Why the Greek bailout failed

Financial Mirror (Cyprus) - - FRONT PAGE -

As the Greek cri­sis evolves, it is im­por­tant to un­der­stand that a suc­cess­ful struc­tural-ad­just­ment pro­gramme re­quires strong coun­try own­er­ship. Even if ne­go­tia­tors over­come the most re­cent stick­ing points, it will be dif­fi­cult to trust in their im­ple­men­ta­tion if the Greek peo­ple re­main un­con­vinced. That has cer­tainly been the ex­pe­ri­ence so far. And with­out struc­tural re­form, there is lit­tle chance that the Greek econ­omy will see sus­tained sta­bil­ity and growth – not least be­cause of­fi­cial lenders are un­will­ing to con­tinue ex­tend­ing an un­re­formed Greece sig­nif­i­cantly more money than it is asked to pay. (This has been the case through most of the cri­sis, even if one would never know it from the world press cov­er­age.)

Greece’s mem­ber­ship in the Euro­pean Union gives its cred­i­tors sig­nif­i­cant lever­age, but ev­i­dently not enough to change the fun­da­men­tal cal­cu­lus. Greece re­mains very much a sov­er­eign coun­try, not a sub-sov­er­eign state. The “troika” of cred­i­tors – the In­ter­na­tional Mon­e­tary Fund, the Euro­pean Cen­tral Bank, and the Euro­pean Com­mis­sion – sim­ply do not en­joy the kind of lever­age over Greece that, say, the Mu­nic­i­pal As­sis­tance Cor­po­ra­tion wielded over New York City when it teetered on the edge of bank­ruptcy in the mid1970s.

The best struc­tural-ad­just­ment pro­grammes are those in which the debtor coun­try’s gov­ern­ment pro­poses the pol­icy changes, and the IMF helps de­sign a be­spoke pro­gramme and pro­vides the po­lit­i­cal cover for its im­ple­men­ta­tion. Im­pos­ing them from the out­side is sim­ply not an ef­fec­tive op­tion. So, for re­forms to take hold, the Greek gov­ern­ment and its elec­torate must be­lieve in them.

That a coun­try must take own­er­ship of its re­form pro­gramme is not a new les­son. The IMF’s rocky re­la­tion­ship with Ukraine be­gan long be­fore the latest round of ne­go­ti­a­tions. Back in 2013, IMF staff wrote a sober­ing re­port on the or­gan­i­sa­tion’s ex­pe­ri­ence in the coun­try. Their con­clu­sion, in essence, was that the gov­ern­ment’s fail­ure to em­brace the re­form process fully all but guar­an­teed that its pro­gramme would not work.

If a gov­ern­ment is in­ca­pable of or un­in­ter­ested in mak­ing the needed ad­just­ments, the re­port ar­gued, the best op­tion is to drip money out as re­forms are im­ple­mented, as is now be­ing done in Greece. Un­for­tu­nately, that ap­proach has not proved ad­e­quate to over­come the chal­lenges there. Struc­tural-re­form con­di­tions of­ten tilt the bal­ance be­tween com­pet­ing do­mes­tic fac­tions, for bet­ter or for worse. If there is no will in­side the coun­try to main­tain the re­forms, they will quickly be un­der­mined.

Left-wing ide­o­logues have long viewed struc­tural-re­form pro­grammes with deep sus­pi­cion, ac­cus­ing in­ter­na­tional lenders like the IMF and the World Bank of be­ing cap­tured by ne­olib­eral mar­ket fun­da­men­tal­ists. This cri­tique has some truth in it, but is overblown.

To be sure, struc­tural re­forms of­ten favour poli­cies like labour-mar­ket flex­i­bil­ity. But one should not make the mis­take of view­ing these in­ter­ven­tions in black-and-white terms. Break­ing down dual labour mar­kets that are ex­clud­ing young work­ers (as they do in much of south­ern Europe, in­clud­ing Italy and, to some ex­tent, France) is very dif­fer­ent from mak­ing it eas­ier to fire all work­ers. Mak­ing pen­sion sys­tems sus­tain­able does not amount to mak­ing them stingier. Mak­ing tax sys­tems sim­pler and same as rais­ing all taxes.

Re­cently, op­po­nents of struc­tural re­form have put for­ward more ex­otic ob­jec­tions – most no­tably the prob­lem caused by de­fla­tion when pol­icy in­ter­est rates are at zero. If struc­tural re­forms sim­ply lower all wages and prices, it may in­deed be dif­fi­cult in the short-term to counter the drop in ag­gre­gate de­mand. But a sim­i­lar cri­tique could be made of any other change in pol­icy: if it is poorly de­signed, it will be coun­ter­pro­duc­tive. The truth is that the way for­ward in Europe re­quires achiev­ing greater pro­duc­tiv­ity.

The lessons from Greece and other un­suc­cess­ful bailout pro­grammes are sober­ing. If a debt bailout pro­gramme re­quires a whole­sale change in a coun­try’s eco­nomic, so­cial, and po­lit­i­cal model, the best course of ac­tion might be to write off the pri­vate losses, rather than pour in public money to cover them. In cases like Greece, the cred­i­tors’ pas­sion for struc­tural re­forms might be bet­ter di­rected at home – par­tic­u­larly to­ward im­prov­ing fi­nan­cial reg­u­la­tion.

The vast ma­jor­ity of Greeks want to stay in the EU. In an ideal world, of­fer­ing fi­nan­cial aid in ex­change for re­forms might help those in the coun­try who want to shape it into a mod­ern Euro­pean state. But given the dif­fi­culty Greece has had so far in mak­ing the nec­es­sary changes to reach that goal, it might be time to re­con­sider this ap­proach to the cri­sis com­pletely. In place of a pro­gramme pro­vid­ing the coun­try with fur­ther loans, it might make more sense to pro­vide out­right hu­man­i­tar­ian aid – re­gard­less of whether Greece re­mains fully within the eu­ro­zone.

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