## The Logic and Fairness of Greece's Program

_IMF Blog, March 19, 2012_

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## Bibliographic details
- Authors: Olivier Blanchard
- Published: March 19, 2012

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### Bringing down the debt
- Greece needs a lower debt burden and improved economic competitiveness.
- Debt had to be restructured because sustained high growth was not going to come soon enough.
- The PSI (private sector involvement) deal—the largest ever negotiated write-down of public debt—has reduced the debt burden of every man, woman, and child in Greece by close to €10,000 on average.
- Foreign and official creditors provided economic space that Greece must use through sustained political commitment to implement fiscal, financial, and structural reforms.

### Fixing public finances
- The fiscal effort so far: the primary deficit came down from 10 percent to less than 3 percent.
- The reduction and rescheduling of debt will help cut interest payments but will not by itself fix the hole in public finances.
- Greece is still running a primary deficit and will soon need to run a primary surplus.
- Policy implications:
  - Much spending will need to be cut.
  - The program focuses on fairness in taxation to ensure richer people pay their fair share.

### Reducing the current account deficit
- Rationale:
  - No country can run a large current account deficit and borrow from the rest of the world forever.
  - As fiscal austerity cuts domestic demand, returning to growth requires relying more on foreign demand.
- Key facts:
  - Greece still has a very large current account deficit, at close to 10 percent of GDP, despite depressed output.
  - Greece’s exports amount to only about 14 percent of the goods it produces.
  - An improvement in competitiveness—or a real depreciation—of about 20 percent seems to be what is required.

### Strategy for improving competitiveness
- Two broad paths:
  - Become much more productive (preferred but slow and difficult).
  - Reduce wages and nonwage costs (quicker, especially under a common currency).
- Constraints and facts:
  - Productivity gaps exist across many sectors; necessary reforms involve changes in regulation and behavior and will take time.
  - In countries with flexible exchange rates depreciation can adjust relative wages; in the Eurozone, adjustment must come via lower nominal wages and prices.
  - Wages in Greece increased faster than productivity for years, compounding competitiveness problems.
  - Unit labor costs increased by over 35 percent during 2000-10, compared to just under 20 percent in the euro area.
- Program design and social considerations:
  - The best route would have been negotiation between social partners to reduce wages and prices, avoiding a long painful adjustment; this did not happen.
  - The program tries to accelerate adjustment while protecting the most vulnerable.
  - The adjustment must occur; the faster it happens, the less pain there will be.

### No viable alternatives
- Large state-financed infrastructure projects are unlikely to boost growth or improve fiscal and current accounts in the short term; they would worsen the fiscal deficit and delay adjustment.
- Leaving the Eurozone:
  - Euro exit followed by a sharp depreciation could achieve the needed relative wage and price decline faster.
  - However, Greece is part of the Eurozone; leaving would incur large costs from dislocations (collapse of the monetary and financial system, legal fights over contract conversion rates) that would be very, very large.

### Long climb
- The program addresses the two fundamental issues: high debt and low competitiveness.
- Success depends crucially on the government’s sustained and strong implementation of agreed reforms.
- Programs will need readjustment in response to unexpected events; risks remain exceptionally high (as Christine Lagarde has said, "the risks remain exceptionally high.").
- The program is fair in asking for shared sacrifices within Greece and between Greece and its creditors.

*Olivier Blanchard, March 19, 2012 — The Logic and Fairness of Greece's Program*

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## References

- [عربي](http://blog-montada.imf.org/?p=991)
- [program](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR031512B.htm)
- [deal](http://www.imf.org/external/np/sec/pr/2012/pr1253.htm)
- [vulnerable](http://www.imf.org/external/np/exr/facts/protect.htm)

_Source: https://www.imf.org/en/blogs/articles/2012/03/19/the-logic-and-fairness-of-greeces-program_