In 2009, Greece had accumulated, due to about thirty years of public financial mismanagement and wide-spread corruption, a staggering for its economy public debt of €299.5 billion at a debt to GDP ratio of 126%.
In May 2010, the European Union (EU), the European Central Bank (ECB), and the International Monetary Fund (IMF), known as the Troika, provided a three-year €110 billion loan (The Economic Adjustment Program for Greece) at relatively high interest rates of 5.5%, under the condition that Greece would implement a number of structural reforms and austerity measures, and would further enhance government revenues from the sale of public assets. The Troika was predicting that with this Program the Greek economy would bottom out in 2011, with a GDP decline in 2011 of 2.6%, and would start to grow after that with a growth of 1.1% in 2012, while unemployment would stabilize at about 15%.
Instead, in 2011 the Greek GDP declined by 6.9%, 111,000 Greek companies went bankrupt and the unemployment rate grew to 21.3%.
In March 2012, a Second Economic Adjustment Program for Greece was approved that included additional loans of €130 billion for the years 2012-2014 and a debt restructure agreement, under the condition that additional austerity measures would be implemented. The program was anchored on the objective of reaching a primary deficit of 1 percent of GDP in 2012 and a primary surplus of 4.5 per cent of GDP in 2014 " to be kept at such a high level for several years. The experience of other EU countries shows, however, that a primary surplus of such a magnitude is not disproportionate and is socially bearable".
The economy continued to contract. The unemployment rate peaked in June 2013 at 27.9% and at the end of 2013 the GDP had shrunk by about 24% from its peak in 2008.
During the first three quarters of 2014 Greece experienced a small positive GDP growth and a glimmer of hope was raised that a fragile recovery could be on the way.
Then came the party of SYRIZA, which, taking advantage of a weakness in the Greek constitution, forced elections and won them with the fiery, unrealistic, and contradictory rhetoric of its leader Alexis Tsipras. After SYRIZA's utter failure to deliver on its promises and a near-bankruptcy experience, Greece has secured the Eurozone's agreement for a third bailout.
What was the net effect of the first two bailouts? Greece avoided bankruptcy in the short term by replacing its old loans from the private sector with loans from the IMF and the EU (the taxpayers of the EU countries). The foreign banks (primarily German and French) avoided the consequences of their foolishness to feed a Greek bubble of unsustainable consumption. Greece started the chain of bailouts with a debt of €299.5 billion in 2009 and a debt to GDP ratio of 126%, and ended up in 2014 with a debt of €317.1 billion, and a debt to GDP ratio of 177%. The severe austerity measures sunk the country into a deep depression and drove it on a path of political instability that deepened the crisis even further. In 2015, to again avoid bankruptcy and exit from the Eurozone, Greece had to add another €86 billion to its debt, raising the debt to GDP ratio to 200%, with terms much harsher than those of the two previous bailouts. The Greek banks, due to their exposure to Greek government debt, the loss of many billions from nonperforming loans, and the flight of deposits, had to be recapitalized twice before 2015 at the tune of over €48 billion, and they will be provided under the third bailout another €25 billion, all to be paid by the Greek taxpayers.
It is clear that it cannot be claimed that the first two Economic Adjustment Programs for Greece have been a success and the Greek debt was sustainable under the terms of these programs. A debt sustainability analysis performed by the IMF and released on July 10, 2015, states that "About a year ago, if program policies had been implemented as agreed, no further debt relief would have been needed...", although the report recognizes that "Greece is expected to maintain primary surpluses for the next several decades of 3.5 percent of GDP. Few countries have managed to do so." Other Troika reports also attribute the failure of the bailout programs to Greek government failures "in the delivery of structural reforms and in the reform commitments".
There is no doubt that it is a shame that the Greek governments of the bailout period have failed to fully implement these structural reforms that could be implemented with available resources and in the time-frame of the bailout programs. Not only they are necessary in building an economy that would provide to the Greek people the standard of living of a developed country, but their implementation would also deprive the Troika of the argument that the programs failed, or their social cost is so heavy, solely because Greece failed in the delivery of reforms.
Although debt sustainability critically depends on economic recovery and growth, the IMF report does not present any analysis of the impact of a punitive austerity on the survival and growth of Greek businesses that are based on healthy business models, on businesses that are export oriented, and on the establishment of new businesses that are based on technological innovation. There is no discussion on how the severe austerity has contributed to the flight of many Greek businesses to other countries and on how this flight has affected employment, economic recovery, and debt sustainability. Since 2009, 11,000 export oriented small and medium size Greek businesses moved to Bulgaria to avoid the heavy taxation and an unpredictable business environment in Greece. As one of the businessmen who left Greece put it "Bulgaria gave me an opportunity to survive, which is difficult in Greece these days."
As was recently reported in the Greek newspaper Kathimerini, "23 percent of local firms have immediate plans to leave the country to enjoy greater security, stability and liquidity... Some estimates say one in every ten firms in northern Greece will move beyond the country's borders in the next few months."
On top of additional tax increases, the terms of the agreement for the third bailout require Greek businesses to prepay 100% of next year's taxes. How it can be demanded to prepay taxes on income that has not materialized, and especially in an environment of economic depression which makes this materialization questionable and the demand by itself contributes further to the depression?
Greece under the Troika faces the daunting task to pull itself out of a deep depression and also serve its external debt. Its membership in the Eurozone deprives her of the ability to use monetary policy, and the MOUs dictated by the Troika force upon her its fiscal policy, which is severely recessionary. The only hope left is that those reforms prescribed in the MOUs that have the potential to promote growth if implemented will deliver.
Some of these reforms can be implemented in the short term by legislative action and the commitment to make them to work. Greece bears full responsibility for the implementation of these reforms. However, other reforms require also investment and time. For example, "improving the education system as well as human capital formation through vocational education and training, developing R&D and innovation" also need investment and do not bear fruit overnight. For a country that is in a deep depression with over 25% of its workforce unemployed, and is under the constant threat of bankruptcy, the implementation of all these necessary reforms is problematic. Also, as history shows, it is difficult to maintain political stability, which is a prerequisite for the success of recovery and growth, under conditions of a prolonged depression.
The institutions (Troika) that severely limit the available options to a Greek government and also dictate policy have also to take responsibility for the results of the Economic Adjustment Programs. And because the debt cannot be sustained by continuously cutting salaries and pensions and increasing taxes, there is an urgent need for corrective measures that will allow for growth in both the sector of the economy that provides for the needs of the Greek people (food, shelter, education, security, health, etc.), as well as in the export sector that will provide for the service of the debt. And these two sectors are not independent, they feed into each other.
Otherwise for how long should Greece have to feed the Minotaur (the mythical beast that as punishment had to be fed every so many years by a number of Athenian maidens and youths)?
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