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It depends. Yes economics (both New Keynesians and Monetarist) would predict this but not for the reason you stated. The input does not have to be external, you

by nickik 10y ago

It depends. Yes economics (both New Keynesians and Monetarist) would predict this but not for the reason you stated. The input does not have to be external, you just need a central bank to keep up demand (think NGDP). If you are in a system where you can not do that (as in the case of Greece) then you have a major problem. The Keynesians believe that you can increase demand by government spending but that was not an option for Greece anyway. The EU would have to pay for it but its hard to do that and do fiscal reforms at the same time. The only solution you have left is really harsh reforms, and most importantly wage cuts. A flexible labor system is the best defence against extend recession. Check out some of the Baltic states, they took pretty harsh wage cuts. They were lucky that they did not yet have such large governments and debt that this could be done and they did not have to face default at the same time. Greece was institutionally not capable of these things, and their situation was bad to begin with. The should have defaulted and set up a tmp government in 2008 that could do sweeping reforms. Had they had a high change of being more or less stable right now. But the EU is against that and Greece was faced with the impossible task of both do structural reforms, debt payback and terrible monetary policy from the ECB. Its an economic shit show of epic proportions.

ethbro 10y ago
I imagine a temporary government was completely off the table for political reasons, as advantageous as it might have been. "The EU reserves the right to replace your democratically elected government at will" would be a pretty frightening message to send.
- nickik 10y ago
  I would hope that with a default that could be an internal choice, and they might have asked the EU for help and support. I certainly don't want the EU to put a government there. Even if that was not possible, a default would have been good. Normal election would also cause some changes after such a period. What the EU is doing is just terrible. Not letting them default and making all lending depend on the countries complaints with the EU.
  - Retric 10y ago
    They did default even if nobody calls it a default.

by nickik 10y ago

ethbro 10y ago

I imagine a temporary government was completely off the table for political reasons, as advantageous as it might have been. "The EU reserves the right to replace your democratically elected government at will" would be a pretty frightening message to send.

nickik 10y ago
I would hope that with a default that could be an internal choice, and they might have asked the EU for help and support. I certainly don't want the EU to put a government there. Even if that was not possible, a default would have been good. Normal election would also cause some changes after such a period. What the EU is doing is just terrible. Not letting them default and making all lending depend on the countries complaints with the EU.
- Retric 10y ago
  They did default even if nobody calls it a default.