Austerity drives are becoming popular in times of sovereign debt crisis and widening fiscal deficits. The primary reason for it could be attributed to overspending and mismanagement of investments by the government to balance inflation and deflation. Greece does not have its own currency, but that does not stop the country from creating effective governance model to control unemployment and wages. Krugman’s observation of the crisis in terms of unemployment and wages is commendable as he proposes two possible plans which the country could have used.
Plan A, according to Krugman, contains a lower wage and higher unemployment. This plan is pain laden because when unemployment is higher, prices of goods and services go down, and this is not the answer to the problem. Rather the plan can escalate the problem by infusing pessimistic outlook in the market and diminishing market confidence. Unemployment rates if existent for a prolonged period can really create economic turmoil in a way that the economic outlook will deteriorate and cause repulsion of finance aid from Euro countries and non-Euro ones. Blanchard and Gali (2007) suggest that constant inflation is the optimal policy especially in times when there are multiple imperfections in the economy. This applies to Greece to a greater extent, because in between the two plans proposed by Krugman, the middle path is a balanced inflation level which would support the economy. Krugman’s plan A is a difficult one to implement, let alone maintain it and digest the oppression of citizens. This plan is not suitable even if the austerity measures are the foremost requirement and requires hurried application.
Plan B is rather in the larger interest of the economy, because when unemployment is not extreme and kept at a level from wages from rising, it could be seen more towards the middle path of balanced inflation. The author, however, did not suggest any active measures for the country which could be used to contain the worsening situation. For example, if the austerity would have touched only those spending items which are non-essential, the response from the country’s citizens could have been more positive.