Greece and austerity policies: Where next for its economy and society?
Between 20th October and 21st December 2014, the World Economic Association organised an online conference about the crisis and the austerity policies in Greece. The conference covered issues related to the social and economic effects of austerity, the 2012 haircut of the Greek public debt and the prospects of the Greek crisis. The papers of the conference, which are available here, provide valuable insights into these issues, as well as useful pointers with regard to the on-going crisis one year later. Here we recap some of the main points raised during the conference and we look into the current state of affairs.
Over the period 2010-2014 the Greek economy underwent a hard austerity programme. After 5 years of implementation it became very clear that the declared targets of this programme were not achieved: the economy contracted by more than the US economy in 1929-1934 (during the Great Depression), the fiscal deficit declined at a much slower pace than expected, the public debt-to-GDP ratio was not put into a sustainable path, the exports did not rise significantly despite the sharp reduction in wages, the fragility of the financial system increased and the unemployment rate almost trebled. Moreover, Greece experienced a remarkable increase in poverty and deprivation, a widening in inequality and other adverse social developments.
But the failure of the programme was not confined to the fact that it caused significant economic and social damage in the short run. Equally important is the fact that the programme did not address two crucial long-run problems of the Greek economy: the lack of a well-organised and overall effective public sector and the low structural competitiveness linked to the de-industrialisation that has taken place since the 1980s. In the austerity programme it was assumed that the main problem of the Greek public sector is its large size, not its ineffective structure and organisation, and that the external sector suffers from low wage/price competitiveness, rather than from structural competitiveness. As a result, the measures that were taken in these areas (reduction of the number of public sector employees and wage cuts) proved counterproductive. Moreover, the ‘one size fits all’ approach that was adopted relegated to the sidelines the importance of the various idiosyncratic features of the Greek economy, such as the significant role of small and medium-sized enterprises in the performance of the macroeconomy.
The new Greek government that was elected on 25 January 2015 aims at putting an end to the implementation of austerity policies and bringing the economy back to growth via measures that include, inter alia, the restructuring or write-off of the public debt, the increase in minimum wages and the enhancement of the protection of socially vulnerable households. However, after many months of intense negotiations it has become clear that the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF) are not willing to accept most of the proposals of the Greek government. On the contrary, the three institutions insist on the need for the continuation of austerity policies with virtually no change to the policy mix. The ECB and the European Commission seem also to have refused to discuss (at least in this stage) the restructuring or write-off of the public debt.
The overall result is that so far (14 June) the negotiations have not led to an agreement. The Greek government appears to have accepted certain austerity measures (e.g. tax rate increases), but insists on the need for a gradual increase in wages and the restructuring of the public debt. The three institutions have emphasised that additional austerity measures are necessary, that more privatisations need to take place and that labour market flexibility should increase. Since there are many points of disagreement, it is still uncertain whether an agreement will be reached soon, if at all.
At the same time, the liquidity of the Greek government has deteriorated significantly. On 5 June the government informed IMF that it would not make a debt repayment due on that day and that its intention was to bundle up the four June repayments to IMF in order to make them at the end of the month. The Greek government has also to make a lot of debt repayments in July and August and it is clear that its liquidity is not enough to fulfil these debt obligations.
The liquidity problems of the Greek banking sector are also serious: over the last few months the bank deposits have declined substantially and, as a result, the Greek banks rely on the liquidity provided by the Emergency Liquidity Assistance of the ECB.
Although an agreement between the Greek government and the three institutions would solve these short-term liquidity problems, much more attention should be paid to the long-run prospects of the Greek economy and the needs of the society. It is clear that a coherent long-run strategy for the Greek economy is still missing. Even if the liquidity issues are tackled via a financing agreement, no answer will have been given to the way that the Greek economy can achieve a sustainable pattern of development within the current structure of the Eurozone.
The austerity policies that are promoted both for Greece and the Eurozone cannot lead to such a sustainable development. Deep institutional transformations and government interventions that go against the idea that ‘when left alone, market forces lead to optimal solutions’ are essential. These include new forms of industrial policies, coordinated pro-labour wage policies, countercyclical fiscal interventions and the fundamental reconsideration of the targets of monetary policy which need to concentrate more on financial stability and employment.
Without such types of policies both the Greek and the Eurozone economies will be trapped into deflation or stagnation with significant social costs that will gradually lead to political instability. At the same time, it is fundamental for Greece to design a long-run strategy for the restructuring of its public sector and the enhancement of its productive capacity.
From: p.2 of World Economics Association Newsletter 5(3), June 2015