Greek bailout must promote growth over austerity, says Brussels think-tank
A third EU bailout for Greece must prioritise economic growth over further austerity and institutional reforms, according to a new study by the Bruegel think-tank.
The paper ‘Reform momentum and its impact on Greek growth’ published on Wednesday by the influential Brussels-based institute argues that the failure of Greece’s two previous bailout programmes was caused as much by poor timing and composition of the reform plans, which focused on austerity rather than private sector-led growth, as by delays and reluctance to implement reforms by Greek authorities.
Although the paper concedes that “Greece’s implementation was far from perfect,” it adds that “neither the timing nor the composition of reform implementation in Greece was optimally geared towards a swift and strong return to growth”.
In the third programme, “growth should be prioritised not only on the ground that poverty has reached unacceptably high levels, but also on political economy grounds,” the paper concludes.
Negotiations between Greece and the EU on a new €86 billion bailout began earlier this week, with EU economics commissioner Pierre Moscovici stating that an agreement should be reached in the second half of August.
The Bruegel paper notes that reforms to improve the business environment in Greece were delayed until late 2012, by which time the country was into its fifth successive year of recession.
“Concluding that the Greek programme failed only or mostly because reforms were not implemented would be unfair to the Greek authorities,” the paper states, adding that “implementation was broadly on track in the early stages of the first Greek programme. However, it was not focussed enough on short and medium-term growth- enhancing reforms.”
The claim that Greece’s previous bailout packages focused too heavily on public sector job and wage cuts is not new.
The European Commission came under fire in June 2012 when the IMF accused it of refusing to restructure Greece’s debt burden sufficiently and of focusing almost exclusively on austerity measures rather than reforms that would drive economic growth.
Despite receiving two bailout programmes worth a total of €240 billion since 2010, the output of the Greek economy is 25 percent lower than it was in 2008 and is forecast to contract by a further 2-2.5 percent this year
The Bruegel paper states that Ireland was the most diligent of the eurozone’s bailout countries in following its programme with a “close to perfect implementation record”.
Meanwhile, Greece and Portugal both implemented around 80 percent of reforms demanded by their creditors. Over the course of two programmes and five years, it finds that Greece implemented a total of 166 reform measures compared to 189 over three years by Portugal.
The study also argues that Greece experienced two big implementation delays: in 2012, when consecutive elections were held in May and June; and in early 2014 when reform fatigue and the collapse of Antonis Samaras’ centre-right government majority in parliament hampered progress.
Despite pushing a series of laws required by creditors to begin bailout talks in recent weeks, over 30 MPs from Alexis Tsipras’ governing Syriza party have rebelled against the government. In an interview on Wednesday, Tsipras warned that, like his predecessors in 2012 and 2014, he would have to call early elections if they continue to oppose a bailout deal.
Tsipras has promised to hold a special congress on Syriza’s future as soon as the bailout deal is agreed.