Nicos Christodoulakis

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.

On the eve of 2013, the Greek crisis entered a new phase which had both reassuring and alarming characteristics. On the one hand, the speculation that Greece might exit the Eurozone – either by domestic choice or as a result of immense pressure from abroad – subsided considerably and substantial improvements in fiscal consolidation took place. In 2012 public deficit was brought down to 6.60 per cent – from a horrendous 16 per cent in 2009; a primary surplus of around 1.80 per cent of GDP is expected to be realised this year and the current account deficit has shrunk to below half of its level in 2008. As a critical step towards adjustment was accomplished, capital inflows of

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