By George Alogoskoufis
Economist and former Greece’s FinMin
It is rumored that Constantine Karamanlis, the Greek statesman who was the architect of Greece’s participation in the European Union, once remarked, “I am throwing the Greeks into the sea, and they will have to learn to swim.”
Thirty-five years down the road, it is still uncertain whether the Greeks, able sea navigators throughout their history, can prove to be good swimmers in the European seas.
The crisis of 2010 in addition to earlier mini crises and near misses of the late 1980s and early 1990s are indicative of the roughness of the seas that the Greeks have had to navigate and their well-documented resolve to do things “their way.”
Some facts: In the 30 years before Greece entered the European Community, the real per capita income of Greece rose fivefold from €2.9 thousand (constant euros of 2010) to €14.5 thousand. 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. Similar trends can be detected in other related measures, such as per capita private consumption or average labor productivity.
It is clear that participation in the European Union did not result in a growth and productivity miracle for Greece, even before the 2010 crisis. Exactly the opposite. Greece entered into a period of slow growth after it entered the EEC. It was only after the creation of the euro that Greece enjoyed a pickup in economic growth. The crisis, and the policies that were followed after the crisis, transformed the slow growth that Greece was recording throughout the 1980s and the 1990s, and the higher growth that Greece experienced after adopting the euro, into “Greece’s Great Depression”. Output per capita fell by 16% between 2010 and 2015 and private consumption per head fell by the same percentage.
On the basis of these facts, one can conclude that with regard to the economy, the participation of Greece in the EU had been troubled, even before the recent crisis unfolded. It became worse after the crisis. The first question is how and why? A related, second question is, what can be done about it?
There is no doubt that the Greek economy was relatively unprepared for participation in the much more efficient and competitive European market in the early 1980s. The economic miracle of the 1950s and the 1960s had taken place under protective tariffs that provided a relative shelter for Greek industry. Manufacturing expanded 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 weakened the position of Greek industry, and the removal of protective tariffs, a precondition for European Central Bank (ECB) participation, weakened it even further.
Second, Greek economic policy in the 1980s dealt another blow to the competitiveness of Greek industry. Exorbitant labor cost increases in the early 1980s, an expansion of the public sector, higher taxation and high inflation dealt severe further blows to the Greek economy. The stabilization program of the mid 1980s was too little too late, as it was soon abandoned. It was only in the late 1980s that Greece started to tackle the policy-induced imbalances that had weakened its economy in the 1980s.
There is no doubt that the reform program of the 1990s was not ambitious enough. In addition, it was saddled with frequent reversals around the time of elections. Yet, Greece had partially changed course and scraped through in order to participate in the Euro Area. It remained an economy with low international competitiveness and large fiscal imbalances, but it managed to tame inflation and put a lid on the growth of the public debt to GDP ratio, an important burden since the 1980s.
Greece’s economic policy was relaxed after the country had secured participation in the Euro Area. Fiscal deficits started increasing again from day one, the electoral cycle returned, and expensive initiatives were undertaken, such as the Olympic Games of 2004. Furthermore, Greece was operating in a low interest rate environment, because of Euro participation. This allowed households, firms and the government to borrow cheaply, thus spending more and saving less. A stabilization program after the Olympic games was again too little too late. The higher investment and consumption since 1998 led to large current account deficits. Greece’s already high public debt, previously mainly domestic, was gradually translated into external debt. The dangers were largely ignored for ten years as economic growth had picked up due to the higher investment and consumption, and unemployment fell without a rise in inflation.
It was at this point that the international financial crisis of 2008-09 struck. It provided the excuse for the reassessment of Greece’s ability to service its external debt by international financial markets, and Greek spreads started rising. The situation reached crisis proportion because of domestic political mistakes that portrayed Greece as a perpetrator and not a victim of the international financial crisis. Due to these domestic political mistakes, and the inability of the European Central Bank to act as lender of last resort to EU governments, Greece experienced a “sudden stop” to international lending and had to seek official assistance from its EU partners.
The seven-year adjustment program that was adopted in the aftermath of the 2010 crisis has, so far, been a resounding failure. Whereas previous failures of economic policy can be directly attributed to the Greek political system, this failure is not a purely Greek failure. The EU Commission, the ECB and the International Monetary Fund were directly involved in the design of the program and its implementation. 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 program.
What is to be done now? The first priority is to acknowledge the limitations and the weaknesses of the current Greek adjustment program. The second is for the troika (EC Commission, ECB, IMF) and the Greek authorities to cooperate on the design of a new mutually acceptable adjustment program to be adopted by a wider political spectrum in Greece than just the current government. The revised adjustment program must enjoy wide political legitimacy in Greece itself, which is something that does not apply to the current program. The third priority is the consistent application of the program in a way that inspires confidence that the program is there for the medium term.
Only a credible medium term adjustment program with broader aims than those of the current one can ensure the revival of investment and consumption in Greece in order to drag the economy out of the seven-year recession and contribute to its sustained recovery. Has Greece’s turn arrived? We shall soon find out.
This post is part of a series produced by The Huffington Post and The Fletcher School of Law & Diplomacy at Tufts University, leading up to “Greece’s Turn: A Litmus Test for Europe,” an upcoming conference that will examine the fundamentals, strengths and vulnerabilities of Greece from the perspectives of politics, business, investment and the economy, society and international relations while exploring the implications for the future of the Eurozone. This series will address some of these challenges in advance of the conference. For more information about Greece’s Turn, visit here.
Source The Huffington Post (US)