One rather obvious conclusion which should be drawn from the experiences of Greece in the past four years or so is that fiscal austerity does not work—in the sense of bringing economic recovery. The IMF forecasts of what would happen under the austerity programme were already indicating that unemployment would increase in the initial phase but recovery would come. The forecasts were that from 2011 there would be positive growth, though output would be some 3½% below its 2008 level. (All the statistics in this piece are derived from OECD Economic Outlook 96 November 2014, Statistical Annex.) Unemployment was forecast to peak at just under 15%. The actual results were much grimmer; unemployment up to 25%, some glimmer of growth only in 2014 (and then nominal GDP declined) with GDP in 2014 some 25% below the 2008 level. These are spectacular failures of forecasting—some of which, at least, could be ascribed to the general IMF failures over the value of the multiplier and hence of the effects of austerity on GDP (see on this score, Blanchard and Leigh, 2013).
The debt to GDP ratio rose from 111% in 2011 (having declined from 135% in 2009) to over 180% in 2014—which looks as though the Greek government ran up further debt. But, of course, the reality was that the ratio rose because GDP shrank by 25%. A high and rising debt ratio appears to go with low (and here negative) economic growth. Is this a confirmation of the Reinhart and Rogoff (2011) thesis? Not really, it is more a refutation since the causation runs from negative growth to rising debt.
The “fiscal compact” is based on two principles—a balanced structural budget and “structural reforms.” Greece has massively reduced its budget deficit (with the consequences that has had for unemployment) to 1% of GDP for 2014. Its primary budget position (that is excluding interest payments on debt) is in surplus to the extent of over 3% of GDP. Further, its cyclically adjusted budget surplus is near 4% and its underlying primary budget surplus over 7%. Against the criteria of the “fiscal compact” this is a massive surplus for which there is no justification.