Abbott is headed for a Greek tragedy

The Prime Minister should heed the lesson of the Greek election and realise that if his government pursues an austerity agenda it will probably be voted out of office.

Tony Abbott is getting a similar lesson to the conservative, and now former, Greek government that has just been booted out: austerity is not popular.

It’s far better politically to devalue the currency than to maintain its value through fiscal and monetary rigor, at least in the short term.

Over the long run, a strong currency, balanced budget and current account surplus are the road to political as well as economic success.

But in the short term, austerity equals unemployment -- Greece’s unemployment rate is 26 per cent -- whereas devaluation equals lower real incomes. Better to have a job that pays less than no job at all.

The irony is that whereas Australia is apparently getting both devaluation and austerity, since the dollar is heading lower and the government remains determined to balance the budget and reduce debt, Greece will probably get neither now.

It isn’t at all certain that Greece will now exit the eurozone and devalue its currency following the election but its new left-wing government will definitely use the threat of that to get forgiveness of its debts and an end to austerity economics.

Greece should never have joined European Monetary Union in 2001. It blatantly cheated on its economics statistics and Goldman Sachs helped with a debt swap that made much of its national debt briefly disappear.

Eventually, in 2009, the government had to confess to cooking the books and restated its accounts. The Goldman Sachs swap fiddle matured and its debt ballooned. In 2010, as global markets retreated in fear that the euro would collapse if Greece departed, it received a €110 billion bailout to keep the euro together.

But it wasn’t enough. Two years later, after two more big stockmarket panics in 2011 and 2012, another €130 billion bailout for Greece was agreed, in return for savage spending cuts.

This time unemployment ballooned rather than the debt. Instead of ending, as forecast by the austerity hawks, Greece’s recession got much worse.

The left-wing coalition called Syriza almost won in 2012 but that was before the fiscal austerity had really bitten, and most Greeks still wanted a hard currency.

Now, after three years of misery, Syriza has won, and yesterday its leader, Alexis Tsipras tweeted: “First we take Athens, then we take Madrid”, echoing the Leonard Cohen song, “First We Take Manhattan, Then We Take Berlin”.

Does Greece provide a foretaste of what’s coming for the rest of Europe, with Spain due to go to the polls this year and with an Italian election always just around the corner?

Maybe. But in any case the German-imposed fiscal and monetary austerity regime that has prevailed in Europe for the past five years looks dead.

The European Central Bank has defied German opposition and launched quantitative easing, and Greece’s new Prime Minister will probably get his way, with a new fiscal deal and further transfers from Brussels to avoid a full default and exit from the eurozone. As a result, anti-austerity forces may well take Madrid to get a piece of that action.

Cutting the interest on Greece’s debt and extending its term should be the work of a few minutes; the ECB might even buy some of the debt and the rest is likely to be cancelled to prevent a formal Argentine-style default. If all of that happens, maybe Greece won’t have to devalue its currency by reintroducing the drachma and exiting the euro.

Australia also needs to devalue, but with its currency set by the market this is not a government decision, as it is in Greece.

It means that in Australia devaluation is not regarded as an alternative to austerity, as it is, and always has been, in southern Europe -- we get both.

Economically that’s good: the dollar is overvalued and needs to come down, and the budget is on an unsustainable path -- both because of the declining terms of trade. Taxes need to rise and government spending needs to fall.

Politically it’s terrible. Whether it likes or not, Australia is heading into a decline in national income, delivered mainly through a currency devaluation making imports and travel more expensive, as well as lower corporate profits and taxes due to the decline in the terms of trade.

If the Abbott government responds by cutting spending and raising taxes it will likely suffer the fate of the Samaras government in Greece, and be replaced by a left-wing party promising to end austerity.