Lessons from the Greek tragedy

Abstract

The Greek financial crisis that erupted in 2010 was possibly cured after 8 years in 2018. It has been extraordinary in its social cost and its cost to European taxpayers. The causes of this failure are multiple. The main burden lies with consecutive Greek governments that did not carry out the necessary fiscal adjustment and reforms. In their lack of urgency they were strongly supported by American economists, especially Paul Krugman, who opposed austerity and instead called for fiscal stimulus, ignoring the need for financial stability. Much of this discussion was devoted to the benefits or harm of the Eurozone, which eventually hardly mattered. The crisis resolution was complicated by the European Union wanting to play a big role but not knowing how and weakening the traditional role of the International Monetary Fund. The key lessons are back to basics: A government needs to act hard and fast to resolve a severe financial crisis. The IMF is the best leader for financial stabilization. Early and fast fiscal adjustment brings about early financial stabilization, more structural reforms and early and higher growth.