The Greek Economy and the Euro: The Troubled George Alogoskoufis - - PowerPoint PPT Presentation
Fletcher School, Tufts University The Greek Economy and the Euro: The Troubled George Alogoskoufis Past and the Way Forward Throwing the Greeks into the Sea I am throwing the Greeks into the sea, and they will have to learn to
Fletcher School, Tufts University
George Alogoskoufis
George Alogoskoufis, Greece and the Euro, April 2018
“I am throwing the Greeks into the sea, and they will have to learn to navigate.” Remark attributed to Constantine Karamanlis, the Greek statesman who was the architect of Greece’s participation in the European Union.
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George Alogoskoufis, Greece and the Euro, April 2018
“I am throwing the Greeks into the sea, and they will have to learn to navigate.” Remark attributed to Constantine Karamanlis, the Greek statesman who was the architect of Greece’s participation in the European Union. Almost forty years later, it is still uncertain why the Greeks, able sea navigators throughout their history, have proven to be such awkward navigators in the European seas. The crisis of 2010 and its aftermath, in addition to a series of earlier mini crises and near misses of the late 1980s and early 1990s are indicative not so much of the roughness of the seas that the Greeks have had to navigate, but mostly of their obstinate, and counterproductive, resolve to do things “their way”. In this lecture we survey the waters and document the troubled economic voyage of Greece in the waters of the European Union, and especially the Euro Area, both before and after the crisis. At the end we offer some thoughts on the way forward, towards quiet waters.
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George Alogoskoufis, Greece and the Euro, April 2018
From the moment that Greece joined the European Economic Community (EEC), later to be called the European Union (EU), it appeared determined to follow its own course, and in particular with regard to macroeconomic policy, which, many times, was at odds with macroeconomic policy in the rest of the EU.
❖ In the 1980s, a decade of fiscal and monetary discipline and cooperation for the rest of the Community, Greece
engaged in an unprecedented fiscal and monetary expansion, which resulted in the accumulation of a huge government debt and an average annual inflation rate in excess of 20%.
❖ In the 1990s Greece tried to adapt to the requirements of the Maastricht Treaty on European Union, but did so
the original eleven members by marginally fulfilling the Maastricht Treaty criteria in 1999.
❖ From the moment it entered the Euro Area, it embarked on another round of fiscal profligacy, which soon set it apart
from the other members of the eurozone. In addition, it embarked on a round of international borrowing, as a result
❖ This last episode, was also the result of Euro Area asymmetries between the economies of the core and the periphery,
which were exacerbated by the creation of the single currency.
❖ Greece turned out to be one of the first EU economies to be seriously disrupted by the international financial crisis
and recession, during 2009-10, as it experienced a classic “sudden stop” in international lending, and had to be bailed
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George Alogoskoufis, Greece and the Euro, April 2018
❖ In the 30 years before Greece entered the European Economic Community, the real per
capita income of Greece rose fivefold from €2.9 thousand (constant euros of 2010) to €14.5
GDP per capita doubles after approximately 13 years.
❖ In the subsequent 30 years, after Greece had become a member of the European
Community and the European Union, the real per capita income of Greece rose by only 1.4 times. From the €14.5 thousand (constant euros of 2010) in 1980, to €20.3 thousand in
GDP per capita doubles every 63 years approximately.
❖ Similar trends can be detected in other related measures, such as per capita private
consumption or average labor productivity.
❖ This refers to economic growth before the 2010 crisis. After the recent crisis, real GDP
per capita fell to €17.1 thousand in 2016, a decline of 25% relative to its peak level in 2007 and shows no signs of recovery yet.
