Greece’s sad story in black and white

Amid the reams of documents that the International Monetary Fund published on Greece and its bailout programs last week, a small chart grabbed most of the attention. It compared Greece’s economic collapse to the Great Depression in the US and showed that our version has been longer and deeper.

The American ambassador to Athens, Geoffrey Pyatt, tweeted the graph, adding: “From new IMF report a reminder of the extraordinary blow to this NATO ally’s economy.” He was in good company as the chart soon became a social media meme, with everyone from analysts to laymen expressing horror at the extent of the economic devastation in Greece.

It is little surprise that this basic image of four colored lines and an axis should prove so captivating. It summed up in simple terms all the wrong turns and crushed hopes of the last few years.

It would be a shame, though, if it should detract from some of the other observations in the IMF’s reports, which are littered with illuminating summaries of recent Greek political and economic history. They are like technocratic short stories providing a window on our tortured existence since the crisis broke out in 2009.

“In the wake of the euro adoption, Greece enjoyed rapid but unsustainable income gains,” explains one extract, which delves into the origins of the crisis.

“The availability of easy financing following the euro adoption in 2001 allowed the public sector to borrow extensively… In addition… the private sector began to rapidly accumulate external debt. A massive fiscal impulse and private borrowing generated strong growth… [but] masked the reality of low investment, poor use of labor and capital, a large and inefficient public sector, rising vulnerabilities in the banking system, a cumbersome judicial and legal system, and widespread informality.”

The IMF documents are also clear about why Greece has been unable to exit the crisis almost seven years since it agreed its first bailout program.

“Greece entered the crisis with exceptionally large fiscal and external imbalances,” write the authors of one report. “Policies supported by its two previous adjustment programs helped to address these imbalances… Nonetheless, Greece has not managed to return to sustainable growth, with output having contracted by more than 25 percent since 2008, investment down by more than 60 percent, and unemployment at the highest level in the eurozone.”

Having established that the bailouts failed to trigger a comprehensive recovery, the IMF experts also explain how the process was undermined, sometimes by the programs themselves.

“Greece implemented important reforms early in the adjustment program,” they write in the Article IV report. “However, implementation of structural reforms has since slowed, and fiscal reforms have relied increasingly on one-off and ad-hoc adjustments. This reflects the inability of the political system to maintain popular and political support for the reform effort amid an increasingly frayed social and political fabric and a perception that the adjustment costs were unequally borne by some groups while others were protected.”

The reports also highlight the political turmoil Greece has gone through, with local politicians struggling to meet the rigors of the challenge. “Over the last six years, Greece had seven governments, including from the center right and center left, as well as technocratic, but none was able to successfully mobilize the broad political support necessary to complete the two previous Fund-supported programs,” the IMF highlights.

“Contrary to the assumption of broad political support for the program and the related positive confidence effects, political turbulence prevailed during the program period. Greece had six Prime Ministers and nine Finance Ministers (between 2012 and 2016), with some serving as little as a few weeks. The continued deep recession put a severe strain on the social fabric of the country.”

The content of the reports is also sobering when it comes to assessing what Greece has been left with after the efforts of recent years. “Public debt has continued to rise, reaching some 180 percent of GDP by end-2015, about 65 percent higher than its precrisis level,” reads one section of a report.

“Despite commitments in its adjustment program to undertake several rounds of structural reforms, Greece has not managed to fully regain competitiveness,” reads another. “In large part, this is due to a weak investment climate, not least because of insufficient progress in opening up the economy in the face of resistance from vested interests.”

Even the drastic fiscal adjustment (nearly 16 percent of GDP between 2010-15) has not had the desired result. “Although the wage bill declined somewhat… the problem migrated to the pension bill through early retirements,” write the IMF staff. “As a result of the sub-optimal policy mix, the pension system remains highly imbalanced, discretionary spending is compressed to unsustainable levels, and the tax burden is unevenly distributed… Thus, the current structure of public finances is fundamentally inefficient, unfair and ultimately socially unsustainable… denying lower-income and unemployed individuals access to the adequate and well-targeted social benefits and other essential public services they need and that are the norm elsewhere in the euro area.”

While the IMF has made a habit of highlighting Greece’s public debt problems, much to the chagrin of the eurozone lenders, the reports also underline the country’s growing private debt difficulties, another painful legacy of the crisis. “Despite multiple rounds of institutional reforms, tax collection rates have plummeted, while private sector debt to the state has reached 70 percent of GDP, the highest level in the euro area,” reads one section. “Around half of the population is in arrears to the state. The economic downturn was a key factor in the accumulation of arrears. But the high tax rates and punitive penalties and fines added to the debt. The problem has been exacerbated by an ineffective tax administration frequently subjected to political interference.”

Finally, there is an admission from the IMF that the program did not turn out as the Fund had expected and even fuelled some of the problems in Greece. “The short- and medium-term growth payoffs of reforms were in a highly optimistic range, fiscal multipliers may have been underestimated, and the possible negative feedback loops stemming from the rapidly rising insolvency problems in the private sector and the persistence of Grexit fears were not fully factored in. Also, political factors may have not been fully exogenous, as the protracted recession and the rapidly falling living standards may have undermined both political support for the program measures and investor confidence.”

So, there it is – spread over dozens of pages, in black and white – the sad story of Greece’s plight and the explanation for why the country is in its current quandary.