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The Rescued Funds Distributed Before 2015
In this section, official documents are used as references. The analyses and statistics are abstracted from the official documents.
The First Economic Adjustment Programme for Greece (Directorate-General for
Economic and Financial Affairs, 2010). On May 2, 2010, the joint mission of Troika
concluded a staff-level agreement for a bailout of 110 billion euros for Greece, along with supporting economic policies; the 110 billion euros was set to be funneled to Greece over the course of May 2010 and June 2013. Of which, 80 billion euros came from bilateral lending of Eurozone member states, and 30 billion euros came from the IMF.
The economic adjustment program had several targets. Its short-term objectives were to maintain financial stability and to restore market confidence that Troika was determined to secure fiscal sustainability and contain the fear that the Eurozone may disintegrate. In the short run, the resumption of market confidence that the authority was containing the crisis and enhancing the sustainability of fiscal consolidation was imperative. Plus, there needed to be measures to generate savings and future revenues. The tight liquidity conditions in the Greek banking system needed to be addressed as well; outflows of capital had to be tamed and monitored to prevent the market from collapsing. The program’s medium-term objective was to improve Greece’s overall competitiveness and better the structure of its economy, which for a large part relied on the service industry such as tourism, towards a more
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investment- and export-led growth model. Thus, the economic competitiveness necessitated improvements. Greece needed to speed up the reallocation of resources from non-tradable to tradable sector in order to foster growth. Greece was also ordered to modernize its public sector, open up for foreign direct investment, with the subtle connotation of scaling down the state’s direct participation in domestic industries and treading towards a more liberal
economy, and render the labor market and the product market more efficient and flexible. The program’s overarching objectives in the long run were to restore Greece's credibility for private investors and to prove to the world that Eurozone would not collapse.
It was crucial that the parties at stake, Greece or the EU officials alike, reassure the market that the Troika would provide sufficient capital Greece required and come up with measures for the Greek economy to generate savings and revenues. At the same time, reforms on the pension system was mandated. In return for monetary assistance, Greece was obliged to carry out fiscal and structural reforms to meet the objectives. Reform plans in the first economic adjustment program were mainly divided into systematic reforms, and labor and product market reforms. Included in systematic reforms were making income tax more progressive, improving tax administration and increasing its efficiency, introducing stronger enforcement and auditing of wealthy individuals, upping the value-added tax (VAT), building headquarters for strategic management and planning capabilities in tax and customs
administration, curbing government’s wage bill (over the course of 2000 to 2008, public
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wage grew by 100% while nominal national GDP increased merely 74%, and public wage went up by 7.5% once more in 2009), setting up wage scale structure, and avoiding fraud and inequality. All these measures were, as a premise, asked to be made into laws.
Large cuts in public wages and pensions were inevitable. For instance, cuts in wages, such as taking away Easter, summer, and Christmas bonuses, were set to be at 10.5% by 2010, while cuts in pensions, including the elimination of flat bonuses and press pensions for those who earn more than 1,400 euros per month, were set at 8% on average. Figure 3-1 shows the estimation of Greece’s future government debt level with and without pension reforms.
Source: Directorate-General for Economic and Financial Affairs (2010, p. 19) Figure 3-1. Two Scenarios for Very Long-term Government Debt Projections
Product markets were also one to-be-fixed area, in which Greece was infamous due to its poor performance related to the “business start-ups, operations, and licensing activities,”
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as pointed out in the World Bank Doing Business indicators. Simplifying requirements and lowering standards are a must for the business to be willing to set up firms in Greece again.
There has to be a friendlier environment for business, which could create job opportunities and boost the economy.
With regard to labor and product market reforms, the package listed several essential items. Greece had to tackle unreported jobs, which includes trimming down the scale of its shadow economy and hence increasing tax revenues, and reducing rents of the vested interests groups. Moreover, and the most severely faulted, the excessive public spending problem had to be dealt with. The inefficient public sector impeded the growth of business activities with complex regulations and, at that, public policies failed to adequately support productivity growth and offered poor-quality but expensive services.
Table 3-1 represents the then estimation of government balance to GDP and debt to GDP ratio, if measures were implemented in their entirety. Fiscal deficit to GDP level was
projected to go down from 13.6% in 2009 to significantly lesser 2.6% in 2014 while the public debt level to go up from 115.1% to the peak of almost 150% in 2013 and then to start wobbling downwards.
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Table 3-1. Macro-fiscal Adjustment (2009-2014)
Source: Directorate-General for Economic and Financial Affairs (2010, p. 13)
European Financial Stability Facility. Initiated in June 2010, the EFSF was a
temporary crisis resolution mechanism that aimed at offering temporary financial assistance through the issuance of bonds and other debt instruments on capital markets to financially troubled Eurozone member states. Essentially, the EFSF is a limited liability company under Luxembourg law. Originally the EFSF had the capital of 440 billion euros, yet there was an enlargement agreed by the Eurozone leaders took place on July 21, 2011, raising the total capital guaranteed to 780 billion euros. Different member states were liable for different proportions of contribution to the fund (European Council, 2010).
A permanent rescue mechanism, the ESM, agreed on October 8, 2012, substituted for the EFSF, and is currently the sole mechanism through which the funds in the third economic adjustment program to Greece was set to be transferred. ESM is now officially in charge of new requests for financial assistance by the euro area member states. According to the Treaty Establishing the European Stability Mechanism (European Commission, 2012), the fund aims
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at “mobilizing funding and providing stability support for the benefit of ESM members which are experiencing, or are threatened by, severe financial problems, if indispensable to
safeguard the financial stability of the euro area as a whole and of its member states.”
According to Treaty Establishing the European Stability Mechanism (European Council, 2012), the ESM will assume the tasks currently fulfilled by the EFSF and the European Financial Stabilization Mechanism (EFSM) in providing financial assistance to Eurozone member states when necessary, for the purpose of maintaining financial stability of the Eurozone. The initial maximum lending volume of the ESM was set at 500 billion euro.