Sen on austerity and structural reform

Amartya Sen writes on austerity, comparing the futility of the Troika extracting primary surpluses from Greece and its other debtors to the self-defeating strategy of the Entente powers extracting reparations from Germany, the subject of a blistering critique in Keynes' 'Economic Consequences of the Peace'.

But he chooses not to explain the real nature of the bargain.  He asks why 'structural reform' should be paired with austerity.  Especially, as many contend, the latter makes it harder to carry out the former.

What is actually happening is that debtors are offered a range of possibilities.  At one end is the option of getting no more funding at all, in return for which the debtor country can run itself as it wishes, but under its own steam, and in this case coping with default, capital controls, and perhaps exit from the Euro.  Then beyond that there is a sliding scale of increasing amounts of further funding, in return for which the creditors want something in return.  That something being 'structural reform'.  Either to satisfy a desire for a sense of fairness (however well or badly founded) amongst the funding voters, or to try to prevent another bout of financial mismanagement (as they see it).

So, the deal is not 'austerity plus reform'.  Instead the deal is:  'if you want to avoid super-strong-austerity by taking more money from us, carry out reform.'  Another way to express Sen's discontent is:  'the creditors should offer more funding than they are currently for the reforms demanded.'  It's pretty obvious why they don't.  The creditors' taxpayers would rather keep the money for themselves and don't value much the diffuse benefits of solidarity that may one day accrue a long time down the road.  Can you blame them?

The other aspect of Sen's article that needs a coda is his point that the austerity demanded makes the structural reform required harder to implement.  There's undoubtedly truth in that.  But - and this is presumably how the creditors see it - there is also truth in precisely the opposite.  The Greek polity, like many both in crisis and outside of it, has swung behind self-destructive microeconomic policies, and costly macroeconomic ones [early retirement, paying public sector employees to produce not much, high minimum wages, uncompetitive public procurement, high costs of hiring and firing, onerous regulations on business formation].  Without the carrot of extra funding [which Sen correctly but misleadingly calls 'austerity'] these policies will not be undone while they are seen as desirable by voters.

So, while 'austerity' [translate:  too little extra funding compared to cutting a defaulter loose] makes some structural reforms harder to implement (through mechanisms yet unspecified) it also makes it more likely to happen.