Abstract
In the aftermath of the 2008 financial crisis a number of Eurozone countries, Cyprus, Greece, Ireland, Portugal and Spain faced significant balance of payments difficulties requiring severe domestic adjustments combined with support from the Eurozone and the IMF. As of 2017 the adjustment programs had been completed in all these countries except Greece. The chapter summarizes the origins of the Greek crisis, the main reasons for the failure of the rescue efforts todate and the prospects for the future. It argues that all three protagonists in the crisis, the Greek government, the Eurozone creditors including the European Central Bank and the IMF failed to heed the lessons of recent history in dealing with debt and adjustment. Muddling through prevailed again and its costs keep piling up. Solutions require adjustments in the functioning of the euro plus continued reforms by the Greek government.
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Notes
- 1.
Actually, the Phoenicians preceded the Greeks as traders by a couple of centuries, but they had little impact on culture, religion and political links in the region. The Romans did far more to unify the area under their control a few centuries later including the building of a large transport infrastructure.
- 2.
My paternal grandfather migrated from Greece to the US around 1908 and died there ten years later (see Michalopoulos 2008).
- 3.
Ukraine’s decline in the 1990s was apparently slightly longer (see Gournichas et al. 2016), except that it had the alibi that it was going through a systemic transformation.
- 4.
Orphanides (2015) called the first bailout the original sin in his 2015 paper. But while the bailout contained a lot of sins it certainly was not the original one.
- 5.
The replacement rate is the ratio of the pension to the pensioner’s salary.
- 6.
There was a number of other countries that attempted to adjust with internal devaluations or with fixed pegs (e.g., Latvia); but none faced the triple problems affecting Greece.
- 7.
Although the US did provide assistance to Mexico directly.
- 8.
I participated representing the World Bank in what was probably the first ‘Troika’ mission to discuss assistance to Jamaica by the IMF, the World Bank and the US in 1985. If my memory is correct, Poul Thomsen, the I MF member of the Greek ‘Troika’ , also participated in the Jamaica mission as an I MF staff economist. Fortunately, Jamaica’s problems at the time were nowhere near the problems faced by Greece. A common memorandum agreed with the government was not needed, but the experience gave me a personal taste of the complexity of such a task should it have proved necessary.
- 9.
Or because he wanted to increase the I MF’s capitalization or for his own political ambitions as some have claimed (Galbraith 2016).
- 10.
The West African countries did devalue the West African franc in 1993, the year Trichet left the French Treasury to take over as President of the French Central Bank.
- 11.
‘So, the internal devaluation or price reduction was supposed to make up for the fact that Greece had a fixed exchange rate, the euro. If the IMF actually thought this would work, they should be shot!’ said one commentator on this paper. The I MF staff probably did not believe the program would succeed, but had no choice.
- 12.
The Athanasoglou study says that Gr eek exports are intensive in the use of ‘medium’ technology without an explanation of what this means in terms of capital/labor intensity.
- 13.
Yet another recent study suggests an inverse relationship of Greek exports to unit labor costs (Geronicolaou et al. 2016). The regression analysis on which this conclusion is based is somewhat suspect as it shows a rise in unit labor costs for the period 2004–2009 and a decline for 2009–2014; but Greek exports grew, albeit slowly throughout this period.
- 14.
Loosening labor market legislation, a structural benchmark under the program, should have reduced the incentives to hire laborers in the gray market; however, the market for agricultural labor was almost wholly outside the formal sector and dominated by immigrants since the fall of the Berlin wall , primarily Albanian and other Eastern European labor, in the early 1990s.
- 15.
When I tried to import a used passenger car from Belgium for my personal use in Greece, I was told by a friendly moving company official that there are no customs duties, but its registration required 29 different clearances (signatures) and would take approximately two weeks; I was advised to hire a customs expeditor—apparently a regular profession, who for a fee of 500 euros would obtain the clearances on my behalf in a few days—which I did and he did.
- 16.
One source (Papaconstantinou 2015) sug gests that the number came from the I MF. It may have been used to ‘fool’ the markets as debt reduction was still not on the table.
- 17.
The main Greek communist party KKE continued to obtain around 5–10% of the votes but stayed in opposition.
- 18.
As well as the cleaning ladies of the Ministry of Finance that had also been fired.
- 19.
An excerpt from a speech by the Governor of the Bank of Greece quoted by Varoufakis (2017, p. 106) was not helpful in dealing with the problem, but I am not familiar with the rest of the speech or the context.
- 20.
Varoufakis says that the Governor of the Greek Central Bank called him to say that ‘650 million euro had miraculously been discovered idling around in some forgotten account that happened to be stuffed with funds that we were allowed to use to repay the I MF’ (Varoufakis 2017, pp. 406–407). In fact, these funds constituted part of Greece’s official foreign exchange reserves, whose existence is regularly reported by the Bank on a monthly basis.
- 21.
This is a Dutch proverb ‘Het verschil tussen gelijk hebben en gelijk krijgen’.
- 22.
The polls had predicted a very close context, the first of several recent instances where the polls have been wrong.
- 23.
- 24.
A personal friend, owner of a construction company, faced with a stagnant Greek market relocated most of his company’s activities in building renovation to London. Finding that Greek producers of building furnishings and materials had excess capacity due to the deep recession, his firm is now exporting these goods to the UK. Brexit is causing him some concerns but he believes he will weather it.
- 25.
There is a huge number of proposals designed to ensure the long-term viability of the euro. These will be discussed in the last chapter of this volume.
- 26.
The proposal to tie the debt relief with GDP growth should be approached with caution: Greece needs private market access; what happens to the costs of accessing the market, if it looks that for one reason or another its growth is not sustained? Furthermore, long-term forecasting of debt sustainability is a business prone to large errors for which countries should not have to pay.
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Michalopoulos, C. (2017). The Greek Crisis: Muddling Through Revisited. In: Aid, Trade and Development. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-65861-2_9
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