Greece austerity measures cannot prevent default and will lead to a breakdown of political order if continued for long, a leading German economist has warned. ‘This tragedy does not have a solution,’ said Hans-Werner Sinn, head of the prestigious IFO Institute in Munich. ‘The policy of forced ‘internal devaluation’, deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30 per cent without major riots,’ he told the elite European House Ambrosetti forum at Lake Como.
‘Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks,’ he said. Dr Sinn said Greece was an entirely different case from Spain and Portugal, which still have manageable public debts and can bring their public finances back into line with higher taxes. ‘Greece would have defaulted in the period between April 28 and May 7, had the money not been promised by the European Union,’ he said, describing the failure of the EU’s bailout strategy to include a haircut for the banks as an invitation to moral hazard.
Greek society has so far held together well, despite a wave of strikes and street violence in the early months of the crisis. However, unemployment is rising fast and political fatigue with such austerity policies typically sets in during the second year.
‘We are in the second Greek crisis right now, today,’ said Dr Sinn. Greece is undergoing what amounts to an IMF austerity package but without the IMF cure of debt restructuring or devaluation that is usual for a country with a spiralling public debt and a chronic loss of competitiveness.
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