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Greek Austerity: Can they do it?

By Anonymous

Note: here is the weekly summary and a look ahead.

The bailout is official ...

From Bloomberg: Greece Gets $146 Billion Rescue on EU, IMF Austerity Package

From the NY Times: Greece Takes Its Bailout, but Doubts for the Region Persist

The austerity program is intended to reduce the deficit from 13.6% of GDP to 3% of GDP by 2012. This will be especially difficult because Greece is expected to be in a recession for most of that time (so GDP is shrinking).

Can it be done? It has been done before ...

From the IMF: The State of Public Finances Cross-Country Fiscal Monitor: November 2009 (ht JA)

Click on table for larger image in new window.

The adjustment needed in many advanced economies will be difficult, but is not unprecedented. More than twenty advanced economies have achieved improvements in their structural primary balances of at least 5 percent of GDP at least once in the last four decades; ten of them have achieved improvements in excess of 10 percent of GDP in that period (Table 9). Of course, adjustment going forward will be more challenging than in some past episodes, because it will have to be undertaken in an environment of adverse demographics and potentially sluggish potential growth. Some past adjustment episodes in Europe also benefited from nominal exchange rate depreciation and the ?carrot? of joining the euro, neither of which will apply in the future. The data also suggest that it has been hard for countries to maintain this adjustment: in most cases, the primary balance deteriorated in the period after consolidation ended. However, this may reflect in part the fact that as the debt ratio declines, smaller primary surpluses are required to stabilize it at its current level.

Greece has done it before (as have several other countries), but this time they have to do it with 1) a shrinking economy, 2) poor demographics (aging population), and 3) no exchange rate depreciation. This will be a huge challenge.

Full post as published by Calculated Risk on May 03, 2010 (boomark / email).