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 navigate.” Remark attributed to Constantine Karamanlis , the Greek statesman who was the architect of Greece’s participation in the European Union. � 2 George Alogoskoufis, Greece and the Euro, April 2018

Greece’s Voyage in the European Seas “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. � 3 George Alogoskoufis, Greece and the Euro, April 2018

The “Greek Way” and the “European Way” 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 grudgingly. It managed to become part of the Euro Area at the last possible minute, as it was accepted two years after 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 of the low real interest rates that followed from Euro area membership. ❖ 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 out by other EA economies and the IMF, and adopt an adjustment program dictated by its international creditors. � 4 George Alogoskoufis, Greece and the Euro, April 2018

Greek Economic Growth Before and After EU Entry ❖ 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 thousand. The average annual growth rate of GDP per capita was 5.5%. At such a rate, 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 2010. The average annual growth rate of per capita GDP fell to 1.1%. At such a rate, 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. � 5 George Alogoskoufis, Greece and the Euro, April 2018

GDP per Capita in Greece, 1948-2016 (2010 euros, log scale) 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00 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 Source: Eurostat , AMECO, November 2017 � 6 George Alogoskoufis, Greece and the Euro , April 2018

GDP per Capita in Greece, 1951-2011 (% of GDP per Capita in the USA, PPP $ of 2005) 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1951195319551957195919611963196519671969197119731975197719791981198319851987198919911993199519971999200120032005200720092011 Source: Penn World Tables, version 8.1 � 7 George Alogoskoufis, Greece and the Euro , April 2018

The Restoration of Democracy and EC Accession 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 of Constantine Karamanlis. � 8 George Alogoskoufis, Greece and the Euro , April 2018

The State of the Greek Economy before EEC Accession ❖ 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. � 9 George Alogoskoufis, Greece and the Euro , April 2018

The Social and Political Climate before EC Accession 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 one of the main drivers of Greek politics. These forces quickly led to the questioning and eventually the change of a very large part of the institutional structure that had characterized the economics and politics of the twenty five years between the end of the civil war in 1949 and the restoration of democracy in 1974. 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. � 10 George Alogoskoufis, Greece and the Euro , April 2018