Our greatest economic minds were too out to lunch to notice an $8 trillion housing bubble and it just keeps getting worse. The NYT tells us how Hungary is giving lectures to Greece about how it should just suck it up, cut its spending, and then celebrate the wonders of the euro, offering its own experience as a model. The headline of this piece should have been something like "Hungarian Premier Doesn't Understand Economics." While the euro may give Greeks or Hungarians the sense of security claimed by Gordon Bajnai, Hungary's prime minister, this sense of security is currently coming at a very great cost to Greece. Because Hungary was not on the euro, it was able to devalue its currency when the financial crisis hit in 2008. As a result, its current deficit fell from 8.4 percent of GDP in 2008 to 3.0 percent of GDP in 2009. This shift of 5 percentage points of GDP gave an enormous boost to Hungary's economy. It would be the equivalent of a $900 billion annual stimulus package in the United States, roughly three times the size of the stimulus package approved by Congress last year. The boost provided by the improvement in the current account deficit meant that Hungary could cut government spending without simply deepening the downturn. However, since Greece is tied to the euro, it cannot count on an improvement in its trade balance to offset the contractionary impact of its budget cuts. This article should have properly been devoted to ridiculing Mr. Bajnai. If what it claims is accurate, he obviously has no understanding of the factors that saved Hungary from a steeper downturn. Instead, the article implies that he has some substantial does of wisdom to pass along to his Greek counterpart.
--Dean Baker
