Illustration for Aesop's fable of The Lion's Share: for the 1501 edition of Steinhowel. Wikicommons. Some rights reserved.According to a well established narrative in 2010 and 2011 Greece was ‘saved’ by a multi-billion euro ‘bail-out’ provided by a ‘troika’ of institutions, the EC, ECB and the IMF. As a condition for the ‘bail-out’, Greece had to implement an ‘economic adjustment programme’ designed by the ‘troika’ which had come to be known as the ‘austerity’ strategy.
It had three components: fiscal consolidation, internal devaluation and structural reforms. All three elements were expected to promote growth and ultimately reduction in indebtedness. Fiscal consolidation by restoring sound public finances can improve confidence and stimulate business investment and growth. This is known as the theory of ‘expansionary fiscal contraction’. Internal devaluation can also promote growth by improving competitiveness and therefore resulting in an increase in exports, which could potentially offset the deflationary impact of the internal devaluation. Finally, ‘structural reforms’ by modernizing the economy and creating a business-friendly environment can create the conditions necessary for a private sector-led growth.
The austerity strategy, however, is not without its critics. There are many powerful and cogent theoretical and empirical arguments against it. Indeed a credible and persuasive case can be made that it has failed in achieving its objectives, the principal one being the reduction in indebtedness that caused the crisis in the first place. After five years of austerity a majority of Greek people, especially those who were at the receiving end of a savage 1930s style economic depression, have come to believe that the strategy was counter-productive, self-defeating and had failed to deliver what it promised. In January 2015, Greece elected a government with a mandate to try to win hearts and minds in Europe not only about ending austerity in Greece but also about the need to reform a malfunctioning and dysfunctional monetary union.
