The German problem

When I was lucky enough to attend a conference in Berlin recently, the conversation inevitably turned to Greece. I listened to endless stories of Greek incompetence, corruption and privilege. Some of these I knew to be false. But what really struck me was the similarity to stories told everywhere about the poor: how poverty is the result of character failures, how throwing money at the problem will not help, and the economic system is not to blame.

In these discussions, one simple fact was never mentioned until I raised it. In terms of budget policy, the Troika (the European Commission, the International Monetary Fund and the European Central Bank - the ed.) has been in charge of Greece for the past four years. As a result Greece has undertaken draconian fiscal austerity. The Organization for Economic Cooperation and Development estimates that the underlying primary budget surplus, a commonly used measure capturing budgetary policy, has changed over the last five years by an amount that is almost twice as much as any other OECD country. The idea that Greece has not done enough to correct its finances is ludicrous.

German problem

The impact of this effort has been more than offset by the collapse in the Greek economy, with GDP falling by around 25 percent. Here we confront a problem which I am afraid is uniquely German. Ask any economist outside Germany about why the Greek economy has collapsed, and the chances are they will tell you that it is largely the result of fiscal austerity. They have in mind the standard Keynesian macroeconomic framework, which is taught to students around the world (including Germany), and which is used by central banks (including the ECB) to set interest rates. This framework says that, for an economy without its own monetary policy, fiscal austerity will be contractionary, and austerity on steroids is likely to be ruinous.

Germany seems virtually unique among major countries in having an economic policy discourse where the Keynesian viewpoint is a small minority view. I often hear Germans describe it as 'Anglo-Saxon' economics, even though most economists outside Germany see Keynesian ideas as universal in their applicability. In this way Greece has become a kind of experiment: a contest between the German view and the Keynesian view.

Bad medicine

It is as if Greece was a patient, and the Troika their doctor. For four years the patient has been taking the medicine the doctor proscribed: a combination of austerity and 'structural reform.' The patient has got steadily worse. Rather than admit that perhaps the medicine was inappropriate or excessive, the doctor has started telling stories about how the patient has not really been taking their medicine. Yet we know that in reality the patient has taken all of their austerity medicine, and also done a great deal of structural reform.

Greece's plight has become a huge challenge to predominant economic beliefs in Germany, but rather than admit this, Germany has constructed a fantasy where everything is the fault of lazy and corrupt Greeks. Now that the patient has begun to question its medicine (the election of Syriza), German policymakers seem to wish that the patient would go away (Grexit).

History will remember

The result is a ludicrous situation, where Germany refuses to consider any debt relief or debt restructuring for Greece, even though its IMF partners know such relief is inevitable. Such obstinacy could be explained as the self-interested actions of a creditor, but Germany must know that if Greece were to be forced out of the eurozone it is likely to get even less of its money back. I am sometimes told that Germany must take a hard line with Greece to prevent other countries also asking for debt relief. But the terms of Greece's debt were modified in 2012 and this did not happen.

I fear that what is driving German policy and public opinion is the wish to deny what their Greek experiment tells Germany about its economic beliefs. It is perhaps inevitable that German politicians will also tell people what they would like to hear rather than the truth. However an international statesman or stateswoman should be able to rise above such crowd pleasing, and recognize alternative perspectives. As I recently wrote with four eminent economists in the open letter to Angela Merkel, history will remember you for your actions this week.

Simon Wren-Lewis is Professor of Economic Policy at the Blavatnik School of Government, Oxford University.