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George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
7.00 7.50 8.00 8.50 9.00 9.50 10.00 10.50 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Penn World Tables, version 8.1
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 1951195319551957195919611963196519671969197119731975197719791981198319851987198919911993199519971999200120032005200720092011
George Alogoskoufis, Greece and the Euro, April 2018
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Greece joined the EC in 1981, following an application submitted in June 1975, shortly after the restoration of democracy. Accession was achieved thanks to the vision, perseverance and efforts of the then Prime Minister, and later President of the Republic, Constantine Karamanlis, who was seeking not only the consolidation of the newly restored democratic freedoms but also further social and economic progress for Greece. The issue of EC membership became the subject of intense political controversy for several years after the restoration of democracy, as the then rising opposition party, the Panhellenic Socialist Movement (PASOK), led by Andreas Papandreou, was firmly opposed to EEC (and NATO) membership from the start. The Communist Party of Greece was also firmly opposed to EEC membership, while the Communist Party of Greece of the Interior (which later evolved into the current governing party, SYRIZA) was more ambivalent towards the EEC. Accession was completed after a relatively short preparation period, despite opposition from the left, and reservations from a number of European governments, due to the perseverance
George Alogoskoufis, Greece and the Euro, April 2018
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❖ The Greek economy was relatively unprepared for participation in the much more efficient and
competitive European market in the early 1980s.
❖ The growth miracle of the 1950s and the 1960s had taken place under protective tariffs that
provided a relative shelter for Greek industry, and inflation was kept low through Greece’s participation in the Bretton Woods system of fixed but adjustable exchange rates. It has to be noted that following a large devaluation in 1952, Greece was never under pressure to devalue, until the collapse of the Bretton Woods system in 1973.
❖ Manufacturing expanded in the 1950s and the 1960s, in order to service the domestic market, but
was never very successful in foreign markets. The international competitiveness of Greek industry remained low throughout this period. Furthermore, the oil shocks of the 1970s had weakened the competitive position of Greek industry, and the rapid removal of protective tariffs, a precondition for European Economic Community (EEC) participation, weakened it even further.
❖ As we shall soon see, problems of international competitiveness, have been pivotal in the
roughness of the seas that Greece faced in its European journey.
George Alogoskoufis, Greece and the Euro, April 2018
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The restoration of democracy had marked the beginning of the end of the deep social divisions that were created by the civil war of the late 1940s. It had also marked the beginning of a process of emancipation of social groups which had remained at the margin of politics for at least a quarter of a century. It was also seen as the way to satisfy social demands for a liberal political system, redistribution of income and wealth, and further convergence towards the standard of living of the more developed economies of Western Europe. The demands of the middle and lower middle classes for a state that would actively play the role of protector and guarantor of their newly acquired democratic freedoms and their living standards has been
change of a very large part of the institutional structure that had characterized the economics and politics
Following a referendum, the monarchy was abolished, and Greece became a Republic. In 1974 a new constitution was adopted, which, in the economic and social field, had very little relation to the previous post civil war Constitution of 1952. The priorities of fiscal, income, credit and monetary policy, the role of trade unions, as well as the nature and the breadth of state economic activity changed radically, as the authoritarian post-war political regime was transformed to one of Europe's most liberal democracies.
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The economic policy of the 1975-1979 period was shaped by three main forces. 1. The social pressure for redistribution of income and wealth, 2. the prevalence of social and political perceptions that contributed to the expansion of state economic activity and, 3. the preparations for Greece’s entry into the EC. These forces influenced almost all economic policy choices in the period up to accession. As a result of the policy of that period, there was a rapid recovery of the Greek economy from the recession of 1974, unemployment remained at very low levels, there was a modest fall in inflation from its high of 25% in 1974, and significant surpluses in the current account. These developments are recorded in the first row of Table 1. Until 1980, the budget deficit remained low, below 3% of GDP, while there was a significant improvement in wages and pensions in real terms. However, the second oil crisis that erupted in 1979 led to a new episode of stagflation. The growth rate declined sharply, from 7.2% in 1978, to 3.3% in 1979, to 0.7% in 1980. In 1981 there was another recession following that of 1974. Inflation almost doubled, from 13.2% in 1978 to 22.5% in 1980 and 23.2% in 1981. Unemployment also doubled from 1.9% of the labor force in 1978 to 4% in 1981. Finally, the deficit of the general government, in the electoral year 1981, more than tripled to 9% of GDP, from just 2.6% in 1980. Thus, 1981, the year of EC accession, was also a year of significant destabilization of the Greek economy, due to the second international oil crisis and the domestic electoral cycle. Towards the end of the year, in the elections of October 1981, the Panhellenic Socialist Movement of Andreas Papandreou, was swept into power, promising “change”. A party that was initially opposed to EC membership, was called upon by the electorate to manage the fortunes of Greece immediately after EC accession.
