by Jeremy Bulow & Kenneth Rogoff
June 10, 2015
The conventional wisdom in Greece is that the nation has suffered years of excessive, Troika-imposed austerity in a short-sighted effort to extract maximum repayment. This column argues that, in fact, Greece was a net receiver of Troika funds from 2010 to mid-2014, with a modest reverse flow since Greece stalled on its reforms. Both sides have negotiated in their self interest – influenced by bargaining threat points that have had everything to do with the direct costs of default and little to do with Greece’s concern about its reputation for making repayments.
A European nation with a proud heritage, Greece is nevertheless still an emerging market in many respects, and its economy has suffered the kind of epic depression that entrenched high-income countries have managed to avoid, even in the Great Contraction. Greece’s per capita GDP (in dollars), which had risen from 41% of German levels in 1995 to 71% in 2009, was back to 47% by 2014. On a purchasing power basis the decline was nearly as significant, from 77% of German levels in 2008 to 57% in 2013.
The conventional wisdom, certainly in Greece, is that the country has suffered through five years of excessive austerity, imposed by the IMF and the EU (primarily led by Germany), in a misguided effort to repay the country’s private creditors and to suck cash out of Greece. This view, although often reinforced by some academic commentators, is wrong. The aim of this note is to lay out the facts as best as we can ascertain them. In doing so, we hope to help illuminate some of the underlying strategic bargaining issues in a way we hope will be of interest to both academics and to observers of Eurozone debt negotiations. (We look more directly at the theory of sovereign debt contracts, and how the Greece case might be illuminating, in a separate companion piece more narrowly directed at researchers.)