Most economists, and even many EU leaders, now think the Eurozone’s handling of the Greek Crisis is a tragedy of poor policy. Much of the pain that has been and will be felt by Greeks and other Europeans could have been avoided. The folly of the Eurozone’s choices on Greece was pointed out clearly in early analysis by Vox columnists right from the beginning. This is what Vox was set up to do.
VoxEU.org’s goal is to make it easier for leading economists to bring their insights and research to bear on topics that matter for today – “economics in service of society”, so to speak. A quote from Marco Pagano’s column of 15 May 2010 on the Greek Crisis sums it up: “… in emergencies such as the one we are currently experiencing, the way to escape the worst-case scenarios and find an exit strategy is to stick to clear-headed thinking.” The Greek Crisis is a classic case where research-based commentary by leading economists was greatly needed but little heeded. A full list of columns on the Greek Crisis is here.
Early warnings came from economists writing for VoxEU using nothing more than basic economic principles and a firm grasp of the facts. They showed that it was possible to foresee many of the problems that tripped up Eurozone policymakers in 2010, 2012 and again in 2015.
In 2008, Carmen Reinhart posted three warnings on Vox that history tells us clearly that severe banking crises are often followed by sovereign debt crises: "Eight hundred years of financial folly" published on 19 April 2008; "The economic and fiscal consequences of financial crises" published on 26 January 2009; and "From financial crash to debt crisis" published on 9 April 2010. How right she was.
Barry Eichengreen added specificity to this in January 2009 with his insightful column “Was the euro a mistake?”, noting: “What started as the Subprime Crisis in 2007 and morphed in the Global Credit Crisis in 2008 has become the Euro Crisis in 2009. Sober people are now contemplating whether a Eurozone member such as Greece might default on its debt.” He wrote that the alternative to default was “fiscal retrenchment, wage reductions, and assistance from the EU and the IMF for the cash-strapped government.”
He predicted – again dead on – that “[t]here will be demonstrations against the fiscal cuts and wage reductions. Politicians will lose support and governments will fall. The EU will resist providing financial assistance for its more troublesome members. But, ultimately, everyone will swallow hard and proceed … In the end, the EU will overcome its bailout aversion.” The farsightedness is astounding. In January 2009, few knew the Greeks had a problem serious enough to require debt restructuring.
Six months before the first Greek bailout
Charles Wyplosz and Paul De Grauwe also gave early warnings, both in December 2009.
14 December 2009, Wyplosz, “Greece: The party is over”
Wyplosz recommended: “The renewed financial market pressure should be taken as a signal that the party is over. It is time for Greece to adopt two simultaneous measures:
Immediate deep spending cuts;
Reform of its budgetary process to credibly enforce discipline.
When he wrote this, this Greek government bond spread over Germany’s was 2.3 percentage points.
15 December 2009, De Grauwe, “Greece: The start of a systemic crisis of the Eurozone?”
De Grauwe used logic and history to explain why the Eurozone would bail out Greece eventually. “The other Eurozone governments are also very likely to bail out Greece out of pure self-interest. There are two reasons for this.
First, a significant part of Greek bonds are held by financial institutions in Eurozone countries.
These institutions are likely to pressure their governments to come to their rescue.
Second, and more importantly, a failure to bail out Greece would trigger contagious effects in sovereign bond markets of the Eurozone.
… I conclude that the Eurozone governments are condemned to intervene and to rescue the government of a member country hit by a sovereign debt crisis.” At the time, a bailout was unthinkable – many thought it illegal. Six months later, De Grauwe proved to be right.
In early 2010, Wyplosz put his finger on the real hostage that was held by Greece’s problems. “The real worry is the banking system. … Many governments have simply not pushed their banks to straighten up their accounts, and they are now discovering some of the unforeseen consequences of supervisory forbearance.”1
Explaining why the first bailout would fail
After long claiming they would never bail out Greece, Eurozone leaders did exactly that in May 2010. The bailout package was a huge failure by any measure. Three months later, Greek spreads were back to pre-bailout levels. Worse still, the failure opened the contagion floodgates and set the monetary union on a five-year slippery slope that lead to today’s emergency meeting. This is not hindsight; Vox columnists spotted the flaws immediately.
The first sentence in Wyplosz’s 3 May 2010 column, "And now? A dark scenario", was: “The plan will not work.”
But even more striking than his prediction was his analysis:
“The drop in public spending … will provoke a profound recession that will deepen the deficit. This, along with the social and political impact of the crisis, will undoubtedly prevent the Greek government from delivering on its commitments.“
He then predicts the exact slippery-slope mechanism that has bedevilled the Eurozone ever since.
