Tailored Approach to Debt and Growth Challenges in Europe’s Crisis Countries

IMF examines key issues at stake in Ireland, Greece, and Portugal

No one-size-fits-all approach, path to recovery differs

Programs seek to curb high debt, boost growth and competitiveness

In a packed house seminar during the global lender’s Spring Meetings in Washington, D.C., the head of the IMF’s European Department and the mission chiefs responsible for Greece, Ireland, and Portugal gave a candid assessment of the varied challenges facing these countries and the paths they are pursuing toward recovery.

“Each country’s individual economic and financial problems are very different, but there are common themes,” said Reza Moghadam, Director of the IMF’s European Department, noting how the welcome decline in interest rates that came with euro membership unfortunately also resulted in a rapid increase in indebtedness, and how competitiveness suffered.

Strategies to curb debt and boost growth

The rise in debt that followed the sharp drop in interest rates took different forms in each country. Greece’s government borrowed heavily and so did Portugal’s, along with the latter’s private sector. In Ireland, private sector borrowing boomed, especially for real estate, leading to a banking crisis when the country’s housing bubble burst and sharply rising public debt as a consequence of bailing out the banks. Large increases in debt were one problem. For Greece and Portugal, a lack of competitiveness and low growth exacerbated the fiscal challenges.

Worries about debt and growth prospects shut countries out of financial markets and stifled their economies. Working closely with the European Commission and European Central Bank, the IMF is helping Greece, Portugal and Ireland get back on their feet. “The focus of our programs has been to put in place the conditions for growth in the long run,” said Moghadam.

Each country’s program is designed to curb debt and boost growth, and provides financial help until a return to market borrowing is possible.

Hastening a return to growth in Greece

Mark Flanagan, mission chief for Greece, outlined how this has meant a focus on bringing down Greece’s very high deficits and debt, as well as measures to make Greek exports more competitive and hasten a return to growth. Given even greater challenges than initially expected, Greek officials, the IMF, and European counterparts have shown flexibility, adapting the strategy to reduce debt more aggressively—including the largest and steepest debt deal in...