Bob Traa, the first International Monetary Fund representative in Greece after the country signed its first bailout program, has blamed the Greek political system for failing both to introduce the necessary reforms in the early stages of the program and to forge a degree of political consensus to deal with serious matters.
In this exclusive interview with Kathimerini, Traa, who was often subject to criticism for being a hardline technocrat, has much to say about the early bailout years. The Dutch official claims that vested interests resisted reforms in the product market which meant that the cost of adjustment fell on the shoulders of workers who saw their incomes drop.
He also accepts that mistakes were made in communicating the need for reforms in a better way to the public, while looking back on his years in Greece he admits he would have liked to see more of the country. “I missed much of the informal interaction with everyday Greek people that can make an extended visit to any country so interesting.”
Why did Greece end up with a serious debt problem? Whose fault was it? Did the Fund warn Greece? Was it ignored?
Let me start by stating clearly that all views expressed in this interview are my own, and do not represent the views of the IMF, its Executive Board, or management. Going to your question, unfortunately, my view is that Greece has a history of accumulating too much debt. Carmen Reinhart and Kenneth Rogoff in their book “This Time is Different” collected data to indicate that Greece has spent about half its time since the creation of the new republic in the 1820s with debt pressures. This suggests to me that the origin of this problem lies in fiscal policies in Greece because external conditions go up and down over such a long period. My view is that weak fiscal policies are related to the difficult politics in Greece. Political representatives cannot agree among themselves how to strengthen fiscal policies, like an orchestra where every player has a different piece of sheet music. Prior to the 2010 debt crisis, Greek public debt already hovered in the 90-100 percent range, which in my view was too high to begin with. Then the debt pressure interacted with the global recession, set off by the United States crisis in the financial markets. In my view, the combination of these two, on top of continuing weak fiscal management, tipped Greece into yet a new debt crisis.
In the published annual Article IV Consultations of the IMF with Greece, prior to 2009, one can read that the Fund had been concerned for some time with high debt and fiscal pressures. The language, based on my review, was often couched in terms of “risks to the outlook.” When I was asked to lead the 2009 Article IV Consultation with Greece, I wanted to sharpen the message and therefore I calculated an intertemporal public sector balance sheet. Since the public sector net worth was deeply negative, this showed that policies were truly unsustainable. If a private entity has such a balance sheet, it would likely be declared insolvent. Thus, in my view, IMF staff had expressed concern about economic developments in Greece in incremental terms.
Was it a mistake not to carry out a serious debt reduction at the beginning of the program?
I think that reasonable people can differ in their answer to this question because I don’t believe that there is one single answer. I personally do not favor debt forgiveness, unless it involves a humanitarian crisis – say a person is suddenly afflicted with a serious illness and loses income, leading to payment problems. The reason that I do not generally support debt forgiveness for countries is that it tackles a symptom, not the cause. Countries live forever, and thus they do not face the same types of incentives and constraints that persons or private entities do. The country problem needs to be fixed with sustained stronger fiscal policies, the symphony of politicians that play from the same sheet music, in harmony, without the incessant need for all to be the soloist. In my view, markets are remarkably good at recognizing stronger fiscal policies and will work with political systems that foster such policies, despite initial high debt. On the contrary, I believe that debt forgiveness can lower the incentives for better policies and basically says: “Don’t lend to us, for we can’t manage our finances well.”
Did you underestimate the capacity of the Greek political system and the civil service to deliver on the reforms?
It became clear to me after some point that Greece was struggling with the program and especially to implement reforms. From my perspective, I saw that the program of reforms was adapted, in stages, to deal with some of these constraints. I did not see this struggle as a value judgment or indictment, but rather as the realization of a concern, or a risk, that gradually transformed itself into a fact. Indeed, some contributing factors were even outside of Greece’s control, but they nevertheless added further challenges to an already difficult situation. I was worried about implementation capacity, however, and political resolve in particular, because, in my experience, countries that have difficulty implementing reforms need more time to get out of the economic downturn, and also tend to experience much deeper downturns as a result. Both factors can enlarge the financing needs of a country. These concerns can also transform themselves into facts. Lastly, although I heard complaints when I arrived in Greece that the civil service was not very good, that was not my experience. I thought that there were very good people working in government, but in my view, they were often afraid to say what they observed and did not have the freedom to fully use their talent. That is an issue of management (again, politics), not the quality of the staff.
Were the vested interests a big handicap in implementing the program?
In my view, vested interests resist change in all countries, and Greece is a normal country in this regard. I was impressed with the progress in labor market reforms during my stay in Greece. This took courage and determination, particularly from a labor-type government. My sense was that product market reforms went much slower, and I saw that as a big problem because if the two sides of the market, labor and capital, face reforms at a different pace, that affects power in the economy and hence income distribution, creating yet another challenge in the Greek programs. In the end, what I saw was that the price of resistance by vested interests was that Greece mainly adjusted by lowering income, not by boosting productivity. I see that as a very high price to pay indeed.
What was your biggest disappointment during your stay in Greece?
I would have liked to see more of the country and go about as I would have liked. Alas, the amount of work was so voluminous that I did not have much time to see Greece. And because the situation was truly challenging, I kept mostly to my house and the Bank of Greece offices and the Ministry of Finance. As a result, I missed much of the informal interaction with everyday Greek people that can make an extended visit to any country so interesting. At a technical level, the biggest disappointment was the functioning of politics and the judiciary as I observed them. I did not think either one was functioning well.
