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.
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