George Alogoskoufis, Greece and the Euro, April 2018
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Growth Rate Unemployment Inflation Current Account Late 1970s 1975-1979 5.3% 1.9% 14.1% 1.0% The 1980s 1980-1984
5.4% 21.8% 0.3% 1985-1989 1.8% 6.8% 17.2%
The 1990s 1990-1994 0.8% 7.8% 16.2%
1995-1999 3.3% 10.3% 6.0%
The 2000s 2000-2004 4.6% 10.5% 3.3%
2005-2009 1.0% 9.0% 3.0%
The 2010s 2010-2014
21.8% 1.5%
2015-2016
24.3%
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❖ Greek macroeconomic policy during the 1980s dealt another blow to the competitiveness of the Greek
economy.
❖ Exorbitant labor cost increases in the early 1980s, an expansion of the public sector, higher taxation, and
explosion of public debt and high inflation dealt severe further blows to the Greek economy.
❖ Two of the problems that have plagued the Greek economy ever since, the pervasive and extremely inefficient
public sector and the extremely high public debt, are a legacy of the 1980s.
❖ A stabilization program in the mid 1980s, following a balance of payments crisis, was too little too late, as it
was focused only on a devaluation and the containment of increases in labor costs for two years. The improvement in international competitiveness proved temporary, and, in any case, the program was abandoned in 1988.
❖ It was only in the early 1990s that Greece started to tackle some of the policy-induced imbalances that had
further weakened its economy in the 1980s. However, the approach was too gradual and relatively
become the twelfth member of the Euro Area in June 2000.
❖ Euro area participation initiated a cycle of “euro euphoria”, during 1998-2000, as Greece succumbed to the
temptations of a low interest rate environment. The balance of payments deficit soared and the “sudden stop” ensued in the aftermath of the international financial crisis.
George Alogoskoufis, Greece and the Euro, April 2018
(Debt financed expansion of the public sector, Expansionary monetary policy, Indexation of Wages, Capital controls. Macroeconomic Outcome: Low Growth, High Inflation, Periodic Balance of Payments Crises, Explosion of Public Debt)
(Limited tightening of fiscal policy, Significant tightening of monetary policy, Lifting of Capital Controls, Limited ‘’structural reforms’’, Euro Area entry. Macroeconomic Outcome: Low Growth, Deceleration of Inflation and Significant Reduction in Nominal and Real Interest Rates, Stabilization of Public Debt at a High Level)
(Low interest rate and inflation environment, Rise in Private Sector Indebtedness, Fiscal relaxation, Limited “structural reforms” such as privatizations. Macroeconomic Outcome: High Growth, Low Inflation, Reduction in Unemployment, Sustained Balance of Payments Deficits and Explosion of External Debt)
(“Sudden stop” in international lending to Greece in 2010, Adoption of “front loaded’’ program of steep fiscal adjustment and wage and pension cuts, “Haircut” of Greece’s external debt, Massive capital flight, Absence of capital controls until
Unemployment, Deflation, “Correction” of External Imbalances, Explosion of Public Debt relative to Output.)
