Monday, January 26, 2015
The Greek crisis: Be flexible on debt, but intransigent on reforms
January 26, 2015
Greece’s voters have spoken; it is now time to act quickly to prevent a Grexit, and it will require sacrifice on all sides. We can better understand what is the proper strategy for Greece – and the EU – if we remind ourselves of some basic facts:
- Until 2010 Greece had accumulated extreme fiscal and macroeconomic imbalances while maintaining an institutional regime which favoured the public sector and rent-seeking to the detriment of honest private activity. These policies were facilitated by massive inflows of cheap credit from more-developed countries of the euro area, which in turn were due to some policy failures at the level of the euro area, that produced an extreme suppression of the credit spreads in this area.
- In response to the crisis that emerged in 2010, Greece has found itself under the supervision of the Troika (the EU Commission, the ECB, and the IMF). There has been a sharp divergence between the agreed and the implemented programs, and the latter has had such a time structure that it has sharply reduced the inherited imbalances. But there have been high costs in the form of a deep cumulative decline in GDP (over 25% between 2010 and 2014) and a sharp increase in unemployment. The implemented policies relied first on the tax increases. They delayed reforms on the spending side as well as the structural reforms, which were absolutely essential to improve conditions for business. This was in sharp contrast to the policies implemented in the Baltics and in Ireland, where rebalancing of the economy after the acute boom bust episodes was achieved at much lower costs to GDP and employment. It had been the nature of the implemented programme in Greece and not ”austerity” (a bad word) which is to blame for the especially high costs of economic rebalancing in Greece