Notes on Greece

 APRIL 19, 2015 5:05 AM

The New York Times

By Paul Krugman

OK, that was intense. I’ll write more about my visit, but right now (from Frankfurt, where I’m laying over for a couple of hours) I want to make a data point. about just how much adjustment Greece has done.

First, on the fiscal side, Greece has made an incredible adjustment — close to 20 percent of potential GDP, or the U.S. equivalent of about $3 trillion per year (not our usual 10-year calculation) in spending cuts and tax hikes:

Second, Greece has accepted roughly a 25 percent cut in nominal private-sector labor costs, or more than 30 percent relative to the euro average, far more than anyone else. You can make a pretty good case that the costs of this adjustment were so large that Greece would have been better off exiting the euro in 2010. You can make an even better case that Greece would have been much better off if it had never joined in the first place. But at this point these are sunk costs. If Greece can negotiate a halfway reasonable compromise, one that more or less pauses further austerity, it’s hard to see that the risks of exit would be worth it.

And the creditors would be equally well served by such a compromise.

So is it going to happen? Well, it’s the right thing to do — which tells you nothing.