Greece missed its $1.8 billion loan repayment to the International Monetary Fund (IMF) on June 30, and voters rejected the austerity measures creditors are demanding as the price of another bailout on last Sunday’s referendum.
Greece has other choices if it can find the political will. The Greeks, as steeped in history as they are, could follow the path Ireland took nearly 30 years ago after years of fiscal mismanagement created similar circumstances. Instead of balking at change, Ireland took control of its destiny with far-reaching market reforms that cured its debt problems and triggered rapid economic growth.
Greece’s creditors, the IMF, European Union, and European Central Bank, have demanded “austerity” reforms before. But the required budget cuts and tax increases have not promoted economic growth, merely belt-tightening, not true pro-market reform.
Greece would be better served by learning from Ireland, which experienced similar problems in the mid 1980s. Greece’s debt to GDP ratio today stands at 180 percent of GDP. Ireland’s debt to GDP ratio in 1986, when things were coming to a head, stood at 116 percent. Similarly, government spending today accounts for 52 percent of the Greek economy. In 1986 Ireland, it accounted for 55 percent of the economy.
Both countries created their debt problems by letting government spending grow out of control. But rather than accept an IMF bailout, and the conditionality that comes with it, Ireland chose to slash its government spending and free its economy.
In 1987, Ireland slashed spending across many categories – health spending by 6 percent, education by 7 percent, and agricultural spending by 18 percent. Entire government agencies, bureaus and boards were abolished, including regional economic development agencies and Foras Forbatha, their environmental protection agency. That eliminated the primary deficit. The following year, in 1988, Ireland followed up with even bigger spending cuts.
The economy started growing again, modestly at first. By 1990, government spending (excluding interest) had declined to 41 percent of GDP and the debt ratio had fallen below 100 percent of GDP again.
Ireland continued its reforms with multiple rounds of tax cuts throughout the 1990s. And by 1999, tax revenue had fallen as a percent of GDP to 31 percent of the economy, without piling up additional debt.
These reforms, coupled with Ireland’s existing, relatively-free trade policies, not overly-burdensome regulatory environment, and strong protection of contract and property rights produced spectacular results. Ireland’s economy grew at a 5 percent rate during the first half of the 1990s and at a nearly 10 percent rate in the second half of the decade.
Ireland’s courageous reforms and the economic growth that accompanied them fundamentally transformed the economy by significantly reducing the burden of government. Greece could make a similar transformation if had the political will to do it.
Ireland’s reforms were not the work of a Thatcher-style ideological movement. Prime Minister Charles Haughey, who began the reforms in 1987, was one of the big spenders who helped create the Irish debt problem in the first place during two earlier terms in office. Greece’s leftist Syriza party could make similar reforms for the same pragmatic reasons.
I lectured throughout Greece in late May to large crowds of college-aged students. I didn’t get a sense of any entrenched ideological position among them. Rather, I sensed dissatisfaction with the current policies and their results and a desire to try something new. Learning from the Celtic Tiger would be a good place to start.
Although Greece’s fiscal situation is similar to Ireland’s, much more comprehensive reforms are needed in Greece. Ireland needed only to get its spending and taxing under control to trigger an economic revival; most of the other fundamentals necessary for a vibrant economy were in place, leading to Ireland’s ranking as the fifth freest economy in the world in the 1995 “Economic Freedom of the World” Annual Report.
Greece, which currently ranks 84th in the world in economic freedom, needs much more than just fiscal reform. Greece also needs to better protect private property rights, deregulate labor markets, and eliminate its stifling business regulations.
Only then will Greece have the kind of free economy that has led to prosperity everywhere it’s been adopted.
