TITLE:
Why “Austerity” Failed in Greece: Testing the Validity of Macro-Economic Models
AUTHORS:
Frederick Betz, Elias Carayannis
KEYWORDS:
Fiscal Models, Macro-Fiscal Policy, Economics, Financial Systems
JOURNAL NAME:
Modern Economy,
Vol.6 No.6,
June
15,
2015
ABSTRACT: During the Euro Crisis which began in 2009 and is still continuing in
2015, Greece provided an interesting case of an empirical test of some
macro-economic theories—particularly the theory underpinning the European Union
(EU) policy of “austerity”. Fiscal austerity had been imposed upon the Greek
governments as the price of EU bailout of bankrupt Greece. But after five years,
the EU austerity policy was judged by many as a failure, and Greece continued
to struggle at the bottom of a depression. Underlying the austerity policies, there
was a macro-economic model called the Polak model. We examine whether or not
this model was valid in the Greek economic context. Identifying the conceptual
model underlying economic policy is important to clarify the validity or the invalidity
of the model assumptions upon which a policy rests. We compare the
macro-economic Polak model to an alternative model of the Greek fiscal crisis
as “disequilibrium-pricing” in financial markets. An empirically invalid model
can suggest bad policy, which may not solve an economic problem but can even
deepen a crisis. An empirically valid model can provide a realistic basis for
formulating effective policy.