The EU austerity plan for Greece will not rescue the country from default, Paul Krugman, Princeton University professor and winner of the 2008 Nobel Prize in economics, said in his blog in The New York Times on Tuesday.
Eurozone officials agreed early on Tuesday a second 130 billion euro ($172 billion) bailout aid package for Greece and called for private investors to waive 53.5 percent of their principal in a bond swap to cut Greece’s debt by 107 billion euros.
As a mandatory condition to provide the bailout, the eurozone officials forced Greece into fresh austerity measures to cut the debt to 120.5 percent of GDP by 2020 from some 160 percent last year.
“The problem with all previous rounds has been that austerity policies depress the economy to such an extent that it wipes out most of the topline fiscal gains: revenue falls, so does GDP, so the projected debt/GDP ratio gets, if anything, worse,” Krugman wrote in his blog.
“Now we have another round of austerity — which is assumed not to do too much damage to growth. The triumph of hope over experience.”
The European leaders are not prepared to take the plunge into either sustained aid to Greece instead of loans or a Greek departure from the euro, leading eventually to higher competitiveness and faster growth.
“Both options would be politically catastrophic, which means that they can’t be taken until there is literally no alternative.”