FISCAL ADJUSTMENT AND DEBT SUSTAINABILITY:
GREECE 2010-2016 AND BEYOND
Nicholas E. Karavitis
Panteion University
ABSTRACT
This paper reviews the fiscal developments that led Greece from a successful convergence process and the adoption of the Euro to an unprecedented prolonged recession. Analysis of all fiscal aggregates reveals the policies behind the sovereign crisis, both on the expenditure and the revenue side. We employ a simple macrostatic model to identify the impact of fiscal policies on the economy through the fiscal multipliers, especially during the adjustment programmes. We attempt to explore the extent to which fiscal adjustment may have been self-defeating by developing ex post adjustment scenarios. Following this, we turn to testing debt sustainability in the long run in an interest rate sensitive environment. This is done based on a set of several varying assumptions regarding growth, fiscal performance and debt reprofiling. Analysis of the resulting scenarios points out the risks surrounding debt sustainability and draws the broad lines of future fiscal policies.
JEL classification: E62, H62, H63, H68
Keywords: Greek Crisis, Fiscal Adjustment, Fiscal Multipliers, Debt Sustainability.
Acknowledgements: The author would like to thank Heather Gibson and Hiona Balfoussia for their very useful comments. Possible errors or omissions are the sole responsibility of the author. The views expressed in this paper do not necessarily reflect those of the Bank of Greece. This research was conducted when the author was visiting Bank of Greece on the Bank’s programme of cooperation with universities.
Correspondence:
Nicholas E. Karavitis
Panteion University
136, Syggrou ave
Athens, 17671
email: n.kar@panteion.gr