The Greek economy is rarely a few weeks or months away from another economic, financial or political crisis. Does Greece have a long-term future inside the Euro Zone? It is clear that, having enjoyed strong economic growth in the years following her accession to the European Union, Greece has struggled to emerge from deep economic problems in the aftermath of the Global Financial Crisis. Greece is a small open economy, her GDP accounts for less than 0.25% of world output and Greece is a relatively small country within the Euro Zone. But her difficulties pose systemic risks for the currency union.

1. Prospects for the
Greek Economy
Geoff Riley
Tutor2u Economics, February 2017

2. Greece in 2017
• Real output (GDP) has fallen by 25% since 2008
• Per capita incomes were Euro 18.6K in 2011, now 16K
• Real consumption is 40% lower than pre-crisis
• Unemployment has been above 20% for six years
• Economy remains on the edge of price deflation
• Private sector wages have fallen by more than 40%
• Investment fell to 10% of GDP in 2014 v 27% in 2007
• Tourism is recovering strongly – having the Euro helps!
• But economy has number of supply-side weaknesses
• Interest rate on 10 year government debt = 7.4%

3. GDP Growth in Greece
-10
-8
-6
-4
-2
0
2
4
6
8
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Annual % Change in Real GDP
Real GDP
Forecast for 2017 is from the OECD
During the period 2008-13, the Greek economy went through a dramatic contraction.
Output fell by approximately one-quarter during this period, and unemployment rose to
more than 25 per cent of the labour force
%

4. GDP and Investment in Greece
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Annual % Change in Real GDP and Capital Investment
Real GDP Investment
Forecast for 2017 is from the OECD

5. Real GDP in Greece
By way of comparison, the UK’s economy shrank by 6% during the 2008/2009 recession

6. Context on the depth of the crisis
IMF Report on
Greece, February
2017
Greece has not
managed to return
to sustainable
growth, with output
having contracted
by more than 25
percent since 2008,
investment down by
more than 60
percent, and
unemployment at
the highest level in
the euro-zone.

7. Social costs of the Greek depression
• Steep rise in relative poverty – more than a 3rd of households
now fall below the poverty line of <50% of median income
• NEETs - 30 per cent of young people in Greece are not in
employment, education or training, this is one of the highest
rates in Europe. Graduate employment rates are only 49%.
• Sharp decline in measured life satisfaction / happiness
• A third of marriages in Greece are ending in divorce
compared to 2 in 10 before the recession
• The informal economy of Greece is one of the largest in
Europe, exceeding 20 per cent of the country’s GDP
• Greece ranked 29th on HDI outcomes – below the average
score for high income advanced countries

8. “Thirty-six per cent of the population are at risk of poverty or
social exclusion and almost 30 per cent of young people not
in employment, education or training, one of the highest
rates in Europe.” (Source: EBRD)

9. Collapsing life satisfaction
Share of satisfied and very satisfied in responses
Source: European Commission, Eurobarometer.

10. Structure of Output in Greek GDP
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ShareofGDP
Agriculture Industry Services
Greece’s economy is dominated by services. The share of industry in GDP is the third lowest
in the EU. Presently, manufacturing in Greece is mainly related to labour-intensive food
processing. Real estate and tourism are key sectors for the Greek economy. Shipping does
well but it is capital intensive and is often said to take advantage of tax-holidays (avoidance).

11. Real House Prices in Greece
-15
-10
-5
0
5
10
15
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Real House Prices%
Source: OECD Economic Outlook
The Greek national minimum wage is about 500 euros/month. It means people remain living
at home into their late 20s and early 30s. Their real disposable income has also been hit by
high price due to taxes including VAT at 24%.

12. Greek Unemployment Rate
Women in Greece are facing significantly more unemployment than men (30.2 per cent for
women compared to 23.7 for men).

13. Youth unemployment rate in EU member
states in October 2016 (seasonally adjusted)
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
Greece
Spain
Italy
Croatia
Portugal
Cyprus
France
Belgium
Euro area
Romania
Finland
Slovakia
EU
Sweden
Youth unemployment rate

14. Estimated Output Gap for Greece
-20
-15
-10
-5
0
5
10
15
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Output Gap% of potential GDP
Forecast for 2017 is from the OECD

15. Inflation and Deflation in Greece
-2
-1
0
1
2
3
4
5
6
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Inflation (Annual % change in consumer prices)%
Forecast for 2017 is from the OECD
What is the main cause of the deflationary pressure in Greece? Most likely to be a
chronic lack of aggregate demand, high unemployment and a large output gap.

