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Can Greece cut its deficit by 10% of GDP?

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Yves Logghe/AP

(Read caption) European Central Bank President Jean-Claude Trichet, left, Greek Finance minister Giorgios Papakonstantinou, center, and Chairman of the Eurogroup Jean-Claude Juncker address the media in Brussels, May 2. Finance Ministers met to review a proposed bailout for Greece. The country is proposing to reduce its massive federal deficit by 10-11% of GDP.

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Greece needs money fast. The International Monetary Fund (IMF) and members of the Euro-zone have that money. But before they lend it to Greece (at very favorable interest rates), they are demanding that Greece get its fiscal house in order.

As a result, Greece is proposing an austerity plan that would reduce its out-of-control budget deficits (currently standing at more than 13% of GDP) by at least 10-11% of GDP.

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You might wonder whether that’s possible. History suggests the answer is yes, at least in principle. Indeed, several countries have achieved even larger deficit reductions.

According to an IMF study that I discussed a few months ago, the past three decades have witnessed at least nine instances in which developed nations have cut their structural deficits by at least 10% of GDP:

1. Ireland (20%, 1978-89)

2. Sweden (13%, 1993-2000)

3. Finland (13%, 1993-2000)

4. Sweden (13%, 1980-87)

5. Denmark (12%, 1982-86)

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6. Greece (12%, 1989-95)

7. Israel (11%, 1980-83)

8. Belgium (11%, 1983-1998)

9. Canada (10%, 1985-99)

This list demonstrates that large-scale budget improvements are possible. But they don’t always stick. Sweden, for example, makes two appearances in the top nine. Its gains in the 1980s were undone in the financial crisis of the early 1990s, so it had to undertake a second round of austerity. And Greece itself is a repeat offender, as its gains from the early 1990s have all been lost.

Greece faces enormous practical and political challenges in its austerity efforts, and success is hardly guaranteed. The nation can take some encouragement, however, from the fact that other nations have addressed even larger budget holes.

With some hard work and luck, perhaps Greece will join Sweden as a two-time member of the Large Deficit Reduction Club.

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