Realistic Greek Solutions

Even a sovereign government with a nonconvertible fiat currency and flexible exchange rates has constraints. In a real world situation an economy has to pay for its imports by producing goods and services sold on world markets, and be considered solvent if it wisges to borrow.

In the abscence of increased exports, printing fiat currency to finance deficit fiscal poicies, or alternatively attempting to continually increase government borrowing, will inevitably fail. The former proceedure leads to inflation and devaluation. The later generates demand that hasn't been earned. This leads to a failure of creditor confidence, high-interest rates, the refusal of financial markets to lend, and ultimately devaluation when importers are forced to pay cash.

In both cases, inflation will result, despite the presence of unused resources. The presence of unemployment, and unused resources, in no way excludes inflation when available resources or manpower skills, lack the flexibility required to match the structure of demand.

Evidently, a better use of all available resources is needed if the Greek economy is unable to produce or pay for the goods and services it requires.  This can only be achieved by restructuring consumption and production, including moving manpower resources to more productive activities.

Simplistic deficit financing cannot  expect to make full use of Greek resources and reduce imports if the present consumption patterns are continued.   In the absence of fiscal prudence solutions cannot be expected, particularly  when unbridled fiscal deficits are used to continue financing private consumption, salaries, pensions, government services, etc.  and that necessarily limits the range of realistic fiscal policies available.

Unrestrained use of fiscal and/or monetary policies would continue to draw in imports that will be difficult to pay for in the absence of increased exports  (and where do they come from if current spending patterns are maintained). Borrowing from increasingly reluctant foreign sources, needing to be convinced they can be reimbursed, would be very expensive or unlikely. Devaluation strategies increase the relative cost of repaments and imports, thus contributing to inflationary pressures.

The illusory, solution is to believe a continuing an gradual depreciation of the sovereign fiat currency will free policy makers from fiscal reatraint. But that policy would inevitably fail as lenders at home and abroard will require repayments in appreciating currencies, the dollar or perhaps the euro. 

I admit, making the assumption that the Greek ecconomy is not perfectly flexible.  But, that changes little. Inflationary conditions and devaluation will inevitably result from fiscal policies that fail to recognise that even sovereign governments cannot get a gallon out of a pint pot.

Link
http://www.project-syndicate.org/commentary/sinn31/English#comments