“The EU governments, facing another loss of face (after letting the IMF into the den), may be tempted by forbearance. If they do, they will eventually to put in more money. If they don’t, the Greek government will default, precisely what the whole plan aims at avoiding.”
In closing, he points out that the situation could have been avoided, if EU leaders had faced up to the facts earlier. “It would have been very easy to let Greece go straight to the IMF months ago and reschedule its debt with the IMF’s assistance. This would have been a partial default, and the haircut could have been quite small. Most banks that are exposed to the Greek debt should have been able to withstand such losses. With a grace period of, say, three years, Greece would have had the breathing space that the latest plan tries so hard to organise, but much simpler and much, much less dangerous.”
Barry Eichengreen (2010) provided another penetrating insight on 7 May 2010 – just before the Eurozone finance ministers agreed to set up the European Stabilisation Fund.
“European leaders and the IMF have badly bungled their efforts to stabilise Europe’s financial markets. They have one last chance, but success will require a radical change in mindset.”
He ended with a stark call to action: “It’s not a pretty picture. The IMF botched its rescue. The ECB hesitates to erect the necessary ring-fence around Greece. Portuguese and Spanish policymakers underestimate the gravity of their position. German leaders are in denial. But although it may be too late for Greece, it is still not too late for Europe. That said, a solution will require everyone to wake up.”
Completing the Eurozone rescue
The rushed, emergency measures taken by Eurozone leaders in May 2010 were half measures, as many Vox writers pointed out. One of the first to lay out the economic logic of further steps was, once again, Charles Wyplosz.
“The debt crisis is unlikely to go away and the monetary union will have to be reconstructed to re-establish the principle of collective fiscal discipline.”2
This foreshadowed the rather massive increases on sovereignty-sharing that the Eurozone adopted over the coming years.
In June 2010, Daniel Gros, Luc Laeven and I gathered a dozen world-renowned economists to contribute to a VoxEU.org eBook that was to answer the simple question: What more needs to be done? The eBook Completing the Eurozone rescue: What more needs to be done? (Baldwin, Gros and Laeven 2010), which has been downloaded over 60,000 times, argued that the Eurozone Crisis was not over. The May 2010 package was a palliative not a cure. Indeed, none of the underlying causes of the crisis was addressed.
Policymakers did nothing, but the markets did. As Wyplosz wrote in December 2010 in his aptly titled column "The Eurozone slides into a vicious cycle", the May package “was the first step down the slippery slope.” He remarked: “It is amazing to observe European policymakers, having taken the wrong turn earlier this year, persevere in piling one mistake upon another. … they have brought the Eurozone to the point where it is contemplating a disaster of historical proportions.”
Here is his analysis of what should have been done: “First Greece was told not to go to the IMF since fellow governments would help out with a generous loan of €10 or €20 billion. The promise was, in part, designed to impress the financial markets and to discourage them from pressing on the embattled Greek government.
“The markets laughed. The amount was laughable indeed and the promise was an encouragement to step up the speculative attack in anticipation of even higher profits.
"The amount was raised, step by step, and Greece was finally told to go to the IMF, but not alone. A joint IMF-EU rescue operation eventually lined up €110 billion and a new fund of no less than €750 billion was cobbled together to really impress the markets.”
He posits that all this was in the interest of political expediency: “In one go, the no-bailout clause was wiped out and the ECB lost an important chunk of credibility. The reason? To avoid at all cost contagious runs on other countries’ public debts and preclude any threat of sovereign default. But, alas, that didn’t work.”
The drumbeat of a failed rescue continued in 2011. Uri Dadush and Bennett Stancil in their column, "Is the euro rescue succeeding?", argued that: “Until leaders deal with the core issues – the periphery’s lost competitiveness and misaligned economic structures – Europe’s rescue will ultimately fail.”
Zsolt Darvas, Jean Pisani-Ferry and André Sapir clearly set out what needed to be done in their February 2011 column "A comprehensive solution for the euro crisis". A complete plan had to do three things: clean up banks, reduce the public debt in Greece, and foster adjustment and growth in peripheral countries.
The first ‘rescue repairs’ come up short
In January 2011, EZ leaders set up the European Financial Stabilisation Mechanism (EFSM) to deal with future crises (remember that only Greece had been bailed out at this point). This lead to a very temporary reduction on interest rate spreads. Over the next few months they struggled to improve the plan, but to no avail.
