The mixed success of EU-IMF adjustment programs in Europe – why Greece was different

The comparison of the economic, financial and fiscal conditions in four EU-IMF financial assistance countries shows that Greece’s economy was hit much harder during the crisis than Ireland, Portugal or Spain. While Greece has fallen back into recession and still depends on financial help from the international community, the adjustment programs appear to have been more successful in the other three countries. The ongoing calamities of the Greek economy are partly the result of especially adverse starting conditions marked by manifold structural problems: Departing from a fairly low level, private debt in Greece surged rapidly. Economic growth in the pre-crisis years was thus credit-financed and consumption-based. This also applies to Ireland and Spain, which started with already comparatively high household debt levels. But in contrast to the latter two countries, credit growth in Greece was also high in the public sector, providing a strong procyclical stimulus to disposable incomes. This boosted domestic demand, whereas the performance of exports remained weak: As a consequence of rapidly growing unit labor costs, the export sector in Greece lost competitiveness, just as in Ireland, Portugal or Spain. It is the plurality of imbalances that makes the Greek case unique. The severity of the recession in Greece was also the result of the extremely strong and frontloaded consolidation efforts made in the middle of a balance sheet recession. These were prompted by the more stringent fiscal requirements in the Greek adjustment programs as compared to the other countries’ programs. Austerity measures seriously curbed domestic demand and could not stop debt from rising. Tight credit conditions and wage cuts additionally weighed on domestic demand and thus aggravated the recession. Overall, the past years have shown that it was important and right to support countries in economic and financial difficulties. But experience with the Greek case has also taught us the limits of established forms of support which were not sufficiently underpinned by investment programs to support domestic demand.