This study note provides background on recent developments in the Greek Economy
The Greek Debt Crisis
The Greek economy became embroiled in a huge debt crisis in the aftermath of the global financial crisis from 2007 onwards. Having struggled to keep public sector spending under control and tackle widespread tax evasion, it became clear a few years ago that the annual Greek budget deficit was much higher than expected. About €30bn annually of tax revenues go uncollected in Greece.
The tipping point for Greece was the immediate and short-run fall-out from the Global Financial Crisis (GFC). Students ought to be familiar with the background here. The sub-prime mortgage crisis in the United States quickly turned into a major global financial meltdown affecting most countries but especially those with highly leveraged financial systems i.e. banking systems and other lenders that had created too much credit to private sector businesses and individuals.
The Greek economy was hit by a fierce demand-side shock and this was made worse because the economy was already suffering from structural competitiveness problems inside the single currency system.
As a direct consequence of the GFC:
In 2009 Greek exports collapsed by nearly a fifth (causing a large inward shift of AD) and the Greek fiscal deficit grew from 5% of her national income in 2007 to nearly 14% in 2009. A decade of progress in reducing unemployment was reversed within the space of two harsh years.
The Greek government has run a budget deficit in every year of at least 4% of GDP. Even during the first half of the last decade there was a sizeable deficit although corruption and fraud meant that the official figures hid this. The deficit peaked at over 15% of GDP in 2009 and in 2011 the budget deficit was nearly 10%. Strong growth in Greece helped to keep the government debt to GDP ratio at or around 115% during the years from 2001 to 2008 but a combination of huge annual deficits and six years of recession has brought about a huge rise in the scale of the national debt.
The OECD is forecasting that this will reach 200% of GDP in 2014 despite attempts to cut the deficit. The reason is simple – even though the Greek budget deficit is coming down, their economy is shrinking so the base level of real GDP is falling. In December 2012, the 'troika' of the IMF, the EU and the European Central Bank reached a new funding agreement for which will cut Greece's long term debt burden. And Greece has made some progress in cutting the annual budget deficit. Greece reduced its fiscal deficit before interest payments by 13.4% of GDP between 2009 and 2012.
The European Union, International Monetary Fund and the European Central Bank are the main creditors to the Greek government. They are known as the EU-IMF-ECB troika
Fiscal austerity means contractionary fiscal policy measures in the form of higher taxes and/or cuts in planned government (public) spending. In Greece in 2010, the country was forced to agree a Euro 110bn emergency bailout and introduce an austerity budget. These measures included a VAT rise from 19% to 23%, higher duties on fuel, alcohol and cigarettes, an increase in the retirement age, a public sector pay freeze and a freeze on the size of the basic state pension.
There is a fierce debate in economics about the most effective ways to address the problems caused by high levels of government debt. Many economists including Nobel-winner Joseph Stiglitz argue that contractionary policies make the debt problem worse and that sustained growth is the best pathway out of a debt crisis.
Greece is also seeking to implement structural economic reforms as part of their bail-out package. Structural economic reforms have included:
The key issue is whether these structural supply-side reforms will be sufficient to improve competitiveness and generate the minimum growth that Greece needs to break out of their debt trap?
Recent articles and videos on the Greek Economy
BBC (Robert Peston) - UK planning for possible Greece exit from the eurozone - http://www.bbc.co.uk/news/business-31297809
See also - gloval debts rise $57trillion since the crash: http://www.bbc.co.uk/news/business-31136707
BBC: Alan Greenspan predicts Greek exit from the euro: http://www.bbc.co.uk/news/business-31249907
The futures facing Greece (Feb 2015) http://www.bbc.co.uk/news/business-31418626
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