16. The Greek Debt Crisis and Fiscal Austerity

17. Essentials on the Greek Debt Crisis
• Over the last 6 years, Greece has had 7 governments
• Public debt has continued to rise, reaching 180% of GDP
by end-2015 (65% higher than its pre- crisis level.
• Greek pension system is in crisis – deficit of 11% of GDP
• Greece has a very narrow tax base - taxpayers in the
highest income decile pay about 60 percent of personal
income tax revenue, while 53 percent of wage earners
and 85 percent of farmers are exempt from tax
• Rates for all major taxes in Greece are higher than the
euro-area average (e.g. VAT is 24%) this encourages tax
evasion and also reduces labour market participation.

18. Greek Fiscal Balances
-20
-15
-10
-5
0
5
10
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Fiscal Balance for Greece, % of GDP
Fiscal Balance Cyclically adjusted fiscal balance
% of GDP

19. Greek Public Debt
In February 2017, the International Monetary Fund predicted that Greece’s sovereign
debt pile could climb to 275 per cent of GDP by 2060. They argue that Greece is
currently unable to grow her way out of the crisis and that debt relief is inevitable.
Under the deal struck in 2015,
Greece is supposed to achieve a
primary fiscal surplus before
interest payments in 2018 of 3.5%
and maintain this surplus for the
medium term.

20. Fiscal Austerity
• The TROIKA has imposed fiscal
austerity on Greece
• TROIKA comprises the European
Commission, ECB and IMF
• Fiscal austerity has included:
1. Cuts in public sector pay and
pensions
2. Rise in the retirement age
3. Large scale privatizations
4. Increases in VAT (to 24%)
5. Deep cuts in public sector
employment
“With the drachma, immediately
better" says the hard left union fly
poster on an Athens street.
(Credit: Phil Holden)

21. Can Greece grow her way out of debt?
• Trend growth of potential GDP comes from:
1. Growth in the productivity of labour and capital
2. Expansion of the active labour supply
3. Positive net investment to grow the capital stock
4. Growth benefits spilling-over from improved innovation
• Supply-side gains gives a country the extra capacity
• The strength of aggregate demand creates actual output
• Crucial for Greece to invest in areas of potential comparative
advantage
• Greece’s long-term potential lies in sectors such as tourism,
logistics, regional energy projects, energy efficiency, food
processing and pharmaceuticals

22. Would Greece benefit from debt relief?
• What forms might debt relief take?
1. Longer grace periods, i.e. pushing back the date of
when Greece makes its first loan repayment
2. Reduction in the interest rates on existing loans
3. Creditors agree a partial “haircut” to unpaid debt
• Debt relief would ease pressure for fiscal austerity and
perhaps allow increased public sector investment
• Greek debt already has a long maturity (not an issue)
• Debt relief is a necessary, but not sufficient condition for
Greece to return to growth – economic reforms needed
• Opponents of debt relief for Greece argue that it would
create a problem of moral hazard for other debtors

23. Supply-Side Challenges Facing Greece
Fragile banking
system – limited
funds for credit
High rate of
structural
unemployment
Low degree of
economic
diversification
Narrow tax base +
high tax avoidance
Low productivity
and innovation
Shrinking and
ageing population
Most estimates find that Greece’s long run “trend” growth rate is low – perhaps around 1%.
But it is almost impossible to estimate this when aggregate demand is so depressed. The
economy has been de-industrializing for some years.

24. Risks from a fragile banking system
Falling trust and capital flight
Greek banks lost 27 percent of deposits in
the first half of 2015 and had to resort to
capital controls and emergency liquidity
assistance (ELA)
Non-performing loans
High level of bad debts in the banking
system threatens / limits the ability of
banks to extend credit to growing
businesses. Mortgage lending has
collapsed.