As Daniel Gros wrote in his March 2011 column, "Pact for the euro: Tough talk, soft conditions?", “…the package is merely the next step down the slippery slope of EU taxpayers sharing the burden with Greek taxpayers.”
“On 11 March 2011, the European Council has once more decided to kick the can down the road. Once again they have failed to think through the consequences of their actions from the perspective of the markets. They failed to think through what this weekend’s decision will mean for the options they will face in the future.
“Having come this far it becomes very difficult to change direction. All our leaders can do now is to hope that the road will take a decisive turn for the better; and that the new ‘Pact for the euro’ helps them avoid future accidents.”
Ramon Marimon put forth a similar judgement in his column, "A credible economic order for the Eurozone?", posted on 17 March 2011: “…the current package being discussed fails to draw a line under this crisis. While the proposal is reasonable, it is not credible.”
The road to debt restructuring and its failure
By the spring of 2011 it was clear that half measures were making things worse. What had been obvious to many Vox columnists in 2010 was becoming obvious to policymakers in 2011. Greece’s debt was not sustainable – it would never be paid back in full.
Paolo Manasse used clear economic logic and basic facts to show that restructuring was the only way forward and was, in any case, inevitable ("Greece, the unbearable heaviness of debt", 24 May 2011): “A new loan may perhaps buy some extra time for Greece, but it would hardly change the substance of things. At present, the only alternative to debt restructuring, ruling out an inflation bout that would require leaving the euro, seems to be a strong, albeit unlikely, rebound in growth.”
Jeffrey Frankel provided a post-mortem of the botched bailout in his column, "The Greek debt crisis: The ECB’s three big mistakes" (16 May 2011). The three mistakes were (i) admitting Greece to the Eurozone, (ii) allowing interest rate spreads on sovereign bonds issued by Greece to fall to almost zero in the 2000s, and (iii) failing to send Greece to the IMF early in the crisis.
Kai Konrad and Holger Zschäpitz pointed out more system failures in their column, "The future of the Eurozone" (10 June 2011), and Hans-Werner Sinn made the point forcefully in his 26 July 2011 column, "Greek tragedy".
By the spring of 2011, interest spreads for Greece, Spain and Portugual were up to levels that triggered the first Greek bailout. The Greek Crisis, in short, was now the Eurozone Crisis. The number of related columns on Vox blossomed. To keep this column to a manageable length, I’ll simply list the key columns from mid 2011 to 2015.
The only exception is a column, again by Charles Wyposz, in 2013 that is likely to prove prescient in the very near future and helps cast the Greek Crisis as a problem for both those who borrowed foolishly and those who lent foolishly. On 23 September 2013, in his column "Next Greek package: Dangers for the EZ", he made a point that would seem to apply equally well in June 2015: “Greece is in dire straits; it will need more debt relief … Greece is suffering because northern EZ countries kicked the can down the road by forcing crisis countries to borrow rather than restructure their debts early on. It is time for the ‘generous’ lenders to face the consequences of their short-sightedness. The bad news that Chancellor Merkel ought to break now to her people is that official debt restructuring is inevitable.”
Key Vox columns on the Greek Crisis with their abstracts, 2009 to 2014
Greece: The party is over, Charles Wyplosz 14 December 2009.
Greece’s public debt is in turmoil. This column says that the country is nowhere near defaulting, but the Greek government should heed the financial markets’ warning and end three decades of fiscal profligacy. It suggests that Greece adopt immediate deep spending cuts and reform its budgetary process to credibly enforce discipline.
Greece: The start of a systemic crisis of the Eurozone?, Paul De Grauwe 15 December 2009 (reposted 11 May 2010).
This column, first published 15 December 2009, shows the main outlines of the crisis were clear months ago and suggests actions that – had they been taken early – would have mitigated problems facing the Eurozone today. The column concludes: "All this leads to the conclusion that the Eurozone governments should make clear where they stand on this issue. Not doing so implies that each time one member country gets into financial problems the future of the system is put into doubt." If only those words had been heeded months ago.
The Eurozone debt crisis: Facts and myths, Charles Wyplosz 09 February 2010.
The latest turn in the global financial crisis has ensnared the debt of some European nations. The fact that these nations are members of a monetary union has generated much confused comment. Here one the world’s leading experts on Eurozone monetary and financial matters sets the record straight, debunking 10 myths and setting forth 10 frequently overlooked facts.
Varieties of internal devaluation: Peripheral Europe in the Argentine mirror, Augusto de la Torre, Eduardo Levy Yeyati and Sergio Schmukler 06 March 2010.
