Austerity, Assistance and Institutions: Lessons from the Greek Sovereign Debt Crisis

Abstract

This paper studies the Greek sovereign debt crisis in the aftermath of the 2007-8 global financial crisis looking for barriers to, and engines of, growth. The vehicle is a calibrated medium-scale micro-founded macroeconomic model. Departing from 2008, our simulations show that the adopted economic adjustment program (the fiscal austerity mix combined with the fiscal and monetary assistance provided by the EU, ECB and IMF), jointly with the observed deterioration in institutional quality (the degree of protection of property rights) can explain most (around 22% of GDP) of the cumulative loss in GDP in the data (around 26% of GDP) between 2008 and 2016. In particular, the economic adjustment program can explain a fall of around 12%, while the deterioration in property rights accounts for another 10%. Counterfactual simulations, on the other hand, show that this loss could have been around 9% only, if the country had followed a different fiscal policy mix; if the degree of product marker liberalization was closer to that in the core euro zone countries; and, above all, if institutional quality in Greece had simply remained at its pre-crisis level. On the other hand, in the absence of the official fiscal bailouts, the depression would be much deeper, while, the accommodative role played by the quantitative policies of the ECB has been vital to the Greek economy. These results can be useful in the face of the ongoing covid-19 crisis.