Economics Assignment – Public Finance

The conduct of fiscal policy in Greece since the crisis.

The most recent financial and economic crisis hit the economy worldwide with Greece arguably being one of the worst effected countries in the European Union. Towards the end of 2009 Greece was in a recession and the countries budget deficit was 15.4% of Greece’s annual output[1]. The country was hit with two consecutive summer wildfires, which left large areas of the country destroyed and many injured or dead. This was in conjunction with, the ND political party loosing support and legitimacy due to scandals which involved corruption, bribery and racketeering. This paired with the swelling economic and financial crisis, the outlook did not look positive.

The authorities requested a three year SBA (stand-by arrangement), and in May 2010 Greece received a bailout of a 110 billion euro, from the ECB, European commission and IMF. This was given in the hope they would remain in the Eurozone, and correct their fiscal and internal imbalances. Fiscal adjustments were deemed necessary to reduce the deficit below 3% of the GDP and further necessitate taxes, reducing incomes and scaling down social security programs which were causing the largest overturns in the budget. This project was spanned over three years and expected Greece to return to growth, however we now know this overly optimistic prediction.

The initial program predicted a -2.0% growth rate in 2009, which would be followed by a low point in 2010 after which recovery would begin, with growth rates in 2010 of -4.0%, 2.6% in 2011 and 1.1% in 2012. According to the European Commission forecasts, depicts the recession was much deeper than originally foresaw. The growth rates were -3.1% in 2009, -4.9% in 2010, -7.1% in 2011, and -6.4% in 2012[2].

In 2012, the SBA was replaced with a new program, the fiscal consolidation and pension reform. The IMF[3] noted in a 2017 article, the fiscal consolidation and internal devaluation has been quite costly for society, as observed from in decreasing incomes and extremely high unemployment rates. However the economy has stabilized since then, with the introduction of new policy adjustment program reinforced by the European stability mechanism. Its main aims were to:

• To strengthen public finances.
• To restore the banking sectors.
• And to boost potential growth.

Fiscal Targets (Targets for general government balance and government debt)

With the introduction of the fiscal consolidation and pension reform, the government have legislated for fiscal, financial sector and structural reforms. Following this, with the help of its European partners Greece has returned to moderate growth in 2016. However Greece still inflicted with massive public debt, which in turn minimizes confidences in their economy. In a 2016 OCED report[4], they called for further debt relief stating if the mid-term fiscal targets laid out in 2015 with creditors were met more should be done to make the debt sustainable.