece’s can get back on their feet again. Well, it helps to remember that the entire EU has been a transfer union from the start. I recently read (but cannot confirm it) that Greece has received 135 BEUR (in current Euros) in grants from the EU since it joined it. Only the four times larger Spain received a slightly larger amount. Those 135 BEUR are equivalent to about 60% of Greece’s current GDP. To put this into perspective: the often-cited Marshall Plan was equivalent to 0,5% of German GDP for a period of 4 years, that is about 2% of GDP for the total of 4 years.
The Marshall Plan was a form of seed-financing: drop a little gasoline on the charcoals so that the fire gets going. If the charcoals are not put into the right place or if there is no one to manage the fire, the gasoline will be nothing other than a strawfire.
When the government’s role as a “stimulator” is forced to shrink, someone else has to fill the resulting vacuum at least partially in order to avoid what we see in Greece today. To keep the government’s role from shrinking is self-defeating if the money it spends is spent on the wrong purposes. The external accounts of Greece show quite clearly: imports have come down in the last couple of years due to the recession. Should the government bring more money into circulation through more spending, much of that money would leave the country right away for imports. That’s like giving a hungry man a fish instead of showing him how to fish.
I have argued since the beginning of this blog that the above-described vacuum must be filled largely by the private sector and the only quick-growth options the Greek economy has are import substitution and export expansion. Suppose the government were to establish Special Economic Zones near Athens and Thessaloniki, large population centers with many unemployed, and invited private sector investments there for the above-mentioned purposes, new jobs for unemployed would come into existence. An employee loses his job in a shop selling imported stuff but has the chance to take up a new job in a business producing that stuff which was previously imported.
Two things are required for such Special Economic Zones: (a) an absolutely internationally competitive business framework and (b) guarantees for new investors for the political risk arising from political developments in Greece. Since investors would not trust the guarantee of the Greek state nowadays, those guarantees would have to come from the EU.
That way, the EU would use its strength not to transfer tax payers’ money to Greece for spending but, instead, to facilitate the transfer of private sector money to Greece for investment.
Last questions: what’s the point of investing in new production when demand in and all around Greece is evaporating? Well, import substitution does not require new demand. It only covers existing demand from different sources. And regarding new exports, Greece’s current share of EU exports is so small that an increase which is significant for Greece might not even be noticed in the overall picture. Greece would have to apply guerilla tactics instead of moving like a large army!