The Challenge of Restoring Debt Sustainability in a Deep Economic Recession: The case of Greece
Dr. Platon Monokroussos
The Hellenic Observatory at the London School of Economics, European Institute, is pleased to announce the publication of their latest GreeSE paper by Dr. Platon Monokroussos. An abstract follows and you can log here for the entire paper.
The present paper studies the evolution of the Greek public debt ratio under different assumptions regarding the size and the degree of persistence of fiscal multiplies, the implementation profile of the applied fiscal adjustment and the response of financial markets to fiscal consolidation. The main results of our simulation exercise can be
summarized as follows: a) taking into account Greece’s present debt ratio, a fiscal adjustment can lead to a contemporaneous increase in the ratio if the fiscal multiplier is higher than ca 0.5; b) despite the unprecedented improvement in the underlying fiscal position since 2010, the concomitant increase in the public debt ratio can be mainly attributed to its high initial level, a very wide initial structural deficit as well as the ensuing economic recession; c) notwithstanding its negative initial effects on domestic economic activity, the enormous fiscal effort
undertaken over the last 5 years leaves the country’s debt ratio in a more sustainable path relative to a range of alternative scenarios assuming no adjustment or a more gradual implementation profile of fiscal consolidation relative to that implemented thus far.
Keywords: Self-defeating consolidations, fiscal multiplier, public debt, Greece, European Commission.
*Deputy General Manager, Chief Market Economist, EFG Eurobank Ergasias S.A.