25. Half of Greeks in work pay no income tax
“Problem with the tax-free threshold in Greece: No matter how low it is, tax-evading
Greeks will always declare lower income than that.” (Source: @greekanalyst)

26. Greece’s lack of Competitiveness
• 86th/138 countries on 2016-17 competitiveness index
Inside a single currency, Greece cannot rely on a devaluation/depreciation of her exchange
rate to improve their competitiveness – they need to achieve this through internal means.
But there are strong vested interests blocking reforms to oligopolistic industries.

27. Greek Demographics
Population Growth
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Populationgrowthcomparedtothepreviousyear
Median Age of the Population
0
5
10
15
20
25
30
35
40
45
50
Medianageinyears

28. Graduate
Employment Rates Greek university
graduates are forced
to compete for a very
limited number of
available jobs,
resulting in 49 per
cent not transferring
into employment
after graduation.

29. Risks of a Brain Drain

30. Greece’s Internal Devaluation
• Internal devaluation is when a country attempts to improve
competitiveness through lower wage costs and prices
• This is an alternative to a currency depreciation / devaluation
• In Greece there has been a significant reduction in labour
costs – with private sector wages falling by 40%
• A key evaluation point is that prices have not fallen much –
because of sheltered oligopolistic sectors and high VAT
• And Greece does not have a sufficiently large export sector
that sells price-sensitive products to other countries.
“In Greece economic policies of austerity, in conjunction with internal devaluation, have
been adopted in an attempt to improve competitiveness, correct external deficits and
promote export-led growth.”
Source: https://dspace.lib.cranfield.ac.uk/bitstream/1826/11158/1/A_post-mortem_of_austerity-2016.pdf

31. Relative Unit Labour Costs
70
80
90
100
110
120
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Relative Unit Labour Costs (2010=100)
Greece Spain Germany
Source: OECD Economic Outlook
Greece and Spain have both made progress in lowering their relative unit labour costs – a
measure of competitiveness. But Greece’s export sector is relatively small – her exports
account for only 15% of GDP, much lower than the EU average)

32. Internal Devaluation – Wage Cuts
Labour cost index has
fallen in part because of
reductions in the
minimum wage and cuts
in salaries of government
civil servants
But retail prices for
Greek consumers have
not fallen as much
The result is a very deep
reduction in real incomes
which has depressed
domestic consumptionGreece remains a small and fairly closed economy, with goods and
services exports still focusing mainly on a few medium and low-
tech sectors (e.g. refined oil products, shipping, tourism).
(Source: BNP Paribas Research)

33. Greek Current Account (BoP)
% of GDP
-16
-14
-12
-10
-8
-6
-4
-2
0
2
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Current Account Balance for Greece (% of GDP)

34. Would the Greek economy be better off outside of the Euro Zone?

35. Grexit “It is becoming increasingly
obvious that Grexit is Greece’s
best hope. Otherwise, where is
recovery ever supposed to
come from?”
(Paul Krugman, July 2015)
“The Greeks are losing
patience with the euro as
they continue to see their
living standards
deteriorate. Support for the
EU in Greece is lowest than
in any other European
country.”
(Danae Kyriakopoulou,
Head of Research, Official
Monetary and Financial
Institutions Forum, 2017)
“A single currency without the political institutions
to support it has not worked and is not likely to do
so. There either has to be more Europe or less.
Many would be saddened by the death of the
euro. But it's not the end of the world.
Currencies come and go.”
(Joseph Stiglitz, July 2016)

36. Benefits
• Chance of export-led growth from a devaluation
• Higher import prices will help domestic producers
• Greece able to inflate away some of their debts
• Greece able to run an independent monetary policy
• Negative real interest rates can provide a monetary
stimulus to help Greece out of a deflationary trap
• End to imposed fiscal austerity allowing the Greek
government to increase their spending
• Some countries such as Iceland have recovered well since
their own financial crisis / currency devaluation

37. Risks
• Spike in inflation – affecting the poorest most
• Risk that Greece will turn printing presses on – hyper-inflation?
• Higher inflation will bring about increased interest rates
• Risk of huge capital flight from banks – big risks for depositors
• Likely to be another deep short term slump in real output
• Devaluation comes with debt default - creditors are unlikely to
lend to Greece again at an affordable interest rate
• Greek export capacity is limited – modest gains from devaluation
• Tourism has boomed with Euros - no guarantee this will continue
• May involve leaving the EU and loss of key EU structural funds

38. Prospects for the
Greek Economy
Geoff Riley
Tutor2u February 2017