Three years after Greece signed the EU-IMF memorandum, some questions remain. Here are some answers:
1. Could Greece have avoidedthe memorandum?
Clearly not, given the state of its economy in late 2009 / early 2010. The economies of all the countries that signed up to a memorandum after Athens did (Ireland, Portugal, Cyprus) were in better shape than Greece’s and still, failed to avoid it. Greece really needed to borrow money, but it was totally unable to do so.
2. Wouldn’t it be better if Greece had restructured its debt back in 2010?
A debt restructuring could not have taken place in 2010 because it would not have been orderly and consensus-based. Instead, it would would have been a unilateral decision with unchecked consequences, including a euro exit. With the exception of some IMF officials, none of Greece’s key partners (Germany, France, the European Commission, the European Central Bank) was willing to discuss restructuring before seeing the fiscal adjustment program yield results. Their skepticism was fueled by obvious reasons: Greece had a 24-billion-euro primary budget deficit and a trade deficit of a similar size (which is why the country’s bargaining position was so weak). Greece’s partners would first have to cancel the country’s debt and after that finance all these deficits. Also, they would have to cover the huge cost of recapitalizing European as well as Greek banks at a time when when no European mechanism had yet been set up. There was no mechanism and there were no serious signs that the administration of George Papandreou would step up to slash the deficits without outside supervision. Furthermore, in the eyes of foreign officials, Greece already had a bad reputation after forecasting a 6 percent public deficit only to revise it to 15 percent. The reaction of most European parliaments to Greece was one of raised eyebrows.
3. But is it not wrong to adopt austerity policies at a time of recession?
Normally it is, unless there is no one willing out there to lend you money. Every serious critic of austerity (from Paul Krugman to Martin Wolf) who has attacked the German recipe of eurozone-wide austerity acknowledges that Greece was an exception, that austerity here was inevitable. That is because Greece not only had a public deficit and public debt; it also had a mammoth external deficit and net external debt. These called for a drastic reduction in consumption as well as imports so as to reduce the external debt – in other words, a recession.
4. Does that mean the crisis was two-pronged?
Yes. In 2010 Greece had to deal with two emergency crises: a fiscal crisis and an external balance crisis. The former was to be expected but the latter was not. No EU body had issued any warning, no government had taken the necessary measures to prevent it from happening. This was pointed out in a recent Bruegel study (“Financial Assistance in the Euro Area: an Early Evaluation”). Balance-of-payments crises are naturally dealt with using currency devaluation. For euro nations, that is not an option. It could only be achieved through internal devaluation – with the known consequences. A balance-of-payments crisis is when markets stop financing low-risk borrowers because of the country they are in. The credit meltdown impacted also on healthy Greek businesses that happened to operate in the land of two-digit deficits. Here’s a fundamental adversity of this two-pronged crisis: Recession facilitates the restoration of external balance but undermines fiscal objectives. People must make huge fiscal sacrifices for a relatively small outcome.
5. Notwithstanding the spending cuts, the tax hikes and the painful austerity, public debt is still growing. Is that not evidence of failure?
First, the debt grows as long as we have a primary deficit, which adds new public debt. This year will see a surplus for the first time in 10 years. Second, the debt grows because of recession (which we already talked about). Third, after the restructuring the public debt is no longer the biggest problem of our economy. Greece is not under pressure from the markets in the way Italy or Spain are. Greece has bought some time to carry out the requisite adaptations. Managing the debt has become a political issue, the size of the haircut will depend on our partners as long as we stay on the track of reform. The cost of servicing our debt is now (after the recent adjustments) among the lowest in the eurozone, with a moratorium on debt repayments and interest rates that are lower than the rate at which our partners borrow. This last comment is also a response to Golden Dawn’s idiotic claims of “international usurers” that target the nation.