Could the Troika's economic plan work for Greece?

There are a number of things that are confusing me about the current Greek financial crisis. The first is this.

Is it plausible that if Greece did everything the Troika asked then the Greek economy would revert to high growth and high employment in a small number of years?

• @denesp I updated the title. I hope it is better. Jul 1 '15 at 10:11
• Okay, vote retracted. Here is the link to the Guardian's article on the IMF estimates. theguardian.com/business/2015/jun/30/… Jul 1 '15 at 10:19
• John Cochrane recently proposed a list of neoliberal reforms for the USA about which he claimed "I think my fellow economists might agree that 4% growth for a decade is possible with such a program. In fact, it we can likely get to 4% with much less than all of these policies. They might complain about inequality or other objectives." johnhcochrane.blogspot.com/2015/06/4-growth.html?m=1 That sort of growth in Greece would likely solve their fiscal problems.
– BKay
Jul 1 '15 at 17:03
• @BKay OK but could the Troika's plan of higher tax and less spending deliver that? Jul 1 '15 at 17:35

1 Answer

The short answer is "No", if by "small number" we mean something no more than "five".

The two characteristics you mention are rather different: "high growth" describes a rate of evolution. Now, it is standard corporate speak to say "we are in an excellent position to grow" to express in a diplomatic way the fact that you have hit rock-bottom. Given the unprecedented fall in Greece's GDP, to obtain some positive growth rate it is not that hard, since the base has shrunk so much.

As for "high employment", if by that we mean reverting back to the country's "natural rate of unemployment" (which was $7-8\%$ for decades), to do that in $10$ years, back-of-the-envelope calculations show that one would need $50$ billion euros additional investments yearly for $10$ years in a row to achieve that. This represents a $128\%$ increase in yearly investments from current level, or almost "two times and a half more" than now. Yearly.

From a structural point of view, what is required is a massive increase in Greek exports, or a massive increase in import-substituting economic activities. These things do not happen "in a small number of years". The first has to deal with international competition, the second requires extended geographical and sectoral relocation of productive resources.

But Greece returning to "high growth-high employment" was not and is not the main concern of the creditors -not unsurprisingly, and perhaps rightfully, since it should be the main concern of the Greeks and their (our) political system.

As to whether the approach taken by the creditors do indeed serve their own interests, is a totally different question, and a very complex to answer -because we would have first to clearly identify "their interests".

• Thank you for this. However, I am really interested specifically in whether the plans that the Troika are suggesting could plausibly produce high growth and high employment. Your very nice answer doesn't mention the Troika's plan currently. Jul 1 '15 at 10:13
• @felipa I assumed that you were familiar with the measures: they have to do with increasing the revenues and decreasing the expenses of the public sector. They are not about growth or unemployment, or investments. Jul 1 '15 at 10:55
• I am familiar with them. But many of them are about increasing tax and cutting spending which traditionally one might think would decrease growth and investment and increase unemployment. Jul 1 '15 at 12:25
• @felipa They do, and in combination, they will do exactly what you describe. Jul 1 '15 at 13:12