Greek Crisis in Perspective: Origins, Effects and Ways-Out

Abstract

In 2011 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 stabilize 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 IMF-EU Memorandum and argues that the collapse of growth inhibits the prospects of debt stabilization. An alternative scenario is discussed showing that stabilization can become more effective and realistic if recession is tackled first and reforms follow on a steadier path.

This chapter was originally published in The New Palgrave Dictionary of Economics, Online edition, 2012. Edited by Palgrave Macmillan

Appendix: A Brief Description of the Conditionality Programs for Greece

The adjustment program 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 favor of firm-level contracts, the lowering of private sector wages by 12% and a reform in the Social Security system. It also included the liberalization of red-tape practices in the transport sector, pharmacists and lawyers, but the outcome was heavily compromised through a series of delays and back offs. 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 initially set target.

Thus, in early 2011 a new round of negotiations resulted in a second round of measures voted 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 The program demanded the abolition of outdated public entities, the reduction in the number of civil servants and a further curtailment in their salaries. It also envisaged ambitious privatizations on utilities and public real-estate that could trim down public debt by Euro 50 bn within a four-year period. Fiscal deficit for 2011 is provisionally 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 will start to be implemented in the final quarter of 2012.