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From Grexit to Growth: On Fiscal Multipliers and how to End Recession in Greece

Published online by Cambridge University Press:  26 March 2020

Nicos Christodoulakis
Nicos Christodoulakis*
Affiliation:
Athens University of Economics and Business (AUEB), and LSE, Hellenic Observatory
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Abstract

Three years after the implementation of the Adjustment Programme for Greece, public debt remains at unsustainable levels. Despite recent improvements in meeting deficit targets and the fact that the risk of exit from the Euro Area has subsided, growth is still missing and unemployment has surpassed 25 per cent, causing major social tensions. The paper argues that a critical parameter of such failure was that the Programme grossly underestimated the adverse effects that fiscal correction might have on growth. Fiscal multipliers are found to be significant in the Euro Area so that fiscal cuts had strong and permanent Keynesian effects, rather than a transitive and minor downturn as initially assumed. In light of this, the paper argues that policies should now concentrate on enhancing growth and by relaxing fiscal targets allow the multipliers to raise activity as the only route to safeguard the exit from recession and ensure sustainability of debt.

Keywords

Debtfiscal policyGreeceH60H61
Type
Research Articles
Information
National Institute Economic Review , Volume 224 , May 2013 , pp. R66 - R76
Copyright
Copyright © 2013 National Institute of Economic and Social Research

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Footnotes

The author is grateful to two anonymous referees for their suggestions on an earlier draft and to participants at seminars held at AUEB, LSE and Warwick for their comments and discussion. The usual disclaimer applies. Proposals on how to deal with the Greek debt and views expressed in this article are solely those of the author, without implicating or representing any other person or organisation.

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