Macroeconomic Policy Lessons for Greece from the Debt Crisis

This paper studies the Greek economy in the aftermath of the 2007-8 global crisis looking for barriers to, and engines of, growth. We use a micro-founded macroeconomic model calibrated to Greece. We first study the years of the debt crisis between 2008 and 2016 and then the recent covid-19 pandemic. Departing from 2008, our simulations show that the adopted economic ad-justment 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 23% 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 13%, while the deterioration in property rights accounts for another 10%. Counterfactual simulations, on the other hand, show that this loss could have been around 10% 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, we show that, 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. Finally, departing from 2019, we quantify the impact of the covid-19 pandemic under various policy scenaria. A loss of around 8:5% of GDP and a sharp jump of public debt seem to be unavoidable during 2020 but, like in the case of the debt crisis, the duration of the new crisis depends crucially on the policy mix chosen.