Greeks Just Voted Against Austerity. Here’s Why They’re Right.


On Sunday, Greeks overwhelmingly voted against a European deal to extend financing to the country’s banks that would have required more harsh austerity measures on the part of the government. Prime Minister Alexis Tsipras, who came to power in large part on a promise to reject more austerity measures, had called the referendum to get more bargaining power in the dealmaking process. Greeks rejoiced at the news of the vote.

The country’s financial fate is far from certain, and the prospects of Greece coming to an agreement with European creditors may now be dimmer after the no vote. In the meantime, Greek banks remain closed, the economy is suffering from the financial chaos, and any new bailout agreement may now come with a higher price tag. But there’s plenty of evidence that Greeks were right about austerity — and that more of it wouldn’t have helped their economy.

Austerity Hurt Greece’s Economy More Than Experts Had Predicted

The International Monetary Fund (IMF) had originally predicted that austerity measures enacted in 2010 would restore the market’s confidence in its debt, help the country’s economy rebound in the medium term, and have a negative, but survivable, impact on output and unemployment. But three years later, an internal evaluation by IMF staff found that this isn’t how it panned out. “Market confidence was not restored, the banking system lost 30 percent of its deposits, and the economy encountered a much-deeper-than-expected recession with exceptionally high unemployment,” the authors wrote. The IMF had originally predicted that Greece’s economy would contract 5.5 percent over three years and the unemployment rate would be at 15 percent, but instead the economy shrank by 17 percent and unemployment soared to 25 percent. The economy ended up shrinking 25 percent between 2008 and 2015. Meanwhile, “productivity gains proved elusive,” the report said.


The measures also didn’t fix Greece’s debt. “Public debt remained too high and eventually had to be restructured,” the authors wrote. And clearly the country still hasn’t gotten out from under that problem.

The IMF’s staff attributed the overly optimistic assumptions both to flawed calculations from analysts, as well as the failure of a private sector rebound to materialize in the wake of austerity measures.

The Argument For Austerity During Recessions Has Fallen Apart

A 2010 paper by the economists Carmen Reinhart and Kenneth Rogoff found that when countries’ public debt reaches 90 percent of their GDP, their economic growth slows down. The paper become a crucial underpinning for those who argued that countries needed to enact austerity measures in the wake of the recession in order to get their debt levels under control. In its wake, some had pushed back by arguing that the causation went the other way: slow economic growth increases debt levels, not visa versa.

But then a 2013 paper tried to replicate Reinhart and Rogoff’s findings with their own data and found serious and significant flaws, such as excluding times where countries had both high debt and average growth, using debatable methods to weight countries, and a coding error and did even more excluding of countries with high debt and steady growth. When the errors were fixed, the results they originally reported disappeared. And a reanalysis in the wake of that paper found that the causality likely runs in the opposite direction: slow growth leads to high debt. That means that if austerity measures hamper an economy, they can do more to hurt, not help, debt levels.

History Shows That Many Countries Have Gotten Away Without Paying Debts

Greece’s high debt levels may appear to be particularly egregious. But they’re not without historical precedent, nor is the idea that they wouldn’t have to pay them all back right away. As economist Thomas Piketty explained in an interview with Die Zeit over the weekend, “Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted.” Some countries, such as Great Britain, were made to deal with their debts in similar ways to Greece, paying them back through strict budget measures, which in that country’s case took more than 100 years and cost 2 to 3 percent of its economy.


There are different, faster, and in Piketty’s view, smarter ways for countries to handle massive debts. Ironically, they have been deployed by Germany, the country currently leading the call for Greece to enact austerity measures, throughout its history. “Germany is really the single best example of a country that, throughout its history, has never repaid its external debt,” he says. For example, after World War II, German debt came to more than 200 percent of its GDP, but it was less than 20 percent 10 years later, thanks in part to 60 percent of its foreign debts being cancelled in 1953 and an internal debt restructuring.

Piketty recommends a combination of debt relief, inflation, and a tax on private wealth to get countries through periods of high debt. “We need to look ahead,” he says. “Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance.”