THE GREEK CRISIS AND THE EUROZONE:

A CURE WORSE THAN THE DISEASE?

Loukas Tsoukalis

Istituto Affari Internazionali Roma, 6 February 2013

Greece as catalyst for transformation of international financial crisis to a crisis of the eurozone in 2009

1. Budget deficit (15.4% of GDP in 2009)2. Current account deficit (15% in 2008)3. Credibility deficit (Greek statistics)

Essentials of Greek problem:

1. Public finances gone out of control, esp. in 2007-9

2. Competitiveness gradually eroded 3. Lack of structural reforms4. Clientele political system

In Greece, it is mostly public debt, not private as in Spain and Ireland. Cheap borrowed money provided mostly by foreign lenders on the assumption that sovereign risk was zero and high growth rates could be sustained forever. Meanwhile, clientelism grew and reforms were postponed.

Greek problem also part of a systemic European problem reinforced by the bursting of the international financial bubble.

Banking crisis Sovereign debt crisis Competitiveness problem in a currency union

  A currency without a state (Tommaso Padoa-Schioppa)

When reality hit in the end of 2009, Greek government dithered and so did its European partners.

Since May 2010 (first adjustment programme), Greece has become a test-case for new policies at national and European level.

Stress test for political system, economy and society.

‘Unthinkables’ become reality in Greece and the EU.

GENERAL GOVERNMENT DEFICIT/SURPLUS AS A PERCENTAGE TO GDP (2001-2012)

2001-20072008

20092010

20112012

-18.0

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

-5.7

-9.8

-15.6

-10.7-9.4

-6.6

General government deficit/surplus as % GDP

Eurostat

2001-2007: Average annual general government deficit/surplus as % of GDP 2012: Forecast, European Commission, "The Economic Adjustment Programme for Greece", December 2012

Unprecedented budgetary consolidation (9% of a rapidly declining GDP between 2009 and 2012)

INTERNAL DEVALUATION: NOMINAL COMPENSATION PER EMPLOYEE (1998-2012)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.06.6

4.0 3.6 3.5

-2.6-3.4

-6.8

Nominal compensation per em-ployee (annual percentage change)

1998-2002, 2003-2005: 5-year averages 2012: Forecast

Cumulative decline of nominal unit labour costs by 14% in 2010-12

European Commission, "European Economic Forecasts- Autumn 2012"

CURRENT-ACCOUNT BALANCE AS A PERCENTAGE OF GDP (2001-2012)

20012002

20032004

20052006

20072008

20092010

20112012

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

-7.2-6.5 -6.5

-5.8

-7.6

-11.4

-14.6-14.9

-11.1-10.1 -9.8

-5.8

Current account balance as % GDP

2012: Forecast IMF

Improvement of current account balance by 9% of GDP in 2008-12, but largely due to the shrinking of domestic demand

Slow pace of structural reforms, accelerating since mid-2012

Pension reform Labour market Closed professions Restructuring of the state Privatisations

GENERAL GOVERNMENT GROSS DEBT AS A PERCENTAGE OF GDP (2001-2012)

2001-2007 2008 2009 2010 2011 20120.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

102.1112.9

129.7

148.3

170.6160.1

General government gross debt as % GDP

2001-2007: Average annual general government gross debt as % of GDP 2012: Forecast, European Commission, "The Economic Adjustment Programme for Greece", December 2012

Eurostat

Public debt restructuring: ‘haircut’ of private holders of Greek public debt (total €200 billion) at 53.5% of the outstanding face amount% in present value in Feb-March 2012, followed by debt buyback of €32 billion in Dec. 2012

Deadly spiral of austerity and recession sustained by fiscal consolidation, monetary squeeze and speculation on Grexit.

ANNUAL AVERAGE GROWTH RATE (2001-2012)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

4.2

-0.2

-3.1

-4.9

-7.1

-6.0

Real GDP growth rate

2001-2007: Annual average growth rate 2012: ForecastEurostat

Cumulative decline of GDP by 20% between 2008 and 2012. Further negative growth expected in 2013.

UNEMPLOYMENT RATE (2001-2012)

2001-20072008

20092010

20112012

0.0

5.0

10.0

15.0

20.0

25.0

9.75714285714286

7.79.5

12.6

17.7

23.6

Unemployment rate (% labour force)

2001-2007: Annual average rate 2012: Forecast, European Commission, "European Economic Forecasts- Autumn 2012"

Eurostat

Partial implosion of political system, rise of extremism, society close to nervous breakdown

Coalition Government accelerating implementation of adjustment programme since mid-2012

.........but risk of accidents

Given where we started, adjustment was bound to be painful and long. Yet, the pain has been much stronger than anticipated and the suffering has lasted longer, because of the ineptitude of much of the Greek political class, the incoherence of the European political system and a faulty economic strategy.

  Frontloading of adjustment? Fiscal multipliers? Sustainability of public debt?

Greece needs a peaceful revolution

Greeks need to take ownership of a wide ranging programme of reforms; they cannot simply be imposed from outside.

Together with other countries of the beleaguered South, Greece needs time, money and an external environment more propitious to growth.

And these can be provided by Europe as part of a new grand bargain.

NEW EUROPEAN GRAND BARGAIN

Banking Union Recapitalisation of banks

Fiscal and Economic Union Symmetry of adjustment Growth policies

  Debt sustainability

Democratically regulated markets or market driven democracies?  

Restore confidence in the irreversibility of the currency union

Restore trust between countries