The most memorable moment?
There is not a single moment that sticks in my head, but rather a number of issues and events that came up during my stay in Athens. I made new friends with whom I keep in touch. I was also impressed by the string of visitors that would come to my office and over the course of many conversations taught me how things work and do not work in Greece. Many of these things I had no clue about until I lived in Greece. Finally, while in Athens, I reread Homer’s Iliad and Plato’s Republic, and I felt that I understood and appreciated these great books a lot better now that I saw the spirit, and the struggles, of Greece so up close and personal.
Was a mistake made in terms of the multiplier effect? Why was the program so front-loaded in terms of fiscal adjustments and not reforms?
In my assessment, the multiplier turned out much larger than I thought it would be at the beginning of the program. From my experience in Greece and elsewhere, I am now even more convinced that multipliers are “state-contingent.” This means that they are not constants, but rather depend on a variety of factors, including the external economic environment, whether adjustment is based mainly on revenue or expenditure (distributional effects), the quality of the political discussion and cohesion of society, whether the banking system is sound and can cushion some of the fiscal adjustment for the private sector, the internal flexibility of the economy, and the amount of financing juxtaposed against the misalignments that need to be addressed. In all these respects, my view is that Greece presented a “perfect storm” in that all the factors turned against the programs.
In my view, it is a popular misunderstanding that the program did not intend to have structural reforms from the beginning,but the immediate job was to address the fiscal deficit. In that very early debate, I saw the role of real economy reforms as essentially avoided by the political system perhaps because it would have been too much at once, and, from my perspective, no reforms were implemented at first. Perhaps the need for reforms could have been communicated alongside the fiscal adjustment in a better way. I did worry about communication to the public from day one and I feel that more should have been done in this regard, no matter how difficult the message sometimes might have been.
Regarding front-loading, my experience is that a very strong adjustment upfront can help to avert repeated calls for more measures later on, especially in the context of the unprecedented amounts of financing that were committed. In the event, my view is that the “perfect storm,” combined with continuous slippage in implementation, dragged out the need for repeated measures anyway.
Did you know early on that Greece would reach such a low GDP level?
As noted above, I initially thought that the multiplier would be more in line with traditional estimates, and not as big as it would turn out to be ex-post. Having said that, I had studied Greece’s (slow) demographics (which moderates growth) and I was rather on the cautious side when I discussed the growth outlook. This was re-enforced with experience on the ground where I had a closer view of developments and sentiments in the country than others that studied Greece from their respective home bases. Finally, I believe that Greece to this date underestimates how much damage that incorrect, or even misreported, data can do to an economy – the country essentially fooled itself by suggesting that the deficit was relatively small at first. This painful subject continuous to be a problem, and the damage to Greece’s credibility from repeated legal attacks on persons (notably Andreas Georgiou as ex-president of Greece’s statistical service ELSTAT) who tried to ascertain what the true data really were, has not been repaired. Concerns about data further added to the “perfect storm” described above.
How was the Single Property Tax (ENFIA) brought about?
The debate and practice of real estate taxation grew in part out of the problems with tax policy and tax administration that were evident from day one. Various Greek governments of different political orientations have tried to improve tax receipts, but with mixed results. Real estate can be a high-quality tax base, so the fact that successive governments reached for this instrument is not surprising, and the specifics of its implementation were largely homegrown. From what I can tell, proper cadasters of real property still have not been developed in Greece, so the infrastructure of this tax base remains incomplete. This should be addressed.
Was IMF micromanagement a mistake?
I don’t agree with the term micromanagement. In my experience, IMF staff take their jobs very seriously, as they should, given that the institution lends money that belongs to the global tax payers. So, my experience is that the staff monitors developments very closely – one cannot agree to lend 30 billion euros and then fall asleep at the wheel.
What were the biggest accomplishments of the program and what were its failures?
My view is that the Greek economy has made it through a very difficult crisis, it is alive and has a pulse, even though lots of work remains to be done. I believe it would have been possible that a debt default had exploded the economy with catastrophic consequences, much worse than what has happened, even though the recession was very grave, and bringing unemployment down will still take quite some time. I believe that it is not fully understood that Greece, as I like to put it, is passing through a “structural cycle.” The recession was not a normal “business cycle.” Structural cycles can take one or two decades to fully play out and there are many examples that bear this out (including from the Netherlands, Germany, and Sweden, to name just a few). So, I fervently hope that Greece continues to build on some significant achievements gained with very hard work, and finds a way to make improvements permanent, with stronger policies that are implemented step-by-step.
In my view, the biggest failure to me was in communications. I personally favor (and this admittedly reflects a cultural bias) saying things as one sees them, and having an open dialogue about the real challenges that invariable show up in such a complex case. I believe that people should also always be allowed to have different views, without fear of retribution. The focus should always be on finding better policies, in dialogue, to foster the public good. It does not help to blame people or individuals for difficult events or situations – people or individuals may see things from different angles that one is not always aware of. The focus should always be on discussion of policies, not persons. In my view, given the stress of the recession and the high political stakes, this more open communications strategy hardly prevailed.
If you could go back what would you do differently?
As noted above, I would hope that better communications could prevail. Everyone tries to do the best they can, but human endeavor is always a work in progress.