The fiscal crisis in several European countries has led many commentators to suggest novel solutions, including a holiday from the euro. This column examines the much-cited example of Argentina and argues that such ideas look better on paper than in practice. What these countries need is a “good old bailout” – conditional on “getting the house in order”.
“The only alternative to a costly internal devaluation under the euro system still is – as was the case in Argentina –a good old devaluation to break permanently free from the euro peg, an avenue that at this stage looks both politically unrealistic and economically suboptimal compared to a good old bailout, sufficient to prevent the exit from the euro but conditioned on getting the house in order.”
A stitch in time saves twenty-seven, Giancarlo Corsetti and Harold James 12 April 2010.
The fiscal crises in some EU countries have put considerable strain on the region. This column argues that the solution requires a credible demonstration of political will from its political leaders. It suggests a voluntary commitment to support struggling governments with financial means provided at a penalty rate and against a clearly defined spending reduction programme.
The European experience with large fiscal adjustments, Daniel Gros and Cinzia Alcidi 28 April 2010.
The key question for European policymakers and financial markets alike is now whether ‘Greece can make it’. This column reviews past episodes and suggests such huge fiscal adjustments have been possible in the past, but take at least 5 years and the debt to GDP ratio keeps on increasing during the process.
And now? A dark scenario, Charles Wyplosz 03 May 2010
Eurozone members, the IMF, and the ECB have announced significant commitments to assist debt-laden Greece. This column outlines a dark scenario in which the plan fails and contagion spreads, necessitating further assistance to other indebted Eurozone governments. That could risk high inflation or debt problems for the entire Eurozone.
European Stabilisation Mechanism: Promises, realities and principles, Charles Wyplosz 12 May 2010.
Markets liked the European Stabilisation Mechanism but a closer look shows that the money is announced but not available. When markets realise this, they may do to Portugal and Spain what they did to Greece. Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements. The debt crisis is unlikely to go away and the monetary union will have to be reconstructed to re-establish the principle of collective fiscal discipline.
New eBook: Completing the Eurozone rescue: What more needs to be done?, Richard Baldwin and Daniel Gros 17 June 2010.
The euro’s crisis is not over. Measures taken in May were critical but they were palliatives not a cure. The Eurozone rescue needs to be completed. This column introduces a new Vox eBook that gathers the thinking of a dozen leading economists on what more needs to be done.
The Eurozone slides into a vicious cycle, Charles Wyplosz 03 December 2010.
The Eurozone crisis is not over. This column argues that the bailout of Greece and the €750 billion Special Purpose Vehicle set up in May 2010 was the first step down the slippery slope. The first and only possible remedy is to reconstruct the no-bailout clause and let markets discipline governments; the EU has proven that it cannot.
Is the euro rescue succeeding?, Uri Dadush and Bennett Stancil February 6, 2011.
The recent fiscal problems in Greece, Ireland, Italy, Portugal, and Spain have left the single currency in need of rescue. But this column argues that this is only part of the problem. Until leaders deal with the core issues – the periphery’s lost competitiveness and misaligned economic structures – Europe’s rescue will ultimately fail.
A comprehensive solution for the euro crisis, Zsolt Darvas, Jean Pisani-Ferry and André Sapir 28 February 2011.
It is well over a year since concerns over debt sustainability in Greece began spilling out to the rest of the Eurozone. The crisis continues. This column presents a three-part plan aiming to clean up the banks, reduce Greece’s public debt, and foster growth in the peripheral economies.
Pact for the euro: Tough talk, soft conditions?, Daniel Gros March 14, 2011.
This weekend, EU leaders agreed to the outlines of a new mechanism to deal with Eurozone debt problems after the current mechanism expires in 2013. The mechanism is a continuation in the leaders’ preference for “tough talk and soft conditions”. This column argues that the package is merely the next step down the slippery slope of EU taxpayers sharing the burden with Greek taxpayers.
A credible economic order for the Eurozone?, Ramon Marimon March 17, 2011.
Europe’s history is littered with crises. This column argues that the latest Eurozone crisis is the latest in a long line out of which the region has to evolve. The problem, it says, is that the current package being discussed fails to draw a line under this crisis. While the proposal is reasonable, it is not credible.
The R word, Charles Wyplosz April 29, 2011.
Restructuring is a taboo word in Brussels. This column argues that debt restructuring may be a viable option for some of the countries on Europe’s highly indebted periphery.
The Greek debt crisis: The ECB’s three big mistakes, Jeffrey Frankel May 16, 2011.
It is a year since Greece was bailed out by EU and IMF and there are many who label it a failure. This column says that while there is plenty of blame to go around, there were three big mistakes made by the European Central Bank: The decision in 2000 to admit Greece in the Eurozone.
