When Greece agreed to an adjustment programme with the troika – the IMF, the ECB, and the Commission – in May 2010, a recovery was projected for late-2012. Clearly, no one expected that the contraction, which began in late 2008, would last for 5 years and would cumulate to more than 25 per cent. Why did the projections go so severely off track?
There are several reasons. The first reason concerns the magnitude of required fiscal adjustment. The magnitude of fiscal consolidation was bound to be substantial, because the size of the initial imbalances was very large. What increased the effects of the fiscal consolidation was the mix of policies adopted.