Greece: third time lucky?

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After several months of tough negotiations between the Greek government and its international creditors, at last an agreement has been reached to start a new bail-out programme, the third in five years. This is therefore a good time to look back, examine the errors of previous programmes and assess whether they might be avoided this time.

Before starting to analyse the first two bail-outs, we need to look at the general conditions of the latest programme. Lasting three years, it will inject 86 billion euros1 into Greece's public funds. In exchange, the government has to implement a series of reforms to clean up its public accounts, change the country's model of growth and restore investor confidence. These reforms are based on four key areas. Firstly, to achieve a sustainable public debt. Although the deficit targets have been relaxed to make them more realistic, additional measures must be implemented to reinforce the mechanisms used to control, plan and spend the budget. The second area involves safeguarding financial stability via a plan to recapitalise banks and resolve the high NPL rate. The third focuses on the structural reforms required to revive growth and competitiveness. To achieve this, the programme not only emphasises the need to optimise the use of the funds provided by the European Investment Bank2 but also proposes programmes to improve vocational training, implement the OECD's recommendations that are still pending regarding competition, eliminate restrictions in officially regulated professions, set up initiatives to boost exports and develop a comprehensive privatisation plan controlled by an independent fund, among many other measures. The last key area concerns the modernisation of the state and public administrations, improving their efficiency and combating corruption.

Thanks to the IMF's monitoring of the programmes it is involved in financially, we can examine some of the particular features of the first two bail-outs. Specifically, and as can be seen in the first graph, most of the reforms contained in the 2010 programme were aimed at cleaning up the public accounts via fiscal adjustment and reforms of public administrations. Although this makes sense given that it was precisely the high level of public debt that had led to the Greek crisis, reforms to boost growth in the short-term were of secondary importance (classified as «Other structural measures» in the second graph). However, this composition changed in the second bail-out, striking a balance between the need for fiscal consolidation and the need to improve the country's model of growth via further reforms in the product market and competitiveness. However, the second bail-out was only moderately successful due to the government's lack of commitment to implementing the programme, leading to delays and nearly 20% of the reforms never being carried out. This is illustrated even more clearly when the country is compared with Portugal.

Greece's latest bail-out programm is similar to the second one insofar as structural reforms have become more important but without forgetting the need for fiscal consolidation. Given this situation, what might make a difference and lead to its success is its degree of implementation. For the time being there are clear indications that the government is firmly committed to this new programme. The re-election of Syriza in the latest elections has given it a stronger mandate to implement the programme although close monitoring on the ground by the European authorities will be crucial.

1. 25 billion euros have been included to recapitalise banks.

2. Greece was allocated 35 billion euros between 2014 and 2020.

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