07 August 2017

Financial Times: Lessons for the eurozone from Greece’s painful crisis years

Greece is finally growing again. But it has been arguably the eurozone’s greatest failure. Catapulted into a debt crisis with a 15 per cent government spending deficit in 2009, the country suffered eight years of economic contraction. Can Europe learn from the country’s painful experience?

A first lesson is to reform at the top of the cycle. Greece had to adjust in recession because it failed to do so in its pre-crisis boom. Reforms should always be adopted in times of growth, when people are confident and losers can be compensated.

The second lesson is to use a balanced economic policy mix. There must be breathing space from restrictive policies.

A third lesson is to address financial fragmentation. The banks were brought down by an illiquid or insolvent government — a situation aggravated by capital flight. Companies tried to offset the prohibitive cost of capital by suppressing wages, while productivity was shrinking through disinvestment. This is no way to run a monetary union. A true banking union would limit banks-to-sovereign contagion. A joint deposit insurance scheme would assure depositors that Europe was behind them.

Fourth, expand non-bank financing.

Fifth, deal with non-performing loans. Action to tackle Greek NPLs was too little, too late.

Sixth, focus on real not just nominal convergence.

Finally, keep sight of the big picture. Greece’s greatest challenge is to shift to export-oriented growth, raise productivity, increase labour participation and improve its dismal, ageing demographic trend. The ageing eurozone must also address its slowing productivity growth. It must focus on real convergence, devising adjustment strategies that do not deprive the eurozone periphery of their best and brightest.

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