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2017 | OriginalPaper | Chapter

12. Economic Crisis in the European Periphery: An Assessment of EMU Membership and Home Policy Effects Based on the Greek Experience

Authors : George C. Bitros, Bala Batavia, Parameswar Nandakumar

Published in: Democracy and an Open-Economy World Order

Publisher: Springer International Publishing

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Abstract

When the economic crisis erupted in Greece in 2009, the view that prevailed was that its causes were idiosyncratic in the sense that they had to do with the structure of the Greek economy and the economic policies of Greek governments, at least since the country’s entry into the European Monetary Union (EMU) in 2002. On account of the available evidence, this view was quite convincing and Greece became the black sheep of the world, because of the risk its imminent bankruptcy represented for the stability of the Euro, and hence, the wider international financial system. But shortly afterwards, the economic crisis engulfed Ireland, Portugal, Spain and Italy, i.e. countries of the European periphery with much stronger fundamentals than Greece, and experts started to suspect that some more systematic forces were amiss. So they turned their attention to the study of the shocks these countries experienced from ascending to the Eurozone and, of the economic policies they had adopted to deal with them or because of them.

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previous chapter Political Economy Perspectives of the Fall of the Greek Monarchy

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From among the countries that were affected, Greece was hit first and hardest. It almost went bankrupt in 2009 and it was spared from this misfortune only by accepting harsh austerity measures in 2010, which have reduced GDP per capita by 25% and raised unemployment to nearly 30%. By contrast, the economic crisis in the other countries turned out milder and at no time exposed any of them to the risk of bankruptcy.

In addition to criticizing rating agencies, Nielsen (2011), Giollamoir (2011) and other researchers blame official government statistics for not providing a true picture. In particular, the point they stress is that when the new Greek government came to power in 2009, it had to revise the budget deficit forecast of the previous government from 6% to 8% of GDP to 15.4%. However, this criticism should be tempered in the light of more recent findings by Bitros (2013).

The literature on the Dutch economic crisis is of rather old vintage. A well-known article is one by Corden and Neary (1982). Other contributions on this topic include those by Fender and Nandakumar (1987), Eastwood and Venables (1982), Forsyth and Kay (1980), Neary and Wijnbergen (1984) and Wijnbergen (1984).

More specifically, in the case of Holland heavy income transfers from abroad due to the sale of gas or oil increased domestic spending. This, in turn, drove up the prices of the non-traded goods and services, for which the price levels are formed in the home market. Finally, as the higher prices of non-tradables translated into wage increases via inflation indexation, collective bargaining or other processes, manufacturing, the competitive product prices of which cannot deviate from world market prices, lost competitiveness and as a result it contracted seriously. In the case of Great Britain, which had a flexible exchange rate system, exchange rate appreciation due to the oil revenue inflows had the same effect, i.e. a major contraction of the manufacturing sector. This explains why the term “Dutch Disease” is sometimes referred to as de-industrialization.

The Treaty of Rome was signed in 1957 by the six founding member-states of the EEC.

There is now a large group of economists in Greece who argue in favour of returning to the national currency for the purpose of defending the competitiveness of the country’s goods and services through devaluation. However, various studies like, for example, the ones by Brissimis and Leventakis (1989) and Paleologos (1993), have confirmed that the devaluations of the national currency in the 1980s did not improve the balance of payments. Devaluations had some small positive effects in the short-run, but over the long haul the competitiveness of the Greek products and services returned to the pre-devaluation level.

The euro was introduced to world financial markets as an accounting currency on January 1, 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1 to the U.S. Dollar (US&). Euro coins and banknotes entered circulation on January 1, 2002. In the following 2 years the euro dropped to US&0.825 (October 26, 2000). But since the end of 2002 it has traded above the U.S. dollar, peaking at US&1.604 on July 18, 2008. Since late 2009, the euro has been immersed in the European sovereign-debt crisis which has led to the creation of the European Financial Stability Facility as well as other reforms aimed at stabilizing the currency (see European Commission (2010)). In July 2012, the euro fell below US&1.21 for the first time in 2 years, following concerns raised over Greek debt and Spain’s troubled banking sector. In July 2016, the euro dollar exchange rate stood at ~US&1.11.

Drawing on the data and the analysis that Bitros (2014) presented recently, EU leaders and institutions failed to foresee the unintended consequences of their actions in the case of Greece. For several possible reasons, they underestimated the risks that were involved in admitting Greece as a full member of the EEC in 1981 and in the EMU in 2002.

By using the term “nontraded goods” henceforth we shall imply the goods and services produced only in the government sector and consumed locally.

For a detailed derivation of these general equilibrium conditions, see Bitros et al. (2014).

Throughout the post war period public employment in Greece was in excess of what it was warranted. Politicians used public employment as a means to win elections. This excess in public employment is captured in (12.8) through the value of the parameter μ, which influences the level of government expenditures, but it does not enter in the supply of government goods functionS _g.

P _f is actually \( {P}_p^{\ast } \) , and Y _f is not considered at all an can be omitted from the list. Note also that \( {P}_p={P}_p^{\ast}\cdot e \).

This trend in the interest rates was reinforced also by the perception in the international money and capital markets that participation in the EMU implied that, if weaker countries like Greece became insolvent, they would be bailed out by stronger member-states like Germany.

Bitros, G. C. (1992). Structural policies to unwind the Greek fiscal tangle. In T. S. Skouras (Ed.), Issues in contemporary economics, The Greek economy: Economic policies for the 1990s (Vol. 5, pp. 23–29). London: The Macmillan Press Ltd.

Bitros, G. C. (2013). Introduction, From riches to rags or what went wrong in Greece. In G. C. Bitros (gest Ed.), On Greece and Greek Statistics. Journal of Economic and Social Measurement, 38, 1–39.

Bitros, G. C. (2014). EU failures in Greece and some possible explanations. In G. C. Bitros & N. C. Kyriazis (Eds.), Essays in contemporary economics: A festschrift in memory of A. D. Karayiannis (pp. 3–27). Dordrecht: Springer.

Bitros, G. C., Batavia, B., & Nandakumar, P. (2014). Economic crisis in the European periphery: An assessment of EMU membership and home policy effects based on the Greek experience. Research Paper in Economic (REPEC). Download link: http://EconPapers.repec.org/RePEc:pra:mprapa:60596

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Title: Economic Crisis in the European Periphery: An Assessment of EMU Membership and Home Policy Effects Based on the Greek Experience
Authors: George C. Bitros
Bala Batavia
Parameswar Nandakumar
Publisher: Springer International Publishing
Book: Democracy and an Open-Economy World Order
Print ISBN: 978-3-319-52167-1

Electronic ISBN: 978-3-319-52168-8

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-52168-8_12