Troika therapy: did it work?

Why a number of the countries that underwent the Troika bailout programme are now performing better than the others.

5 April 2016

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

The impact of the European sovereign debt crisis on many countries was to force governments to undertake fiscal and structural reforms. The so-called Troika was the group of agents that enforced some of these reforms in exchange for financial aid.

Has Troika worked?

There are both good and bad examples of the impact of having the Troika involved. For example, both Ireland and Portugal have performed very well after their respective bailouts.

Meanwhile, Greece has struggled despite the very recent improvement. Spain has been one of the leading economies in recent years and it did not have a Troika programme.

Thinking about the reforms themselves; some fiscal reforms would have been positive for growth, such as cutting inefficient or wasteful government spending; however, most cuts to public spending would have had a negative impact on GDP growth.

Meanwhile, tax increases will almost always also cause a drag on activity. So, the fiscal reforms alone are unlikely to have been the drivers of the recovery.

Reforms needed to boost growth

However, fiscal reforms were a prerequisite for recovery. Without repairing public finances, confidence amongst investors would not have returned, and they would have continued to demand a premium for buying sovereign debt – effectively keeping borrowing costs for nations elevated.

It is true to say that the European Central Bank did play a role in lowering government bond yields; however, it was the turnaround in public finances that has helped the likes of Ireland and Portugal most.

Fiscal reforms were only a prerequisite, but structural reforms in product, services and labour markets have been most beneficial for growth.

By opening up markets to competition through removing barriers to entry, the additional supply helps create jobs and income, while also lowering prices and improving disposable income for households.

This has been powerful in Portugal and Spain, where as countries like Italy and France, which have been slower to reform, have not seen the same improvements.

How can the reforms benefit workers?

From the perspective of individuals, it can be difficult to see the merit in these types of reforms.

Many workers that enjoy protected labour contracts, in protected industries, with cumbersome labour laws are extremely well protected. Removing those protections allows companies to hire and fire staff without high costs.

It allows companies to raise productivity and take greater risks in their capital spending. Ultimately, higher profitability and productivity growth leads to lower unemployment and higher wage growth.

For those individuals that tend to be young and in second-tier temporary employment contracts, well-educated and hungry for success, structural reforms are fantastic. They may be the only way to stop such young talent from leaving those countries over the medium term.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.