Greece Austerity Risks ’30s-Style Depression

Economy shrank 18.4% over past four years; another 4% decline forecast for next year.

Greece is spiraling into the kind of decline the U.S. and Germany endured during the Great Depression, showing the scale of the challenge involved in attempting to regain competitiveness through austerity.

The economy shrank 18.4 percent in the past four years and the International Monetary Fund forecasts it will contract another 4 percent in 2013 as Greece struggles to reduce debt in exchange for its $300 billion rescue programs. That’s the biggest cumulative loss of output of a developed-country economy in at least three decades, coming within spitting distance of the 27 percent drop in the U.S. economy between 1929 and 1933, according to the Bureau of Economic Analysis in Washington.

Yield Moves

In Spain, where unemployment is running at 25 percent, Catalonia is demanding independence, while in Italy anti-euro populists led by former comedian Beppe Grillo may garner 18 percent of the vote in elections due by May, polls suggest.

Domino Effect

The IMF also has reviewed its assumptions, saying that the knock-on effects of cuts to government spending, called fiscal multipliers, may be more than three times greater than previously estimated. That means that a given spending reduction risks erasing a larger amount of output, causing revenue to fall and deficits to increase.

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