Greece, the unbearable heaviness of debt, Paolo Manasse May 24, 2011.
For a long time analysts have been arguing about whether Greece will default on part of its debt – leaving its creditors to take a “haircut”. This column argues that this prospect is becoming more and more likely.
The future of the Eurozone, Kai A Konrad and Holger Zschäpitz 10 June 2011.
A year after the rescue of Greece, the Eurozone is still on life support. This column argues that Europe’s policymakers have got their strategy desperately wrong.
Greece through the rear-view mirror, Miranda Xafa and Domingo Cavallo July 23, 2011.
Thursday's EU summit in Brussels announced new plans for tackling the Eurozone crisis. This column says that the agreement reached on a new financing package for Greece, including some debt relief, will not reduce Greece's debt to sustainable levels. It suggests additional financial support contingent on larger haircuts.
Greek tragedy Hans-Werner Sinn July 26, 2011.
The Eurozone crisis is far from over. Greece still needs substantial reforms if it is to regain competitiveness and survive without support. This column argues that the pain of doing so will be unbearable for Greek society. It claims that the best solution for all concerned is if Greece temporarily leaves the euro.
An institutional bailout plan for Greece Elias Papaioannou and Dimitri Vayanos August 13, 2011.
Greece’s bailout plan – agreed more than a year ago – is failing to meet some of its key objectives. This column argues that the ECB, EU, and IMF should be wary of focusing on short-term goals and instead strive for an institutional framework that can drive the long-term growth of the Greek economy.
The Greek revolt: Good news for Europe Charles Wyplosz November 4, 2011.
Greek Prime Minister Papandreou made a stand this week. Even though he was backed down, this column argues that he did the EZ a favour by providing an opportunity to change course. One way or another, a disorderly Greek default is in the cards with its attendant contagion. At that point a real solution is inevitable – one that requires EZ leaders and the ECB to play on the same side with credible rules for all.
The logic and fairness of Greece’s programme Olivier Blanchard March 23, 2012
The Greek package has cheered up markets. In this column, the IMF’s Chief Economist Olivier Blanchard argues that the programme deals squarely with the two most fundamental issues facing Greece – high debt and low competitiveness. And it is also fair, asking for sacrifices of both Greece and its creditors.
Greek exit from the Eurozone: Neither inevitable nor desirable Avinash Persaud May 30, 2012.
Should Greece leave the Eurozone? This column argues that aggressive restructuring of Greek debt within the Eurozone, rather than departure, is the best option.
Fiscal discipline in the monetary union Charles Wyplosz November 26, 2012.
For the euro to survive, the recession must be halted without piling on more debt. This column argues that the unpalatable conclusion is that public debts must be written down. The massive moral hazard problem this will cause must be dealt with by making sure that public debts will never again be allowed to grow to unsustainable levels. To this end, decentralised US-style fiscal discipline is needed.
Tax evasion and reforms in Greece Athanasios O. Tagkalakis December 2, 2014
Greece is currently implementing a fiscal adjustment programme aimed at tackling tax evasion. This column discusses the impact of recent tax administration reforms on tax compliance in Greece. The intensification of audits, enforcement of penalties, and efficient collection of past debts can induce tax compliance and raise the collected revenue. These findings could contribute to the successful conclusion of the fiscal consolidation programme.
Debt-for-equity swaps offer Greece a better way Peter Allen, Barry Eichengreen and Gary Evans February 28, 2014
Greece needs debt reduction. This column argues that instead of offering another lengthening of maturities and reduction in interest rates, Eurozone leaders should seize the occasion and implement debt-for-equity swaps that would encourage foreign investment, speed privatisation and jumpstart the Greek economy.
Tax evasion and austerity-plan failure Francesco Pappadà and Yanos Zylberberg, February 3, 2014
Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.
Privatisation and debt: Lessons from Greece’s fiasco Paolo Manasse January 31, 2014
Sales of state-owned assets have been proposed as a way for highly-indebted countries to ease the pain of fiscal consolidation. This column argues that, despite the potential merits of privatisation in terms of long-run efficiency, in practice it is unlikely to improve short-run fiscal solvency. Since governments rarely alienate control rights, the efficiency gains from privatisations are often small. Moreover, financial markets may not fully reflect these gains – particularly during a financial crisis. The implication is that the Troika policy of linking financial assistance to privatisations is inappropriate and self-defeating.
2 Charles Wyplosz 12 May 2010, European Stabilisation Mechanism: Promises, realities and principles.