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Revisiting the Latvian and Greek Financial Crises: The Benefits of Front-Loading Fiscal Adjustment

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  • Anders Aslund

Abstract

This paper discusses why Greece has done so poorly in comparison with all other European Union countries since the onslaught of the global financial crisis in 2008. To show what was wrong with its fiscal adjustment, this paper compares Greece with the other European Union country that was hit be the most severe fiscal crisis, namely Latvia. The conclusion is that front-loaded fiscal adjustment works much better. Greek economic policy has been a popular topic among opinion writers, notably Nobel Prize winner and New York Times columnist Paul Krugman, who claimed that Greece suffered from austerity. Because of his prominence in the international public debate, I shall scrutinize his arguments on the Greek crisis. The paper also examines what policy the International Monetary Fund has pursued with regard to Greece, and how its views have been influenced by the debate and Greek economic developments. Finally, the paper assesses what lessons can be drawn from the contrasting experiences of Latvia and Greece. The conclusion is that a fiscal adjustment should be sufficient to resolve the crisis to restore confidence and that it should be as front-loaded as is practically and politically possible.

Suggested Citation

  • Anders Aslund, 2014. "Revisiting the Latvian and Greek Financial Crises: The Benefits of Front-Loading Fiscal Adjustment," CASE Network Studies and Analyses 0477, CASE-Center for Social and Economic Research.
  • Handle: RePEc:sec:cnstan:0477
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    References listed on IDEAS

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    1. International Monetary Fund, 2010. "Greece: Request for Stand-By Arrangement," IMF Staff Country Reports 2010/111, International Monetary Fund.
    2. World Bank, 2010. "Latvia - From Exuberance to Prudence : A Public Expenditure Review of Government Administration and the Social Sectors - Analytical Report," World Bank Publications - Reports 3009, The World Bank Group.
    3. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, vol. 103(3), pages 117-120, May.
    4. Olivier Blanchard & Mark Griffiths & Bertrand Gruss, 2013. "Boom, Bust, Recovery Forensics of the Latvia Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 325-388.
    5. [multiple or corporate authorship]., 2014. "CASE annual report 2013," LSE Research Online Documents on Economics 58040, London School of Economics and Political Science, LSE Library.
    6. International Monetary Fund, 2010. "Greece: Staff Report on Request for Stand-By Arrangement," IMF Staff Country Reports 2010/110, International Monetary Fund.
    7. World Bank, 2010. "Latvia - From Exuberance to Prudence : A Public Expenditure Review of Government Administration and the Social Sectors - Overview and Summary," World Bank Publications - Reports 3008, The World Bank Group.
    8. Olivier Blanchard & Mark Griffiths & Bertrand Gruss, 2013. "Boom, Bust, Recovery: Forensics of the Latvia Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(2 (Fall)), pages 325-388.
    9. Joshua Hall & Robert Lawson, 2009. "Economic Freedom and Peace," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(4), pages 445-446, December.
    10. International Monetary Fund, 2014. "Nigeria: Staff Report for the 2013 Article IV Consultation," IMF Staff Country Reports 2014/103, International Monetary Fund.
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    More about this item

    Keywords

    Macroeconomic policy; fiscal policy; fiscal adjustment; austerity; Greece; Latvia; International Monetary Fund;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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