George Papaconstantinou: Greece Needs Debt Relief and Another Bailout

Former finance minister analyses the causes of the Greek debt crisis and looks to the future

When George Papaconstantinou became finance minister under the socialist government headed by Giorgios Papandreou in 2009, Greece was on the verge of bankruptcy. Seven years, nine finance ministers and three bailouts later Greece has not yet recovered from the debt crisis. In a SAFE Policy Lecture on 9 May at Goethe-University Frankfurt, George Papaconstantinou looked back to the causes and the evolution of Greece’s debt crisis. Together with about 150 guests, who had come to his lecture on “Greece: A Never-Ending Tragedy?” he discussed ways out of the debt trap.

The trained economist did not hold back with self-criticism: The Greek government had concealed the massive budget problems and had faked the statistics far too long, he admitted. However, he also criticized the Euro-partners, especially chancellor Angela Merkel. At the German-French summit at Deauville in October 2010, she had announced – together with the then French President Nicolas Sarkozy – that a future debt cut (haircut) would have to include also a bail-in of private investors. “This announcement caused a sell-off on capital markets and exacerbated the crisis,” Papaconstantinou said.

Although Greece has already benefited from a haircut, its gross domestic product (GDP) is still one quarter below the pre-crisis level of 2009. The national debt ratio is now as high as 170 percent of GDP. In contrast to countries like Portugal and Spain, which also had to get under the Euro Rescue Mechanism, Greece did not manage to improve its financial and economic situation, Papaconstantinou stated. Meanwhile, the past bailouts add up to more than 226 billion euros.

“Greece needs massive international investments in order to get rid of its unsustainable debt pile and to grow again,” Papaconstantinou said. He greeted the fact that international creditors, when forecasting debt sustainability, now take gross financing needs as a bearing point rather than the nominal debt ratio. At the same time, he pleaded for a prolongation of the interest-free period as well as the credit term period for the bailouts. Yet, the former finance minister expects that after the end of the third bailout in 2018 a fourth has to follow suit. It will take some time until the austerity efforts show an impact, he said. However, first results are already visible: The primary deficit raised from 11 percent in 2010 to a primary surplus of 4 percent.

According to Papaconstantinou, 2017 is going to be the make-or-break year regarding the question of whether EU countries will continue to demand more austerity measures from Greece. He hopes for a policy change after the German federal elections.