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Greece’s policy mix: austerity failure and unfairness
In the 1980s, Europeans and Americans started to get hooked on debt to afford their lifestyle. Newly available bank loans, a wide range of mortgages and credit cards suddenly became a necessity. At that time Robert Dall, a mortgage trader at Salomon Brothers, started to mix two or more types of mortgages together and re-sell them in the global financial markets.
In an interview with BBC Panorama in 2015, Dall pointed out that “some mortgages were real and others were phoney” and “the market did not understand the difference between them”. These are the main financial products that have turned the banking sector into money-making machines and, decades later, turned the global economy upside down in 2007 when millions of “phoney” mortgages and consumer loans were left unpaid.
Along with all European economies, Greece was engulfed in the crisis in early 2008. Greek politicians, in the context of the worst global contraction since the Great Depression, had to accept a public austerity program imposed by the European Commission, the European Central Bank, and the International Monetary Fund (Troika). Under the mantra of “expansionary austerity policies”, the program has depressed the economy instead of leading it to economic growth. As widely reported in the media, the hard-line austerity plan adopted has proven to be worse than the global contraction of 2008. Greece’s GDP (Gross Domestic Product) collapsed by 25% and unemployment rates shot up and have yet to recover to pre-2007 levels.
Additionally, the austerity packages forced upon the Greek population have brought large redistributive effects, worth billions of euros. Under its most recent format, the Greek government is implementing redistributive measures ranking high in terms of unfairness. Greece’s value added tax rate, for example, which accounts for 21.2% of the tax revenue, was recently increased by the government in an attempt to collect an extra 5 billion euros from consumers. It is widely acknowledged in the economics profession that an increase in VAT is more likely to hurt middle and lower income households because they end up spending a higher percentage of their income on more expensive food. That’s the regressive nature of the VAT. Additionally, it will reduce overall consumption by at least 5 billion euros.
In line with the recessionary effects of the Troika policies, MarketLine has been analysing a number of industries affected by the crisis in Greece and their struggle to catch up with pre-crisis levels of activity. Our analysis clearly reviews that a gradual fiscal consolidation would have worked better than any attempt to consolidate the debt during the downturn of the economy.
Industries would have contracted, but not to the same extent imposed by the full recessionary package. In a press release, the IMF’s managing director, Christine Lagarde, has already acknowledged that a “significant debt relief, well beyond what has been considered so far” will be needed to restore the fiscal and growth sustainability of the Greece economy. It is a clear indication that the IMF has lost faith in austerity programs because they do not generate the expected fiscal saving necessary to lower the levels of government debt.