Blog post

Who lost Greece? (update)

Publishing date
21 February 2012

The Brussels agreement on 21 February with private creditors and public lenders has not only removed the threat of imminent Greek default. The Europeans must be commended for having based the restructuring deal on a much more realistic assessment of Greece’s ability to pay back its private creditors. The 53% haircut and the lowering of interest rates on the remaining debt to 2% in the short term and 3.6% on average over the lifetime of the claims offer an opportunity to finally create financial conditions that are conducive to economic adjustment, reforms, and ultimately recovery. If these do not materialise, the official creditors will in the end have to forgo part of their claims – especially as the agreement protects private creditors for the future. For the time being, however, Athens has a chance to move away from the edge of the precipice and focus on the domestic agenda.          

It is hard to remember than in March 2010 – less than two years ago – Europe’s official line was that Greece did not need any assistance, and that only domestic efforts were required; or that until July 2011 – less than a year ago – the very notion of a debt restructuring was taboo; or that until October – less than six months ago – a marginal reduction in the private debt was supposed to be sufficient. Even if the Europeans’ new realism is largely attributable to the IMF’s insistence that it would not be part of a programme that would not bring the debt down to 120% of GDP, it is nevertheless welcome. 

In spite of it, many are of the view that the deal is only putting off the evil day, as Greece will not implement the promised austerity, that it will not succeed in restoring competitiveness and growth and that it will end up either deciding to exit the euro or being pushed out following default. The Hague, Helsinki and some in Berlin are wondering aloud why Greece should remain in the euro, in Athens exasperation has reached alarming levels, and the bitterness of the disputes have started to echo the disputes over German reparations of the 1920s. 

‘Who lost China?’ asked US strategists of the 1950s. It is to be hoped that the Europeans won’t have to start asking themselves who lost Greece. The answer would be first of all: the Greeks themselves. The fecklessness of their politicians has plumbed new depths, patronage is poisoning government, Transparency International’s corruption index ranks Greece eightieth in the world, and in September 2011 the Greek treasury had only carried out thirty-one of the seventy-five tax controls on high-income individuals which it had committed to do this year.  

But it would be too easy to leave it at that and to absolve the Europeans of their own responsibilities. Their first error has clearly been to procrastinate for months, only to produce in the end an unrealistic assistance programme scheduling the return of Greece to the markets by 2013. It is now clear that it will take years, perhaps a decade, to reform the country and correct economic imbalances.   

The incoherent reply to the solvency crisis was the second error. Two strategies were possible: either an early reduction of the sovereign debt so as to restore solvency rapidly, or its mutualisation in the name of preserving the collective reputation of euro-area sovereigns. Either would have been coherent, but Berlin and Paris agreed on a cocktail of the two which was not: pretending that the country was solvent while at the same time lending at punitive interest rates which made the situation worse. It took eighteen months to abandon this policy.  

The third error was getting priorities wrong. Right at the start the IMF diagnosed a twin problem, of public finances and of competitiveness, but the focus was put on the first and it was blithely hoped that structural reforms would resolve the second. The government invested most if its meagre political capital in budgetary adjustment rather that in building a competitive economy. Almost two years later, the programme now being finalised reverses the order of priorities, putting competitiveness and growth up front and delaying the completion of budgetary consolidation. Why was this not done at the outset?    

Fourth, nothing substantive has been done about growth. An adjustment programme is necessarily recessionary but this need not thwart an attempt to mobilise tools for economic recovery.  Athens could in principle have counted on a large amount of regional development aid from the EU budget, which was underutilised owing to a lack of local cofinancing. It took until summer 2011 until the penny dropped that this aid could be used to support economic recovery, and then only to a modest degree. True, it is not easy to identify projects that are worth international support and the counterpart of speed is inevitably the misallocation of funds. But the risk of protracted recession causing the failure of the overall programme is of potentially much bigger consequences.     

The final error of Europe has been a certain indifference to fair burden-sharing. At a pinch it is understandable that the IMF, a technocratic institution, does not venture beyond macroeconomics. But the European Union is a political entity which has made social justice one of its fundamental goals. It cannot call for a cut in the minimum wage and at the same time assign secondary importance to the fact that tax evasion among the top ten per cent of the taxpayers costs one quarter of income tax receipts.    

Contrary to what lazy critics claim, Europe cannot be reproached for imposing austerity on the Greeks. This is the necessary counterpart of a major financial support effort, and a country with such huge imbalances must inevitably be subject to extreme rigour. But Europe can be reproached for an initially late, ill-designed, unbalanced and inequitable programme. It is to be hoped that its new-found realism will pave the way to success but if the question one day arises as to who lost Greece, there will be a lot of soul-searching.       

About the authors

  • Jean Pisani-Ferry

    Jean Pisani-Ferry is a Senior Fellow at Bruegel, the European think tank, and a Non-Resident Senior Fellow at the Peterson Institute (Washington DC). He is also a professor of economics with Sciences Po (Paris).

    He sits on the supervisory board of the French Caisse des Dépôts and serves as non-executive chair of I4CE, the French institute for climate economics.

    Pisani-Ferry served from 2013 to 2016 as Commissioner-General of France Stratégie, the ideas lab of the French government. In 2017, he contributed to Emmanuel Macron’s presidential bid as the Director of programme and ideas of his campaign. He was from 2005 to 2013 the Founding Director of Bruegel, the Brussels-based economic think tank that he had contributed to create. Beforehand, he was Executive President of the French PM’s Council of Economic Analysis (2001-2002), Senior Economic Adviser to the French Minister of Finance (1997-2000), and Director of CEPII, the French institute for international economics (1992-1997).

    Pisani-Ferry has taught at University Paris-Dauphine, École Polytechnique, École Centrale and the Free University of Brussels. His publications include numerous books and articles on economic policy and European policy issues. He has also been an active contributor to public debates with regular columns in Le Monde and for Project Syndicate.

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