What went wrong?

Greece has been rescued for five years - with a lot of effort and money and very little success. What went wrong between Athens, Brussels and Berlin? German daily Die Welt draws a reconstruction in seven steps.

Industrialised countries and even more the International Monetary Fund (IMF), founded in 1945, have decades of experience in rehabilitating overindebted states and laying the foundations for their sustainable recovery. Many mistakes were made ​​in the past, but many lessons were drawn as well - so many that prior to the euro crisis, we thought we knew in principle what to do when a country was about to go bankrupt.

Then, in 2010, the Greek case came on the agenda. Shortly afterwards, the Greek crisis became a eurozone crisis as Ireland, Portugal and Spain also needed help. But while on the whole the other crisis countries are on the right track, eurozone partners and international organisations reached the extent of their limits in Greece.

Greece has been killed through excessive austerity - that’s how Greeks and some top American economists see it. Greece is simply unwilling to reform and could get a fresh start by means of devaluation and a “Grexit” - that’s the opinion of many in Germany, be they grassroots supporters of Alternative für Deutschland or professors of economics.

The truth lies somewhere in between. A closer look reveals many decisions were made in the course of the Greek bailout that were in their day quite well-founded and well-intentioned - but then produced side effects that were counterproductive and often difficult to anticipate.

1. Excessive focus on figures

The Greek government was allowed to ignore most structural reforms and focus mainly on fiscal targets, mainly because the governments of donor countries needed tangible successes to justify the bailout before their voters. Healing Greece’s budget took the highest priority. Austerity itself is not wrong, but its effects on growth were underestimated, especially in the absence of the much needed structural reforms, which are difficult, because they clash with vested interests.

2. Provocative micromanagement

Aid to development and dozens of IMF programs make clear that there is no use in forcing a predefined reform plan on a recipient country. The government has to present the electorate with its own reform and consolidation program, to have the “ownership” of reforms. This principle was blatantly disregarded in Greece. Aid was made conditional on a very detailed agenda. However, this was self-defence from the Troika’s point of view, because their Greek counterparts made few proposals and exploited ambiguity in the reform plan to protect interest groups.

3. Expenses cut the wrong way

Governments that choose how to restructure their finances generally choose the easiest way. In Greece, there was a window of opportunity to close numerous tax loopholes that favoured the wealthy, which would have made tax collection fairer and created support for the entire adaptation process. But the government did not make the necessary moves, probably out of fear of the well-connected elite. Also, the public sector was strongly reduced by cutting salaries instead of jobs, because it is used as a safety net for the redundancies of the private sphere. Other unpopular and unnecessary reforms, like the closure of state television, appeared as attempts to discredit the Troika before the citizens.

4. Leisurely pace instead of a “Big Bang”

A common complaint is that Greece was expected to do too much in too little time, but the reverse is true. People accept two years of deprivation more eagerly than a seemingly endless agony. Greece was initially spared the worst, but consequently little was done to revive the economy and attract investors to the country. Problems kept growing.

5. Ignorance of problems

There was no Big Bang in Greece because in the early years of the euro, the European Commission paid too much attention to the Maastricht debt criteria. The structural problems of eurozone countries went unheeded. Only once the crisis erupted did Brussels realise how little it knew about Greece, for example about the inefficiency of its public management. Furthermore, Greece was the first victim of the crisis and was regarded as an isolated case. When other countries were hit, the deriving economic downturn further worsened the situation.

6. Too hesitant a haircut

Politicians wanted Greece to remain an isolated problem. Experts pointing out that Greece was not just illiquid but also insolvent were ignored, as was the thought that only a significant debt reduction could prevent draconian austerity measures. There was fear that the creditors of other weak countries would panic if Greece was granted debt relief.

7. Lacking foresight

That the EU thought for a long time a haircut was too dangerous was also due to the lack of protection for the rest of the eurozone. The budgetary and debt rules of the Maastricht Treaty gave no provisions for a severe economic and debt crisis. This is symptomatic of a certain hubris. It was believed crises such as those occurring in the emerging markets could not happen in Europe. It took valuable time before instruments like the European Financial Stability Facility, the European Stability Mechanism and the banking union were created.

Greece is again on top of the European agenda. Unfortunately, the Troika is now discredited and the Greeks are exhausted and more unwilling than ever to reform. Is it still possible to keep the country in the euro?