Greek Crisis in Perspective: Causes, Illusions and Failures

Abstract

Soon after the 2008 global crisis, the euro faced its toughest challenge since its introduction as several of the participating Member States faced unprecedented financial problems. Greece was the most severe case, requiring intervention from the EU and IMF to stabilise its economy and repay debt obligations. This article explains the debt process in Greece from the 1980s to date, and describes its main causes and episodes. It also assesses the impact of the IMF/EU austerity programmes and shows that its failure to control recession inhibited the prospects of debt stabilisation. Five years after the bailout agreement, Greece is in a deep contraction, with socially explosive unemployment rates, while public debt is alarmingly higher than the level that triggered the crisis. An alternative scenario is discussed, showing that stabilisation can become more effective and realistic if recession is tackled first and reforms follow on a steadier path.

Appendix: A Brief Description of the Conditionality Programmes for Greece

The adjustment programme for Greece was laid out in three phases. The first Memorandum was signed in May 2010 and aimed at reducing the fiscal deficit to 3% in 2013. Specific measures that were actually implemented included universal cuts in public salaries and all pensions, a rise in VAT from 19% to 23% and similarly in other consumption surcharges, the abolition of collective agreements in favour of firm-level contracts, the lowering of private sector wages by 12% and a reform in the social security system. It also included the liberalisation of red tape practices in the transport, pharmacy and legal sectors, but the outcome was heavily compromised through a series of delays and back-offs. The fiscal deficit for 2010 ended up close to 11% of GDP, substantially lower than the horrendous 15.4% in the year before, but still away from the initial target.

Thus in early 2011 a new round of negotiations resulted in a second round of measures voted for by parliament in June 2011. They included further taxation on past incomes, a lump-sum tax on professionals, further rises in indirect taxes and a new property levy that was imposed two months later. The programme demanded the abolition of outdated public entities, a reduction in the number of civil servants and a further curtailment in their salaries. It also envisaged ambitious privatisations of utilities and public real estate that could trim down public debt by h50 bn within a four-year period. The fiscal deficit for 2011 was estimated to be 9.8% of GDP, revealing a major difficulty in further adjustment in the absence of growth.

The third round of adjustments was voted for in February 2012 as Memorandum II. (For the full text see ‘Memorandum of Understanding on Specific Economic Policy Conditionality’, 9 February 2012, available at http://www.hellenicparliament.gr).

This time it was approved by the two major parties, but only after a line-up was imposed to avoid desertions and rising internal protest. Measures included a reduction of minimum wages in the private sector by 22%, an additional cut by 10% to new entrants as a means to beat youth unemployment, 15% cuts in various pensions, the abolition of several tax credits and explicit targets for cutting employment and entities in the wider public sector. Policies started to be implemented in the final quarter of 2012. After the referendum in July 2015, a new round of measures was agreed to be voted by Greek Parliament. The process is expected to be completed in the autumn 2015 and a third Memorandum will apply for the next three years.