It's a strange day on the opinion pages of the Wall Street Journal Europe. An editorial hails "Estonia's Lessons for Greece" which are that you stick for all it's worth to a fixed exchange rate and you make whatever cuts are necessary for that to be credible. There is no mention of the implications of this strategy for GDP growth. Or rather GDP decline. Paul Krugman has the chart. It's about 20 percent loss in GDP.
Then nearby there is veteran monetarist Allan Meltzer mainly preaching the virtues of privatization for Greece but then he does a segue into macroeconomic policy --
Keynesians who think reducing public spending during a recession is a disastrous error should recall that they warned British Prime Minister Margaret Thatcher in 1981 that Britain would never recover if she continued with her tight fiscal and monetary policy during Britain's deep recession. Mrs. Thatcher declined to take their advice. Expectations about Britain's future changed for the better, and a long, productive recovery began soon after.
Now that 1981 budget and the famous "364 economists" letter that followed it is indeed very interesting. First, the budget achieved most of its fiscal tightening by higher taxes. Second, when the budget came in, it took about 4.7 Deutschemarks to buy a pound. By the end of the year, it was about 4.3 DM/pound and over the rest of the Thatcher miracle, the pound was on a long downward trajectory towards 3DM.
Thus Maggie's exit from recession included tax hikes and devaluation. Let's hope for the sake of the Wall Street Journal that the Greeks weren't paying attention.
UPDATE: The 1981 Thatcher case is again an issue in Steve Hanke's critique of Paul Krugman.