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George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0% 15.0% 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
% of GDP
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 200.0% 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0%
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
General Government Balance General Government Primary Balance
George Alogoskoufis, Greece and the Euro, April 2018
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0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Primary Expenditure Interest Total Revenue
Source: Eurostat, AMECO, November 2017
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Recession Wage Inflation Price Inflation
George Alogoskoufis, Greece and the Euro, April 2018
Difference of Greek and OECD Inflation Rates and Depreciation Rate of the Effective Exchange Rate (% per annum)
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Difference between Greek and OECD Inflation Depreciation of Effective Exchange Rate
George Alogoskoufis, Greece and the Euro, April 2018
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0% 5% 10% 15% 20% 25% 30% 35% 1992.09 1993.03 1993.09 1994.03 1994.09 1995.03 1995.09 1996.03 1996.09 1997.03 1997.09 1998.03 1998.09 1999.03 1999.09 2000.03 2000.09 2001.03 2001.09 2002.03 2002.09 2003.03 2003.09 2004.03 2004.09 2005.03 2005.09 2006.03 2006.09 2007.03 2007.09 2008.03 2008.09 2009.03 2009.09 2010.03 2010.09 2011.03 2011.09 2012.03 2012.09 2013.03 2013.09 2014.03 2014.09 2015.03 2015.09 2016.03 2016.09 2017.03 Yield of 10 year Government Bond Inflation Rate
Source: OECD, Main Economic Indicators, April 2017
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0% 15.0% 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Current Account Private Savings Investment Balance
George Alogoskoufis, Greece and the Euro, April 2018
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Source: Eurostat, AMECO, November 2017
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Recession Gross Fixed Capital Formation
George Alogoskoufis, Greece and the Euro, April 2018
Real Effective Exchange Rate (2010=100, Based on Relative Unit Labor Costs against 24 Industrial Economies)
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60 65 70 75 80 85 90 95 100 105 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Eurostat, AMECO, November 2017
George Alogoskoufis, Greece and the Euro, April 2018
❖ International financial crisis and recession leads to deep 2009 recession, fiscal deterioration
and a classic “sudden stop” in international lending to Greece in 2010
❖ Greece is forced to adopt “front loaded’’ fiscal adjustment program designed by the “troika”
❖ “Haircut” of Greece’s external debt through so called Private Sector Initiative (PSI) of 2012
and second bailout
❖ Greece’s external debt transferred from private investors to public entities, like the ECB and
the newly fangled European Stability Mechanism
❖ ‘’Grexit” fears and PSI lead to massive capital flight, eased by the absence of capital controls ❖ The economy slides into a “Great Depression” ❖ Successive Failures of the adjustment program lead to demands for more of the same by the
“troika”.
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George Alogoskoufis, Greece and the Euro, April 2018
❖ As with every sovereign debt crisis, a prerequisite for a sudden stop is a period of sustained
current account deficits, which lead to the accumulation of foreign currency denominated debt.
❖ In the case of Greece, and the other economies in the Euro Area periphery, the euro proved to be a
“foreign currency”, as the ECB was constrained by the “no bail out clause” which prevented it from acting as lender of last resort to EA governments or banks. Had the ECB been able to buy government debt, this may have proven enough to avert a sovereign debt crisis, as was the case in the US or the UK during the financial crisis. Due to this major fault line in the design of the Euro Area, the macroeconomic asymmetries that made the countries of the periphery net borrowers, and the countries of the core net lenders, could not be addressed by the ECB. It was only after 2012, with the “whatever it takes” policy of President Draghi, that the ECB started acting as a “lender of last resort” in a limited way, through the QE program, but then it was too late for Greece.
❖ Hence, in the wake of the crisis, Greece, and other countries like Ireland and Portugal, were not
unlike the Latin American economies which had borrowed in dollars during the 1970s, or the Asian economies which had borrowed in dollars during the 1990s. The Euro Area crisis of 2010-12 was very similar to the Latin American crisis of the 1980s and the Asian crisis of the late 1990s.
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George Alogoskoufis, Greece and the Euro, April 2018
❖ Every financial crisis is in effect a confidence crisis and requires a trigger. In the case of Greece
the trigger was the international financial crisis and recession of 2008-09.
❖ It provided the opportunity for the reassessment of Greece’s ability to service its external debt
by international financial markets, and Greek spreads started rising mildly at the end of 2008, receded somewhat in the early part of 2009 and started rising again after the election of 2009.
