There is an elephant in the the Greek Debt Crisis room that no one is openly addressing : Should Keynesian Economic policy apply in a situation where one country demands that another country “prime its pump” when it has no ability to do it itself?
And given our American revolutionary heritage, do we see in it our founding fundamental wrong – “No Taxation without Representation”?
In the creation of the Euro, the issue of how a member country could or should apply Keynesian methods of government stimulation (or for that matter,other post-Keynesian economic approaches) was not handled. (Caveat, one general rule against the central bank financing a member country’s budget was included.)
The problem is simple to state. From the new Greek government side:
(a) Greece wants to stimulate its economy through government spending. A classical Keynesian prescription. So far, so clear; and often so good.
(b) But Greece has no means of its own to implement this prescription.
(c) So, Greece wants other countries to provide the stimulus money for them.
(d) Greece wants to be the beneficiary of this stimulus and for its citizenry to reap the economic benefits.
From the Euro Group side:
(e) In the circumstances, we other “paying” countries have no way to get our stimulus money repaid.
(f) We Euro countries gain no (direct) real economic benefit and our citizenry doesn’t want to pay for it.
The negotiating problem is equally simple to state.
(a) Greece has demanded it in combat mode, instead of Oliver Twist supplicant “please sir, more sir” mode.
(b) Greece has used the Cold War “MAD” (mutually assured destruction) approach to threaten the destruction of the EURO project and currency (as well as Union) – if they don’t get their demands.
(c) How does the Euro Group hold together if their taxpayers object to what amounts to taxation without representation – and no economic benefit for themselves to boot?
(d) How does the Euro Group operate if it treats Greece differently than it treats other members?
Consider that the Greek Euro Crisis is therefore a novum in Keynesian Economics. (Let’s also ignore the competing economic schools and not bother to even consider an answer to this conundrum.)
There is something more important stuck behind the Keynesian idea: it is the implicit understanding that the context of all of it is based on an economy where the citizens who bear the burdens will also reap the gains. In other words, it all applies within a country; not cross-border.
So the novel Greek demand is a cross-country Keynesian Economics application where the country deciding for the Keynesian prime the pump will reap the benefits, but other countries will bear the burdens without the benefits.
The big categories that are at play here, have been largely ignored by the participants. They have ignored them, because they believe them to be too difficult to resolve, in general, and in this debt crisis context. So, we are also witnessing an exercise in “containment” of the “outbreak”, by ignoring all these big issues at play. (Let’s just ignore other big notions, e.g., of “too big to fail” for banks as analogous to the EU rule requiring unanimous consent of all countries; and of “moral hazard”.)
So, we are being provided a fascinating opportunity for observing how parties to a problem go about trying to both (a) gain comparative advantage; (b) engage in “on-the-go” rule-making; (c) resolve the problem; and (d) resolve it when the resolution will apply in other situations – all the while not even addressing the underlying fundamental issues.
Wanna bet that the solution they adopt is both no good and will be an example of a solution leading to further problems?