Nobel Prize winner says further austerity is not the answer for Greece

Further austerity is not the solution to the Greek debt crisis, the Nobel Prize-winning economist Myron Scholes told The National.

“Austerity for Greece doesn’t really work,” said Mr Scholes, who was awarded the Nobel Prize in 1997 for his work on options and derivatives pricing, and taught at Stanford University for 15 years.

“The only way in generations and centuries past you got out of these debt problems is to default, restructure or inflate,” he said. “The loss is there. Who recognises what is the more fundamental question?


“It’s out [from under] the rock now — who’s gonna take it?”

Mr Scholes joins the Nobel laureates Paul Krugman and Joseph Stiglitz in their criticism of austerity in Greece.

Mr Scholes, who was educated at the University of Chicago under the Nobel laureate Eugene Fama, argues that austerity will not work for Greece because the country lacks the political will to make payments, and that creditors’ indulgence of Greece has led to moral hazard.

“Probably austerity doesn’t work if a lot of the people don’t want it to work — and they then replace the government who is going to tell them they don’t have to have austerity,” he said.

Mr Scholes – who was in Abu Dhabi recently in his role as chief investment strategist at Janus Capital – compared the negotiations between Greece and its European creditors to an argument between a child and his father.

“If my child says, ‘dad, I’m not going to crash the car, I’m not going to drink as many nights, I’m gonna be a good boy, give me money.’ I don’t want to do it,” Mr Scholes said.

“I give the child the money, and then the child says, ‘dad, I’m sorry, I tried but I couldn’t do it — give me more money’.”

Greece cannot grow its way out of its debt problems because it has run out of capital projects worth investing in, Mr Scholes said. Before the crisis, Greece was already investing in projects with “negative present value”, he said.

Greece faces a key deadline on Monday, when its leaders meet euro-zone finance ministers to discuss revenue raising and spending cuts. The European Central Bank wants to see evidence of Greece’s commitment to paying back its loans, and has threatened to tighten Greek banks’ access to emergency credit if this is not forthcoming.

Further writedowns of Greek debt are unlikely to solve the crisis either. Greece’s creditors have “already written a lot of stuff off”, Mr Scholes said. “The only issue now is how little [Greece has] to do to get more money.”

abouyamourn@thenational.ae

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