Well, that didn’t last long. The debt deal agreed between Greece and the Eurozone bosses last month is already unravelling. With the Eurogroup threatening to reject the Greek government’s effort at economic reform, the Greek finance minister has made a counter-threat of fresh elections or even a national referendum on the whole agreement.

As discussed on the Deep End last week, it’s easy for us to cast the Greeks as the victims and the Eurocrats as the villains of this drama. For the British right, the crisis confirms the wickedness of Brussels (and Frankfurt); while for the British left it provides proof that austerity economics doesn’t work.

However, in an article for Project Syndicate, Ricardo Hausmann refutes the notion that austerity is to blame for the weakness of the Greek economy:

“But the truth is that the recession in Greece has little to do with an excessive debt burden. Until 2014, the country did not pay, in net terms, a single euro in interest: it borrowed enough from official sources at subsidized rates to pay 100% of its interest bill and then some.”

Far from starving Greece of capital, membership of the EU and the Eurozone provided the country with unprecedented access to credit:

“…the problem is not that austerity was tried and failed in Greece… Insufficient spending was never an issue. From 1998 to 2007, Greece’s annual per capita GDP growth averaged 3.8%, the second fastest in Western Europe, behind only Ireland.”

For those of a fiscally unconservative disposition this might look like evidence that Keynesianism works. Yet, this decade of debt-fuelled growth still left the country fundamentally broke:

“But by 2007, Greece was spending more than 14% of GDP in excess of what it was producing, the largest such gap in Europe – more than twice that of Spain and 55% higher than Ireland’s.”

In Spain and Ireland, the flood of credit was pumped into property markets (the sort of investment a country can do without). In Greece, however, the irresponsibility was undisguised with most of the borrowing going into straightforward unearned consumption.

Far from exemplifying the failure of austerity, Greece illustrates the pitfalls of Keynesianism (or at least the ‘spend first, ask questions later’ policies of those who claim that label). The idea that borrowing by governments will automatically find its way into productive investment is the trickle-down economics of the left:

The problem is that Greece produces very little of what the world wants to consume. Its exports of goods comprise mainly fruits, olive oil, raw cotton, tobacco, and some refined petroleum products… The country produces no machines, electronics, or chemicals. Of every $10 of world trade in information technology, Greece accounts for $0.01.

“…in 2008 the gap between Greece’s income and the knowledge content of its exports was the largest among a sample of 128 countries.”

Of course, productive investment requires debt too (or some other means of accessing capital). However, thanks to the unmerited influence of macroeconomists on public policy, governments have assumed that if they can pump enough cheap credit into the economy, the right investment opportunities will naturally present themselves.

The experience of Greece, Spain, Ireland and, indeed, our own country, shows that this is the central economic fallacy of our time.