❖ The situation reached crisis proportion because of domestic political mistakes which prompted
financial markets to portray Greece as a perpetrator and not a victim of the international financial crisis and the fact that the Euro Area, lacking a lender of last resort, was very slow in arranging a bailout for Greece.
❖ It was thus due to the accumulation of external imbalances in the years of the “euro euphoria”,
domestic political mistakes after the international financial crisis, and the fault lines in the design of the Euro area, such as the inability of the European Central Bank to act as lender of last resort to EU governments (until 2012), that Greece experienced the “sudden stop” to international lending and was led to seek official assistance from its EU partners and the IMF.
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George Alogoskoufis, Greece and the Euro, April 2018
❖ The seven-year adjustment program that was imposed on Greece in the aftermath of the 2010 crisis has, so far, been a
resounding failure.
❖ It was one sided, in focusing mainly on fiscal adjustment through wage and pension cuts and tax increases, resulted in
financial repression, as it did not recognize the dangers of capital flight, at least until the imposition of capital controls in 2015, and it lacked credibility, as its targets were unrealistic and the program was not consistently applied.
❖ Whereas previous failures of economic policy can be mostly attributed to Greek governments and the Greek political
system, this failure cannot be considered a purely “Greek” failure.
❖ For a start, asymmetries in the Euro Area were also responsible for Greece’s external imbalances and the sharply different
current account behavior of countries in the core and the periphery of the Euro Area. To put it simply, in the years of “euro euphoria”, the common monetary policy of the ECB proved too lax for the countries of the periphery like Greece.
❖ Furthermore, after the eruption of the crisis, the EU Commission, the ECB and the International Monetary Fund were
directly responsible for the design of the adjustment program and, in addition, had a large impact on the way it was implemented.
❖ Hence, the failure of the program is as much their own failure, as it is the failure of the post-2010 Greek governments, who
never truly embraced the adjustment process, as they were not even consulted.
❖ Whenever a Greek government tried to renegotiate or amend some of the more catastrophic provisions of the program, it
was threatened with “Grexit” and had to capitulate.
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George Alogoskoufis, Greece and the Euro, April 2018
❖ There is limited scope for an overhaul of Greek macroeconomic policy now that the current
adjustment program heads towards its conclusion.
❖ The first priority is for Greece and the “international institutions” to acknowledge that was
is required is a program targetted at the sustained recovery of the Greek economy, and agree on the limitations and the weaknesses of the Greek adjustment programs of the last eight years. The Greek government, the EU institutions and the IMF have deep
and Greece is in the middle.
❖ Thus, the first priority, even before the current adjustment program ends, is for the three
sides to cooperate on the drafting of a realistic recovery program.
❖ This must obviously retain the focus on fiscal consolidation and structural reforms that
will promote the growth potential, the fiscal balance and the competitiveness of the Greek economy in the long run, but in addition it must also focus on the short and the medium run, and the need for a rapid recovery of confidence, investment and aggregate demand.
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George Alogoskoufis, Greece and the Euro, April 2018
❖ On of the main problems of adjustment efforts so far has been the lack of credibility of the adjustment
❖ There is an urgent need to arrive at an acceptable compromise to be adopted by the European side, the
IMF and the widest possible spectrum of political forces in Greece. This will require involving both the government and the main opposition party in the drafting of the recovery program and getting them to agree on a minimum of commonly acceptable priorities. A serious and credible input from the Greek side on the drafting and adoption of such a recovery program is extremely important for its success.
❖ A credible recovery program must enjoy wide political legitimacy in Greece itself, as well as being
acceptable to the “international institutions”, which is something that does not apply to the current adjustment program.
❖ The consistent application of such a program by Greece for a number of years, in a way that inspires
confidence that the program is there for the medium term, will gradually increase its credibility.
❖ Only a credible medium term recovery program with broader aims and wider political legitimacy than
the current one can ensure the revival of investment and consumption in Greece and the reversal of the capital flight that occurred after the sudden stop.
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