ABSTRACT
The Greek case stands out as the first crisis country and the only one to undergo several economic adjustment programs. As in the other case studies, Greece had used the EU as an external constraint to promote macroeconomic adjustment in the 1990s as it geared up for euro membership. The current account deficit soared and the non-tradable sectors of the economy flourished at the expense of exports and tradables, weakening economic competitiveness. The loose credit conditions provided by the ECB’s low interest rates and the credibility conferred by euro area membership led to debt-driven growth (public and private) that was funded by external capital flows. These flows came to a “sudden stop” in 2010. The first adjustment program viewed the problem as one of liquidity rather than solvency, thereby rejecting debt restructuring. Instead, it front-loaded austerity policies so that the internal devaluation and fiscal consolidation would restore public finances. The ECB’s loose monetary policy failed to alleviate Greece’s economic contraction because of financial fragmentation and the bank-sovereign doom loop. The second program exhibited greater flexibility than the first, deferring fiscal surplus requirement and focusing more on reforms to improve economic competitiveness and including debt restructuring. Despite the deleveraging of the economy, both public and private debt continued to grow. Labor suffered the most while powerful coalitions in product and services markets resisted liberalization. Program implementation varied across governments, and substantial political opposition arose; both ND and Syriza reversed course, however, upon assuming power and continued the respective adjustment programs. Indeed, for Greece there was a “weak supply and demand for reforms”, with the status quo coalitions resisting reform efforts in the absence of an effective pro-reform coalition. The euro area reforms exacerbated the situation and were procyclical. Despite the successive reform programs, the Greek economy continues to suffer from a weak public administration, low savings, high consumption, small average business size, and a weak export sector, despite improvements made in all these areas. On the other hand, public and private deficits diminished substantially, a wide array of structural reforms were implemented, and the administrative capacity of the state has improved.
