Unfortunately, Professor Hausmann has misrepresented what I said. I did not say that Greece's fiscal position only worsened from 2009 onwards. On the contrary, I said that Greece's debt/gdp remained stable from 1993-2008 DESPITE a sizeable fiscal deficit. The fiscal deficit increased considerably from 2004 onwards. I also pointed out that this was due to the worsening current account deficit. For some reason Professor Hausmann decides to ignore this and give me an economics lesson on how current account deficits drive fiscal deficits. Professor Hausmann, you should retract.
Professor Hausmann points to infrastructure in Spain as evidence of constructive investment in the boom years. Airports where no plane lands, roads where no cars drive, houses where no-one lives: this is "productive investment", is it? I'm sorry, this is not credible.
Professor Hausmann also criticises the data I use. I used charts from tradingeconomics.com for convenience, but I cross-checked the data with Eurostat before posting. Is Professor Hausmann arguing that Eurostat data is not reliable?
But most importantly, Professor Hausmann says he does not understand what point I am trying to make. So, here is a summary of my argument.
- The fragility of Greece's fiscal position was of very long standing. Debt/gdp built up during the 1980s and was over 100% by 1993. Despite an attempted fiscal consolidation in the late 1990s, debt/gdp did not fall significantly. Therefore Greece was in a difficult financial position long before it joined the Euro.
- From 2002 to 2008, Greece's debt/gdp was actually stable, though high. This was of course an illusion, since it was due to rising GDP which we now know was caused by a credit bubble. But since no government in the world understood that rising GDP at that time was illusory, it is unreasonable to expect the Greek government to have exhibited sense that seemingly was absent everywhere else. The big myth of the boom was that it would never end - until it did.
- Greece's current account was already significantly in deficit when it joined the Euro, because of declining competitiveness in the 1990s. It would have been useful for Professor Hausmann to have offered some explanation for this decline in competitiveness PRIOR to Greece joining the Euro. Unfortunately the only explanation he gives is "Greece produces products no-one wants to buy". Really, that won't do. Is it changing market preferences, relatively high prices, poor quality?