Greece after the Bailouts: Assessment of a Qualified Failure

Lax fiscal oversight, loose credit following euro-accession, and credibility conferred by Eurozone membership led Greece to a debt-driven growth funded by external capital inflows. These private flows came to a “sudden stop” in 2010, forcing a bailout. The first adjustment program viewed the problem as one of liquidity rather than solvency, imposing heavily front-loaded austerity, that accentuated recession and led to complete target slippage. The second program included debt restructuring, exhibited greater flexibility, and focused on decreasing labour costs to improve competitiveness. The third program, whose size increased by the 2015 deterioration of the economy, contained much of what had been left undone, and was the only one completed. Despite deleveraging, both public and private debt as share of GDP continued to grow because of the steep recession, procyclical policy mix, and bank-sovereign doom loop. Eventually, hard external conditionality overcame much of the resistance of status quo coalitions to reforms. Despite the successive reform programmes, the Greek economy continues to suffer a weak public administration, slow functioning justice system, low savings, high consumption, small average business size, and a still weak export sector. Prolonged austerity has left a heavy legacy in terms of poverty, social vulnerability, and weakened productive capacity, as steep disinvestment and the decline of employment are dragging down the economy’s growth potential. On the other hand, the twin deficits (fiscal and current account) have been eradicated, a wide array of significant structural reforms have been implemented, exports have increased, and the administrative capacity of the state has relatively improved. Greece represented a Mediterranean market economy, driven by domestic demand and deficit-financing; the crisis has brought about an evolving rebalancing of the economy towards a fiscally disciplined, reform-driven, and more export-oriented growth model.