What the Greek experience shows is that trying to eliminate deficits once you’re already in trouble is a recipe for depression

SO GREECE has officially defaulted on its debt to private lenders. It was an “orderly” default, negotiated rather than simply announced, which I guess is a good thing. Still, the story is far from over. Even with this debt relief, Greece – like other European nations forced to impose austerity in a depressed economy – seems doomed to many more years of suffering.

And that’s a tale that needs telling. For the past two years, the Greek story has, as one recent paper on economic policy put it, been “interpreted as a parable of the risks of fiscal profligacy”. Not a day goes by without some politician or pundit intoning, with the air of a man conveying great wisdom, that we must slash government spending or find ourselves turning into Greece, Greece I tell you.

Just to take one recent example: when Mitch Daniels, the governor of Indiana, delivered the Republican reply to the State of the Union address, he insisted that “we’re only a short distance behind Greece, Spain and other European countries now facing economic catastrophe.” By the way, apparently nobody told him that Spain had low government debt and a budget surplus on the eve of the crisis; it’s in trouble thanks to private sector, not public sector, excess.

But what Greek experience actually shows is that while running deficits in good times can get you in trouble – which is indeed the story for Greece, although not for Spain – trying to eliminate deficits once you’re already in trouble is a recipe for depression.

These days, austerity-induced depressions are visible all around Europe’s periphery. Greece is the worst case, with unemployment soaring to 20 per cent even as public services, including healthcare, collapse. But Ireland, which has done everything the austerity crowd wanted, is in terrible shape too, with unemployment near 15 per cent and real GDP down by double digits. Portugal and Spain are in similarly dire straits.

And austerity in a slump doesn’t just inflict vast suffering. There is growing evidence that it is self-defeating even in purely fiscal terms, as the combination of falling revenues due to a depressed economy and worsened long-term prospects actually reduces market confidence and makes the future debt burden harder to handle. You have to wonder how countries that are systematically denying a future to their young people – youth unemployment in Ireland, which used to be lower than in the United States, is now almost 30 per cent, while it’s near 50 per cent in Greece – are supposed to achieve enough growth to service their debt.

This was not what was supposed to happen. Two years ago, as many policymakers and pundits began calling for a pivot from stimulus to austerity, they promised big gains in return for the pain. “The idea that austerity measures could trigger stagnation is incorrect,” Jean-Claude Trichet, then the president of the European Central Bank, declared in June 2010. Instead, he insisted, fiscal discipline would inspire confidence, and this would lead to economic growth.

And every slight uptick in an austerity economy has been hailed as proof that the policy works. Irish austerity has been proclaimed a success story not once but twice, first in the summer of 2010, then again last autumn; each time the supposed good news quickly evaporated.

You may ask what alternative countries such as Greece and Ireland had, and the answer is that they had and have no good alternatives short of leaving the euro, an extreme step that, realistically, their leaders cannot take until all other options have failed – a state of affairs that, if you ask me, Greece is rapidly approaching.

Germany and the European Central Bank could take action to make that extreme step less necessary, both by demanding less austerity and doing more to boost the European economy as a whole. But the main point is that the United States does have an alternative: we have our own currency, and we can borrow long term at historically low interest rates, so we don’t need to enter a downward spiral of austerity and economic contraction.

So it is time to stop invoking Greece as a cautionary tale about the dangers of deficits; from an American point of view, Greece should instead be seen as a cautionary tale about the dangers of trying to reduce deficits too quickly, while the economy is still deeply depressed. (And yes, despite some better news lately, our economy is still deeply depressed.) The truth is that if you want to know who is really trying to turn the United States into Greece, it’s not those urging more stimulus for our still-depressed economy; it’s the people demanding we emulate Greek-style austerity even though we don’t face Greek-style borrowing constraints, and thereby plunge ourselves into a Greek-style depression.