Wall Street Journal: Greece and its creditors agree that the bailout flopped, but they disagree on why

Greece and its creditors, deadlocked over fresh financing, agree on at least one thing about the country’s mammoth bailout, launched five years ago this month: It hasn’t worked as hoped.

But Athens and its lenders—the eurozone and the International Monetary Fund—disagree diametrically on why the bailout program has flopped. This dispute about the past five years helps explain why the players so often seem to be talking past each other today, and why reaching agreement on further aid is proving so hard.

Lenders, led by Germany, believe that the bailout’s blueprint was and remains correct, but that Greece failed to follow it. Rapid deficit-cutting was the only way to cure Greece’s debt problem. The rollback of stifling regulation and unaffordable social benefits and an injection of free-market competition were unavoidable if Greece was to grow sustainably.

German leaders such as Finance Minister Wolfgang Schäuble see Greece as the patient that didn’t take its pills, unlike others in the same hospital, such as Portugal and Ireland, who swallowed the same medicine and recovered. To many Greeks, however, the eurozone seems more like the psychiatric ward in the Ken Kesey novel “One Flew Over the Cuckoo’s Nest,” where a domineering “Big Nurse” controls the inmates through punishment and humiliation.

In this view, Greece under Syriza is Europe’s Randle McMurphy, the rebel inmate who rattles Big Nurse Merkel’s regimen with constant provocations, encouraging others to stand up for themselves, too. Syriza ministers and lawmakers believe they have a duty to Greece and Europe to fight, even if the odds are against them.

There is little doubt that major economic overhauls were overdue in Greece, and that painful fiscal austerity was unavoidable. Athens had lost control of its budget and nobody was prepared to finance its deficits.

But most economists, and some officials on the creditors’ side, say the bailout program always suffered from at least three design flaws.

Firstly, the scale and speed of austerity were unique, and proved to be an overdose, many economists say. Greek spending cuts and tax-revenue measures totaled over 30% of gross domestic product in 2010-14, according to Greek and European Union data.


That 30%-of-GDP austerity effort improved Greece’s primary budget balance, excluding debt interest, but only by 11 percentage points of GDP. The rest of the austerity effort was merely adjusting government spending and revenues to an economic depression, to which the drastic cuts were themselves contributing.

The IMF admitted in 2013 that its forecasts of a shallow recession and early recovery had been unrealistic under such conditions.

“The ultimate goal of achieving debt sustainability was not properly served by overdoing the fiscal consolidation,” says Christian Odendahl, chief economist at the Centre for European Reform, a nonpartisan think tank in London.

Many analysts believe a better plan would have been to recognize that Greece was insolvent in 2010 and to restructure its debts. That would have allowed a more moderate pace of austerity. German and other European leaders rejected that option in 2010 for fear of destabilizing the eurozone’s banking system and bond markets.

Secondly, the simultaneous attempt to slash the deficit and enact broader economic overhauls, known in technocrats’ parlance as “structural reforms,” made those very reforms harder.

Market-oriented overhauls, such as cutting pension entitlements and job protections or deregulating service sectors, are rarely popular, but they became politically toxic in a country whose economy was in free fall, leading to slow and patchy implementation of changes meant to make Greece’s economy more competitive.

Some economists and officials say the program should have emphasized structural reforms first and austerity later.

“The sequence of measures was not correct: The measures to improve growth and the changes in the structures of the state needed to be put first on the agenda instead of the austerity measures,” says Kyriakos Mitsotakis, a leading figure in Greece’s opposition conservative party New Democracy.

That sequence, however, would have required either more patient financing by Germany and others, or an early debt restructuring.

Thirdly, many Greek analysts and officials say some of the reforms weren’t necessarily the ones Greece needed most, and reflected a standard international formula rather than the country’s idiosyncratic problems.

Pressure to sack public-sector workers to save money and slim down the state, for instance, overlooked that Greece’s public sector wasn’t particularly big by European standards: The problem compared with elsewhere was its inefficiency.

Better-quality institutions, including a faster-moving justice system, were an afterthought in a program driven mainly by cost-cutting, critics say.

Even Greece’s foot-dragging in implementing some beneficial reforms can be seen as a design flaw in the program, say critics. The weakness of Greek governance, and the ease with which vested interests hold up or hijack legislation, should have been obvious to the eurozone and IMF, says Gabriel Sterne, head of global macro research at the consultancy Oxford Economics.

“The IMF has worked in places with much worse governance than Greece. They factor that in and adjust their targets,” says Mr. Sterne. In Greece, he says, that would have implied restructuring Greek debt at the outset.

Despite these misgivings, the creditors have barely changed their prescription. Greece may have to swallow the medicine again. But many Greeks will remain unconvinced that the doctors know what they are doing.