George J. Papaioannou
Zarb School of Business, Hofstra University
When in May 2010, the Greek government agreed to a bailout plan drawn by the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Union (EU) – also nicknamed Troika – it was expected that by 2012 the government budget would show a small positive primary surplus, the GDP would start to grow again and Greece would have returned to the public debt markets. With the year 2012 almost upon us, none of these expectations seem realizable. GDP is expected to decline in 2012 and Greece is not expected to return to the debt markets before 2020. The government’s recent projections show a small primary surplus but its realization is precarious. Debt has risen from 127% of GDP in 2009 to over 160% at the end of 2011 and is projected to stay way above the original projections in the Medium Term Fiscal Strategy (MTFS) unless there is a severe restructuring plan.
So the question is: what went wrong? A case can be made that the expectations were overoptimistic and the medicine prescribed to Greece was too strong. Common to both explanations was the reliance on a set of assumptions that were not present in the case of the Greek economy and, more critically, the case of Greek politics and socio-economic culture.