Troika therapy: did it work?
Why a number of the countries that underwent the Troika bailout programme are now performing better than the others.
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.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.