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Greece 2010-18: what could we have done differently?

Lenoël, Cyrille, Macchiarelli, Corrado and Young, Garry (2022) Greece 2010-18: what could we have done differently? GreeSE Papers: Hellenic Observatory Papers on Greece and Southeast Europe (172). Hellenic Observatory, London School of Economics and Political Science, London, UK.

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Abstract

At the beginning of 2010, the fiscal situation of Greece was unsustainable, and an ambitious but costly adjustment plan had to be put in place under a consortium of the International Monetary Fund, the European Commission and the European Central Bank. It took three consecutive adjustment programmes, including debt-relief through private sector involvement, to restore confidence in the economy and achieve a budget surplus. In this paper, we provide a theoretical analysis of the Greek Crisis starting from 2010. We build a series of counterfactuals using the National Institute General Econometric Model (NIGEM) to analyse why the cost of the adjustment in terms of GDP loss and increase in debt-to-GDP ratio turned out to be much worse than expected. In doing so, we analyse three scenarios: (i) one in which we simulate a much more conservative cut in public investment by the Greek central government; (ii) a second scenario of a lower risk-premium, signalling, e.g., lower political and redenomination risks, had the European Central Bank guaranteed its lending of last resort role earlier than 2012; (iii) finally, a similar financial envelope as the one adopted during the first Greek adjustment programme but over a longer period, moving beyond the standard IMF three-year duration programmes. We find that the mix of expenditure cuts and loss of confidence among households and firms explain a large part of the unanticipated costs of the adjustment in the Greek crisis.

Item Type: Monograph (Discussion Paper)
Official URL: https://www.lse.ac.uk/Hellenic-Observatory/Publica...
Additional Information: © 2022 The Authors
Divisions: LSE
European Institute
Subjects: H Social Sciences > HC Economic History and Conditions
J Political Science > JN Political institutions (Europe)
H Social Sciences > HJ Public Finance
H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures; Other Public Investment and Capital Stock
Date Deposited: 30 May 2022 14:00
Last Modified: 30 May 2022 14:00
URI: http://eprints.lse.ac.uk/id/eprint/115240

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