All because of a ‘coding error’?

“So, to put it simply so that everyone who is watching us understands: every baby born in Greece today will start life with a debt of 50,000 euros. Is that correct?” asked the TV presenter, on one of the country’s private channels. “Yes, that is correct!” replied the financial expert who was there to explain that the Greek economy already shrunk by 25 percent after five years of recession and had accumulated a public debt of approximately 600 billion euros.

Greece was the first to fall under the weight of the Eurozone crisis. For the last three years, tied by the stringent terms of bail-out agreements with the EU-ECB-IMF, it has been struggling to push through an austerity program conditional to the phased release of installments in order to stay alive. An urgent multiple bill was to be voted last night, which would provide among others, the instant dismissal of public servants if their departments closed down. The approval of the bill was once again a matter of life and death so that the Euro-working group meeting today could approve two installments of 2.8 billion and 6 billion euros. The government is struggling to balance its figures against an increasingly suffering public and sooth the cracks within the coalition while the opposition insists that the “program is wrong as the figures do not add up”.

The news from Spain last week confirmed that the situation is not getting any better in most countries of the Eurozone, too. With 27.16 percent unemployment – which means 6 million people without work – Spain is now racing with Greece to top the list among the countries in the Eurozone. France is following. With a record 3.2 million French now seeking work, Benoit Hamon, the social and consumer affairs minister, declared yesterday that it was “time to finish with the politics of austerity in Europe,” adding that only Merkel, and a few northern countries, believed that austerity was working. And the surprisingly open statement by the President of the Bundesbank, last week that “it may take a decade to exit this crisis which would test democracy, social cohesion and support for the European Project,” just added to the feeling of uneasiness apparent among Europeans that the recipe of extreme austerity for countries in debt may not be the right one. Or to quote the New York Times, it has been a medicine that “is killing the patient”.

But a row among academics which also took place last week may signal the changes to come.

Reducing deficits and spending by imposing tough austerity packages has been a solution imposed so far by the countries of the Eurozone and supported mainly by Germany. The intellectual basis for this was the work of two Harvard economists, Carmen Reinhart and Kenneth Rogoff, who in their book, This Time is Different published in 2009, argued that historically when a country’s debt rose above 90 percent of GDP, growth would decline sharply. In a more recent post-war sample of economies, they claimed, the average growth dropped from around 3 percent to -0.1 percent after the 90 percent-of-GDP threshold was reached. This kind of fall in the growth rates is claimed to be the main pretext for the imposition of austerity measures.

However, a new paper by Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst, claimed that there were calculation mistakes in the analysis of Reinhart - Rogoff and they proposed that average post-war growth above the 90 percent threshold ought to have been reported at 2.2 percent rather than -0.1 percent. Reinhart and Rogoff acknowledged the coding error.

This academic argument which, in more prosperous times, would have been limited to an intellectual challenge, may become a cause for a serious policy change among the Europeans.

As the news of galloping unemployment figures is now coming fast from all corners of Europe, it seems that the obsessive insistence on reducing public debt will not remain a priority for long. Heavily indebted countries may be given more time to sort themselves out. But it is a matter of racing against time. Because what the European leaders are also facing is the fast-growing disillusionment among their citizens –even among Germans – over the viability of the Eurozone project as a whole.