Future eurozone bailout programs should aim more at restoring economic growth rather than focusing mainly on fiscal tightening, and their length should be set accordingly, an independent report commissioned by the bloc’s bailout fund said.
“Besides the necessarily ambitious fiscal adjustments to restore budgetary and public debt positions, fostering endogenous growth must be one of the key objectives of every financial assistance program,” the report writers, who looked at three eurozone bailout programs for Greece, said.
Greece lost market access in 2010 after it emerged that its budget deficit in 2009 was equivalent to 15.4% of GDP rather than the 3.7% forecast earlier. Athens had to rely on cheap loans from eurozone governments for almost nine years to finance itself.
The three-year bailouts, designed jointly by the eurozone and the International Monetary Fund, imposed tough reforms and triggered a lot of Greek resentment as they focused strongly on restoring the viability of the country’s public finances.
Already in recession in 2008 and 2009, Greece suffered four more years of contracting output after the collapse of its public finances in 2010.
The economy eked out growth in 2014 as the first results of bailout-linked reforms started to show, but plunged back into recession in 2015 and 2016 when the new, left-wing government of Alexis Tsipras decided to go back on already-agreed bailout reforms.
The back-and-forth with Athens frustrated eurozone officials who complained about Greece’s inability to implement what had been agreed.
The writers of the report for the ESM bailout fund, entitled “Lessons from Financial Assistance to Greece,” said future bailouts should foresee such problems.
“The program design should derive its objectives and length from an analysis of the main problems to be tackled, including societal realities,” they said. “Program duration must hinge on these objectives.”
“Some of the important elements to be assessed in program design are the degree of the beneficiary country’s institutional capacity… The program should also include an analysis of …how to adjust the initial timetable to changing circumstances,” they said.
They also said future bailouts should limit the number of economic problems they are aimed at solving and focus on just a few priorities. There should be less infighting among institutions involved in setting the bailout conditions and better monitoring of continued reform implementation after the bailout ends.