Interview with ECB President Christine Lagarde: Greece’s Miraculous Recovery and Lessons from the Crisis

Interview with ECB President Christine Lagarde conducted by Alexis Papahelas on 30 October.

November 4, 2023

When you were in Athens last week You talked about Greece’s resilience and its miraculous ability to recover. Can you please tell me how this happened? How did Greece become a success story?

When I look at the main performance indicators in assessing the economic and financial situation of Greece. I see overall improvements: in employment, growth, fiscal situation. and debt-to-GDP ratio, Greece has completed several reforms on its to-do list. Of course, that’s not all. There is still a lot of work to be done. I understand there is still more reform to come. But overall The results of the country’s efforts are impressive. And this has not gone unnoticed by those whose job it is to rank economies and assess credit ratings. This is evident from the two recent decisions that raised Greece’s credit rating to investment grade. I think it’s a huge testament to the country’s efforts. This turnaround is thanks to fiscal adjustments and reforms implemented. but also the determined efforts of the Greek people and the Greek authorities.

Does a high debt-to-GDP ratio worry you?

The debt-to-GDP ratio is around 160% at the moment. It has dropped significantly over the past few years. And it is clear that this downward trend needs to continue in the future. I know there is more to come. But it is clear that Greece has responded to this challenge with determination. And the results are already clear to see.

Have you ever been really worried about Grexit? Do you think it is possible?

There are two periods when a threat may actually occur. The first came during France’s G20 presidency in November 2011, when there was talk of a possible referendum. That ultimately did not happen. Second, as the threat became more tangible and more worrying, That was in July 2015, so we had two Grexit threats, but the one in 2015 was the most concrete. And if it were not due to the decision of Few European leaders would emerge.

You had a front row seat to the Greek financial crisis from the beginning. Looking back, do you think any mistakes were made?

The original mistake was to put the country in that situation. If there is more fiscal discipline and adopt prudent principles in setting up a rainy day fund during an economic downturn. The crisis would not have happened. The fiscal policy adopted before and after the 2009 crisis was a mistake from the beginning. As I said before It would be beneficial for the IMF to have longer programs than it currently has in its arsenal. Programs aimed at rapid and deep fiscal transformation, reform and integration, at the time, they were not the best tool for countries in a monetary union without a monetary union or for Greece’s specific fiscal situation.

Have you learned any lessons or conclusions from this crisis?

One particularly relevant lesson is to ensure that we have the collective discipline to deal with the lack of fiscal union. I think this should be an urgent issue for all of us. When you have a monetary union without a monetary union. same as us You need to have clear fiscal fences and a domestic fiscal framework that countries can use. It can design and implement its own fiscal policy. and must be responsible to other members of the monetary union

Something else that stands out from the Greek situation is that the decision was made. But sometimes this is reversed by the political team that follows. And even though the decision has been made The implementation and follow-up required to move forward also doesn’t always happen. Another lesson is Although banks were not the cause of the crisis, But a strong, robust financial sector with well-capitalized banks is also vital.

Are you satisfied with the current state of the Greek banking system?

I think a lot of work has been done to consolidate and strengthen the Greek banking sector. Take non-performing loans as an example. In 2016, nearly 50% of loans were non-performing. Now it’s over 8%. That’s an important sign of improvement. This involves parking those non-performing loans outside the banks, so in a way the banking system has been sterilized. Capital adequacy ratios are much stronger. Non-performing loans decreased And the liquidity ratio is quite strong as well. Yes, a lot has been done to make Greek banks stronger and more attractive. I think the fact that large foreign banks are taking an interest in Greek banks is a clear indication that the sector is becoming more attractive.

When we measure inflation We draw your attention to the general rate, which is what our compatriots in Europe are experiencing. How much more will it cost to put gas in the car, food on the table, or clothes, shelter, and everything else? But we are still trying to understand what lies beneath the most variable elements. One of those elements is food. Will food prices rise in the future? That might be possible if you look at the effects of climate change, for example droughts, floods, rising temperatures. and rising sea levels Often affects food prices in the future.. As for the political implications you ask me? I would say that our job is to maintain price stability. And this is the best contribution we can make to social and social peace. This is especially true of its most vulnerable members.