Alternate Minister of Finance and Chairman of the Council of Economic Advisers of Greece George Chouliarakis spoke at the London School of Economics on Thursday, 9.2.2017 at an event organised by the LSE’s Hellenic Observatory and chaired by Eleftherios Venizelos Professor of Contemporary Greek Studies and Head of LSE's European Institute Kevin Featherstone.
In his lecture under the title "Greece: Conditions for a Sustained Recovery" the Alternate FinMin stressed the severity of the Greek recession and traced its causes, referred to the difficulties of managing the crisis, analyzed what went wrong with the first two Greek programmes (2010 & 2014), and emphasized the third adjustment programme and Syriza’s administration goals: fiscal credibility, inclusive growth-social efficiency, product market reform, foreign investments attraction, communicating reforms as beneficial for society. He finally expressed his concern over the timely completion of the current (second) programme review in view of the coming elections in the Netherlands, France and Germany.
Chouliarakis referred to the key facts that lead to the crisis that Greece is going through for seven years characterizing it as one of the worst in the history of capitalism. Greek recession has been nearly as deep as the USA’s Great depression but USA recovered in 4 years, he stressed.
The proximate cause of the Greek recession is the twin deficits, a primary fiscal deficit and a current account deficit. When Greece joined the Euro, private/public external borrowing increased at very favorite terms, causing a widening of the public deficit while competitiveness suffered. This led to deterioration of the current account deficit.
The world financial crisis in 2008 caused liquidity to dry up globally and that triggered a typical sudden stop of capital inflows towards Greece. The markets estimated that Greece would not be able to service the cumulative deficits of that decade. The cause that triggered the sudden stop of capital influx was exogenous. But the ultimate cause of the lack of trust of the markets towards the Greek economy was that Greece had a legacy of weak fiscal institutions.
Chouliarakis referred to the difficulties of managing the crisis with a small policy space and fiscal space: There is no monetary policy autonomy in the monetary Union. There no space to consolidate through devaluation. According Chouliarakis the only way to address crisis is to shape expectations to households and investors by trying to stabilize the economy. Refering to the Grexit scenarios, Chouliarakis stressed that it is impossible to quit European Monetary Union. A Grexit would mean huge loss of wealth for the country, testing the limits of a liberal Democracy.
The first two adjustment programmes: 2010 &2014
Commenting on the first two bailout programmes 2010-2014, Chouliarakis said they were a financing envelope to rely on, given there was no access to capital markets. But the problem was that there was a coordinated fiscal consolidation in many peripheral European economies, magnifying the spillover effects of recession from fiscal consolidation, while countries with primary fiscal surpluses were reluctant to stimulate economies. Here lies one of the key weaknesses of the European architecture: Countries with surpluses are not obliged to take any action. The other problem was that Europe’s reluctance to offer a financial envelope big enough to make Greece’s adjustment less painful in terms of output and employment loss.
Commenting on the first two bailout programmes he said that they were aggressive and ambitious programmes with major problems that rendered them ill designed. They were aggressive front loaded programmes, which did not provide for debt relief (especially the first bailout), and they put a lot of emphasis on drop in labour costs, adjustment of the labour market but no significant adjustment of the product market (exports etc), which led to no gain in terms of competitiveness.
In juxtaposition to the characteristics of the 2010 &2014 Greek programmes, in the more successful cases of Ireland and Portugal fiscal adjustment was not so aggressive and the emphasis was given mainly on product market adjustment, while there existed wider political consensus.
Syriza Government and the third programme
The third programme negotiated in 2015 by the new Syriza government takes into account the failures of the previous two bailout programmes: it has significantly lower primary fiscal targets, a milder fiscal path, a lot of emphasis on product market reforms and repairing the fragility of the banking sector.
Chouliarakis stressed that the goals in order to turn the current rebound (end of 2016) into a sustained recovery should be fiscal credibility, fiscal targets attainment, inclusive growth with a social efficiency profile, product market reform and foreign investments attraction. And last, but not least, communicating the reforms to explain why they are beneficial for society.
Chouliarakis concluded that a consensus will have to be achieved regarding the evaluation of the Greek programme and expressed his concern over the timely completion of the bailout program review, stressing that “there is a good reason to conclude the negotiations as soon as possible than to await the results of the elections in Europe”.
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A video, podcast, vodcast (Audio+Slides) and photos from Minister Chouliarakis' lecture at LSE's Hellenic Observatory are available here