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

Cyrille Lenoel, Corrado Macchiarelli and Garry Young

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: fiscal multipliers; fiscal policy; government; public expenditure; public investment (search for similar items in EconPapers)
JEL-codes: E62 E63 H54 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2022-05
New Economics Papers: this item is included in nep-dem, nep-eec and nep-mac
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http://eprints.lse.ac.uk/115240/ Open access version. (application/pdf)

Related works:
Working Paper: Greece 2010-18: What could we have done differently? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:115240

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