Greek economist: bailout deal comes as costly relief to citizens

European leaders came to an agreement that paves the way toward a third Greek bailout.

We spoke with Greek economist Manos Matsaganis, whose paper on union structures and pension plans was trending on ResearchGate last week. Matsaganis is associate professor at the Athens University of Economics and Business, and former visiting scholar at the Minda de Gunzburg Center for European Studies, Harvard University, and at the Center for Equitable Growth, UC Berkeley.

ResearchGate: What do you think of this morning’s agreement?

Matsaganis: Paradoxical though this may sound, today's bailout deal comes as a relief to the vast majority of Greek citizens who (as every opinion poll has been telling us) are opposed to GREXIT “at any cost”. On the other hand, mostly as a result of the Greek government’s absurd negotiating tactics, that cost will be much higher than would have been otherwise.

The economic cost of the last five months is that Greece is again in recession, unemployment on the rise, and the primary fiscal surplus a fond memory. The political cost is the near total loss of any trust left between Greece and her European partners.

It is not hard to see why Europeans might be mistrustful. Only a few days ago, the Greek government rejected the creditors' proposals on the grounds that it had no mandate for more austerity, so it called a referendum. The sovereign Greek people returned a massive "No" verdict. Then the government discovered it had no mandate for GREXIT either. So it accepted an austerity plan that was harsher than the creditors' original proposals.

The charitable way of looking at this would be that the Greek government is a fast learner; the less-than-charitable way would be that the vitriolic rhetoric of the last five years, and the embarrassing antics of the last five months, having prevented a reasoned response to the crisis, have eventually caused more suffering than would otherwise have been the case.

As for the long-term damage to Greece's credibility and international standing, the less said the better.

RG: What do you think a third bailout and further austerity measures mean for the Greek welfare state?

Matsaganis: The Greek welfare state was ineffective and unsustainable pre-crisis, and has become a little less unsustainable and arguably more ineffective because of the austerity. Greek domestic actors, but to a lesser extent also our European partners, will be judged by their capacity to create a leaner but more effective social safety net, and hence preserve the ‘European social model’ even in the adverse conditions of fiscal consolidation. Needless to say, the evidence so far is not very encouraging.

RG: Let us look at the background of this crisis. In your trending paper you wrote about a vicious circle that was fueled by raising pension contributions in Greece. What happened?  

Matsaganis: There are three (and only three) ways for any government to contain pension spending: by lowering pension benefits, by raising the effective retirement age, and by raising pension contributions. My point was that raising contributions – which successive Greek governments saw as least painful socially and most feasible politically – was in fact pretty bad: it inhibited employment growth, and hence undermined the very foundation on which a healthy “pay as you go” pension system rests.

RG: In another paper you wrote that fiscal adjustment programs were far from successful and lead to more poverty.

Matsaganis: I have also written that, given the colossal “twin deficits” Greece posted pre-crisis (budget deficit 15% of GDP in 2009, current account deficit 16% of GDP in 2008), it was difficult to see how (at least some) austerity could have been avoided. I also happen to believe that debt is a political rather than economic issue: its level is without doubt high, but the cost of servicing it is low.

RG: What role should fiscal adjustment programs play?

Matsaganis: Fiscal adjustment programmes are never painless. But as the experience of other EU member states shows (from Latvia to Portugal), they can be less painful, more equitable, less protracted and more successful than the Greek case suggests.

One big lesson from the Greek experience is that, in order to be successful, fiscal adjustment programmes must meet a number of conditions. They must be ‘owned’ by the government, and at least passively accepted by the opposition. They must be seen by public opinion as legitimate, and compatible with democratic institutions. They must be equitable, in the sense that they protect the poor, the unemployed and vulnerable groups, and allocate the costs of adjustment fairly among social groups. And they must deal with the causes of fiscal imbalances – in the Greek case, perverse political incentives, deficient public institutions, and an uncompetitive ‘growth model’.

This is a tall order, granted. But anything less is bound to set in motion vicious circles from which it is difficult to escape.

RG: If there are more fiscal adjustment programs, will this mean even more poverty for the Greek people?

Matsaganis: Not necessarily. Fiscal adjustment programmes can be equitable: as I just wrote above, they can protect the poor, the unemployed and vulnerable groups, and allocate the costs of adjustment fairly among social groups. To give a specific example: After five long years of harsh austerity, one quarter of all retirees in May 2015 (latest data available) were aged below 55. Among public sector retirees, the proportion was one third. Greece’s new government has pledged to preserve the right to retire at such tender age. The total cost of all pensions below the age of 55 is €1.5 billion (i.e. about 0.75% of GDP). In contrast, the total cost of the same government’s measures to deal with the country’s ‘humanitarian crisis’ is €200 million over the next two years (i.e. 0.05% of GDP per year). Readers can easily work out the fiscal feasibility (and the social desirability) of a shift in resources from ‘baby pensions’ to anti-poverty policies.

Image courtesy of m.p.3