Greece’s exit in 2022 from the European Union’s so-called “enhanced surveillance framework” for its economy ended a 12-year ordeal of pain for its populace. It returned to the country its sovereign freedom to, once more, determine its future.
The economic performance and policies of the Greek Republic have been closely monitored under the framework since 2018. The purpose, ostensibly, was to ensure it implemented reforms agreed to under three international bailouts from the European Union and the IMF between 2010 and 2015 – totaling more than €260 billion ($285 billion).
“A 12-year cycle that brought pain to citizens now closes,” Kyriakos Mitsotakis said in a statement. “Exiting the ‘enhanced surveillance framework’ means greater national leeway in our economic choices.”
In the framework’s implementation, the Greek people experienced multiple pension cuts, fiscal constraints, tax increases and banking controls following its first bailout in 2010. The Greek economy shrank 25% during the austerity-driven bailouts. Since entering the ‘framework’ in 2018, the country has relied solely on the financial markets for any of its funding needs.
The surveillance framework was intended to ensure the continued adoption of measures needed to address potential sources of economic difficulty and structural reforms necessary to support sustainable economic growth. Greece’s emergence from the enhanced surveillance also allowed the country to regain an “investment grade” credit rating.
Greece’s center-right government this month welcomed a credit rating upgrade by Moody’s, the last major ratings agency to lift junk status on government bonds that began 15 years ago during a severe debt crisis.
“(This) upgrade marks the closing of a great cycle for the Greek economy and certifies the country’s return to European normality,” Finance Minister Kostis Hatzidakis said, describing the action as “a success not only of the government, but of all Greeks.”
Moody’s announced the upgrade to Baa3 from Ba1 late Friday. It cited public finances that “have improved more quickly than we had expected” as a key factor in its decision.
The agency highlighted the government’s policy stance, institutional improvements and stable political environment, saying it expects Greece to “continue to run substantial primary surpluses which will steadily decrease its high debt burden.”
Lessons learned?
Greece’s austerity measures and the subsequent political fallout offers a meaningful case study of crisis management. There are important lessons the European Union should take from the framework and Greece’s experience of it. The experience, itself, should provide the EU a basis for what course to pursue, or perhaps avoid, in future financial crises within its orbit.
There are several lessons the European Union should glean from the “Greek experience.”
An increasing body of opinion now exists which accepts the premise that the basic rationale behind Greece’s three bailouts was either miscalculated or, perhaps badly misconceived. Harvard personalities like Alberto Alesina and others promoted the concept of “expansionary austerity.”
The Greek experience revealed that austerity measures were excessive. They provided neither a stimulatory effect on growth nor a sustainable path to recovery.
For the European Union, this raises critical issues regarding its policy paradigm. Is the European Union a transfer union that provides financial support across member states? On the other hand, is it merely a group of nation-states which must bear the weight of responsibility for their own economic stability, but does so by pursuing the German fiscal model? In other words, it emphasizes the need for the government to ensure that the free market produces results close to its potential but neither advocates for nor against a welfare state.
The Greek crisis brought these tensions into specific relief.
There were also rather pragmatic flaws in the conceptualization of the bailouts. Some fiscal and economic targets were excessively short-term, undermining the potential for a reasonable crisis exit. Other conditions were basically clumsy. A prime example is the second memorandum, which required Greece to fire 150,000 public servants within a specific time period. The question is – why 150,000?
It would seem the figure was purely a function of perceived needs of fiscal austerity. It was apparently shortsightedly aimed at reducing the budget deficit, without considering what skills the Greek public sector needed. Nor did it consider where those job cuts would be most effective or do the most damage. In that sense, it was quite clumsy.
There is at least one clear lesson for the European Union: reforms should not be imposed within such a narrow, rigid and fiscally confining manner. Rather than emphasizing short-term financial aims, the European Union should pursue a more circumspect approach – considering first how public services function – then decide upon how to improve their effectiveness.
The European Union (as well as Greece) has, of course, moved on since the bailouts. The bailouts and how they were conceived and implemented were a product of their time. Consider the aftermath of COVID-19. There was a quite different response with the European Recovery and Resilience Fund.
Vast sums of money were distributed to member states, particularly Greece. This reflected a fundamental shift in thinking about crisis management. Whether the European Union has truly learned the specific lessons of Greece’s experience, however, remains to be seen. It would appear that not all the lessons were learned.
Consider this headline from Politico, “Europe is on the brink of another financial crisis, new German Chancellor Merz warns.” It’s “definitely coming.”
