Greece: Why Did the Forceful Internal Devaluation Fail to Kick-start an Export-Led Growth?

Abstract

Much has been said about the results of the austerity program implemented in Greece by the “Troika.” The official creditors initially sanctioned an implementation of the agreed conditionality program (included in the MoU that also provisioned the official loans to the Greek government) that principally focused on increasing taxes and labor market reforms that facilitated the fall of private sector wages. As already described, only during the third year of the implementation of the program did they try to complement this tax spree with horizontal cuts in pensions, medical benefits, and public sector wages,¹ that failed to touch the key distortions of both the pension system² and the public sector wage structure. Growth-enhancing structural reforms, as defined by deregulation of network industries, professional services, reduction in red tape and corruption, and the privatization of assets that are important for the functioning of the economy, like infrastructure, were not deemed a priority, at least as far as the release of payment tranches to the Greek government was concerned. They were effectively off the agenda, with the exception of a few half-hearted and therefore incomplete attempts. To make matters worse, a number of ill-advised policies and strategic political decision directly undermined the ability of the productive part of the economy to contribute towards the stated goal of an export-led recovery of the Greek economy.