Monday, July 2, 2012

On a "real" Marshall Plan for Greece

July 2, 2012

Nicholas Crafts is director of the CAGE Research Centre and professor of economics and economic history at the University of Warwick. A full exposition of this argument can be found in the author's CAGE-Chatham House policy briefing paper, “Saving the Eurozone: Is a ‘Real' Marshall Plan the Answer?”.

For the last year or so, there have been a number of suggestions to the effect that there should be a new "Marshall Plan" for Greece. The person in the street thinks of the Marshall Plan as generous American aid which kick-started growth in war-torn Western Europe 60 years ago.

The attraction to its proponents is that Grexit would be avoided because aid would ease the pain of fiscal consolidation and it would reward Greek politicians in favour of staying in the euro. This could appeal to other European countries since a Greek exit would in all probability have a very damaging impact on their economies, while a break-up of the euro zone would likely trigger a deep recession. Critics of the proposal think that Greece has already been treated much more generously than anything provided by the original Marshall Plan and that further rewarding Greeks for bad behaviour is not acceptable to hard-working northern Europeans.

Both sides fail to understand the reality of the European Recovery Programme (Marshall Plan) as it was implemented in the years 1948 to 1952. The United States provided grants (not loans) of about $12.5 billion, equivalent to around 1% of its GDP for each of 4 years. The key point to recognise is that the Marshall Plan involved strict conditionality which pushed European countries towards pro-market reforms. It was the indirect effect of these reforms—in particular, moves to liberalise trade—which had the big positive effect on growth.


Read the Paper

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