Greece 2010–18: What Could Have Been Done Differently?

Cyrille Lenoël, Corrado Macchiarelli and Garry Young
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Cyrille Lenoël: National Institute of Economic and Social Research (NIESR)

Open Economies Review, 2023, vol. 34, issue 2, No 3, 315 pages

Abstract: 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 re-denomination 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: Greece; Fiscal policy; Government; Macroeconomic adjustment; Risk premium; E62; E63; E68; H54 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11079-022-09672-8

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