Abstract
The debate over how Greece has reached this point has been going on for many months. The question, as expected, has been and continues to be the subject of political conflict between Greek political parties, mainly between New Democracy, which was in charge of the country until the national elections on 4 October 2009, and PASOK, which took power immediately afterwards.
Overall consideration of the data shows that the country could have avoided appealing to the Support Mechanism if measures to reduce the deficit had been taken in time. This, unfortunately, did not happen, due to a series of failures, omissions and mistakes by the PASOK government, but also due to the strategic political choice of the then government, during the last quarter of the year, to ‘inflate’ the deficit.
The Greek economy has certainly displayed serious and lasting structural problems, such as limited competitiveness, a large public debt, corruption, the presence of multiple conflicting laws, an inept public sector and extensive state intervention in the economy. All the governments of the last 30 years are responsible for these weaknesses; they did not dare to promote the appropriate reforms in time. The New Democracy government, in which I participated, also bears some responsibility, of course, because it hesitated when applying the radical structural changes required to rationalise the Greek economy.
Given the consequences of the financial and credit crisis that began in 2008, almost all EU countries presented a high deficit and debt in 2009. Characteristically, in that period, the majority of European governments failed to accurately forecast deficit levels.
For example, in the Stability Programme submitted in early 2009, the Netherlands forecast a surplus of 1.2 % of GDP, while ultimately reaching a deficit of 5.4 %. Malta forecast a deficit of 1.5 %, but ultimately reached 3.8 %.
From 3.9 %, which was its original forecast, Portugal showed a deficit of 9.3 %. Similar failures were also recorded in Slovakia, with a deficit of 7.9 % instead of the forecasted 3 %, the Czech Republic with 5.8 % instead of the forecasted 1.6 %, Lithuania with 9.2 % instead of the forecasted 2.1 %, Poland with 7.2 % instead of 2.5 %, Britain with 11.4 % instead of 8.2 %, and Finland, with a deficit of 2.5 % compared to a forecasted surplus of 2.1 %.
Greece was no exception. The 2009 budget had been drafted with a forecast of 2.7 % growth. In November 2008, the European Commission itself had forecasted that the Greek economy would grow by 2.5 % in 2009. In the end, the growth rate was negative, at –2.3 %.
In January 2009, when I took over the Ministry of the Economy and Finance, the international crisis was at its peak. In March of 2009, then Prime Minister Kostas Karamanlis issued an invitation to the leaders of all political parties represented in Parliament. He asked for fruitless conflicts to be set aside and for a broader consensus to be achieved concerning the necessary reforms and measures. He also warned about the dangers that threatened the country due to the international crisis and its immense public debt.
As a government, we proposed a framework for agreement based on the following six points: following EU rules, dealing with public debt, gradually reducing the fiscal deficit with an emphasis on reducing expenditure, respect for the limits set by the public debt and the deficit, targeted actions for development and social protection, and restraint and responsibility on the part of the political parties and unions.
All political parties knew the state of the Greek economy before the elections of 4 October 2009. They had been informed that measures had to be taken. One of the main factors that led Greece to the Support Mechanism was the complete loss of its reliability and its defamation by its own government after the 2009 elections.
This tragic handling of the issue resulted in concern within international markets and a rise of Greece's borrowing spreads. In October 2009, the PASOK government inherited a deficit problem, which deteriorated due to the international crisis. Unfortunately for Greece, it managed to convert this deficit problem into the inability of the country to borrow, with the consequence of a forced appeal to the IMF.
This marked the start of a nightmarish period of recession, poverty and rapidly rising unemployment for Greece. The mixture of economic policies applied in the country, mainly the responsibility of the then government, but to a certain extent of its lenders as well, had catastrophic consequences for the economy and society.
Instead of placing emphasis on limiting the state and promoting structural reforms, Mr Papandreou's government, with the approval of the troika, chose to apply horizontal reductions in salaries and pensions, in parallel with an insufferable increase in taxation. These policies led to an unprecedented multi-annual recession, price increases, the drastic drop of consumption and the disintegration of the social fabric, with large parts of the population—employees, pensioners, SME owners and professionals—being marginalised. In addition, they caused irreparable damage to the market climate, leading to the postponement or cancellation of investment plans, the stalling of new jobs, and, in contrast, to an exponential growth in redundancies. The ‘national depression’ that consumers and entrepreneurs have been experiencing for two years is one of the main obstacles to any effort to overcome the crisis.
What is currently at stake is whether the Greek economy can overcome the recession, which is continuing in 2012 for the fifth straight year. A return to positive growth is a necessary prerequisite for the success of the ambitious fiscal objectives to which the country has committed itself. The production of primary surpluses and the gradual reduction of debt will become achievable only if the Greek economy warms up and revives with the restoration of liquidity, new investments and jobs. At the same time, reforms must be accelerated and completed, with the aim of reducing the state and improving public administration, reforming the country's production base and strengthening the competitiveness of Greek products and services abroad. This effort requires seriousness, responsibility and effectiveness. It requires a complete and clear government programme with a mandate from the Greek citizenry.