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Greece's economy symbolizes in many ways the Eurozone's economic problems and divergent interests as it amasses most of the economic disadvantages characterizing the Eurozone's economy itself. This book presents the economic and political challenges to Greece and the EU member states.

Inhaltsverzeichnis

Frontmatter

Introduction

1. Introduction

Abstract
The strategic failures in the approach to deal with the problems of the Greek economy, namely the disproportionate internal devaluation of the private sector and the tax base with respect to the milder internal devaluation of the government expenditure, has certainly taken place in the context of a country that was asked to undertake one of the most difficult adjustments made by any country and through a deal that appeared to be ignoring important warning signs (Mitsopoulos and Pelagidis, 2011, 2012; Pelagidis and Mitsopoulos, 2014). Essentially, the 2010 and onward sequential deals amounted to agreeing with the political leadership and the administration of an economy that has been turned by the former into a quasi-soviet economy at the fringes of free markets that they will tear down the bureaucracy that has been established for over 30 years, while being offered the cash and support to keep operating largely in a “business as usual” environment.
Theodore Pelagidis, Michael Mitsopoulos

The “Party Period” before the Crisis

Frontmatter

2. The Costs and Benefits for Joining a Common Currency with Emphasis on Weaker Member States: The Pre-Crisis Debate

Abstract
Long before the crisis, the dominant theory of an Optimum Currency Area (OCA) was that there are necessary conditions or properties for success (Mundell, 1961; McKinnon, 1963; Kenen, 1969). The basic premise was that the fundamental requirement for a successful currency area is wage/price flexibility and mobility of factors of production as well as harmonization of economic and political institutions. This injects sufficient flexibility in the system to hedge against the so-called “asymmetric demand shocks/disturbances”. Asymmetric shocks are demand shocks or disturbances that hit two or more regions or countries with a common currency. When shocks are asymmetric, business cycles between two countries — let us assume Greece and Germany — are de-synchronized. De-synchronization of business cycles means that Greece experiences, for example, a negative growth rate along with relatively low inflation, while Germany experiences, at the same time, a high growth that goes with low unemployment. Then, the two countries need different monetary stabilization policies. Greece needs some accommodation through decreasing interest rates in order to stimulate economic activity, while Germany needs some contraction to fight an excessive inflation rate. Then, the dilemma that the European Central Bank (ECB) faces has to do with the diversified stabilization prescriptions the two aforementioned economies require.
Theodore Pelagidis, Michael Mitsopoulos

3. Greece before the Crisis: The Critical Years in Domestic Politics

Abstract
In this chapter,1 we offer a historical analysis of the Greek political market and Greek politicians’ views in particular, on the issue regarding the costs and benefits of Greece’s economy joining the euro area. We used material from various sources (e.g., archives of the Greek Parliament, interviews with prominent politicians of the time, published laws) to present and analyze their view on Greece’s economic possibilities to adjust to such a demanding common-currency environment. This chapter presents the results of this fieldwork. We placed particular emphasis on the 1990–1993 period where a liberal government set an agenda of structural reforms that remains pertinent even today and paved the way for the fiscal adjustment to the Maastricht convergence criteria, so that the economy could join the single currency. Our summary draws from discussions within the Parliament, on important relevant topics, such as the debate preceding the ratification of the Treaty of Maastricht by the Greek Parliament in July 1992 and other key discussions with regard the economic policy of the government. Such are the discussions in the Parliament ahead of the votes for the annual budgets and the inaugural statements on policy from the time the government had started its term, and sought the vote of confidence of the Parliament in the summer of 1990.
Theodore Pelagidis, Michael Mitsopoulos

4. IMF and EU Reports on Greece

Abstract
This chapter proceeds with an assessment of IMF Article IV missions to Greece, and in particular the chairman’s summing up of them, for the 1990–2009 period.
Theodore Pelagidis, Michael Mitsopoulos

Greece’s Free Fall 2010–2013

Frontmatter

5. The Troika Period Reconsidered

Abstract
The importance given constantly to debt sustainability exercises by the official lenders of Greece at this point underlines, above all, the importance of the debt-to-GDP ratio as it juxtaposes all the malfunctions and shortcomings of both the private economy and state apparatus. During the period of strong growth, the denominator in the ratio could maintain acceptable projections for the dynamics of the public debt, especially given the low interest rate environment that was secured by euro area membership. However, in spite of these appearances, government expenses started rising at a faster rate, as a percentage of GDP, after 2003 gradually eroding the long-term projections of the public finances.
Theodore Pelagidis, Michael Mitsopoulos

6. Assessing the Intentions of the Government(s) since the Ratification of the Maastricht Treaty

Abstract
The documented intentions of, as implied from the policy statements in the Parliament and other public occasions, and the policy initiatives taken by the Greek government that ratified the Maastricht Treaty demonstrate, in a nutshell, the following:
  • • The dangers to the Greek society in general, and in particular to the prospect of joining the EMU as an able and equal member, that stemmed from the extreme imbalances and inefficiencies introduced during the ’80s, were accurately assessed and a plan to address them was devised and quite consistently executed.
  • • This program aimed at addressing the problems at hand in the following ways: a) with some tax increases in order to stabilize the public finances, that were on an clearly unsustainable path, b) by placing the main burden on the fiscal adjustment process on cutting expenditure and stabilizing the costs of the social security system, with a reduction in the public sector wage bill and a reform of the social security system, c) with a wide-ranging privatization program that included selling off of state owned enterprises, handing over the construction and operation of major infrastructure projects to the private sector, handing the management of utilities over to the private sector, cutting collectives off of state patronage, and eliminating unneeded public service entities and privatizing others.
Theodore Pelagidis, Michael Mitsopoulos

Looking Ahead

Frontmatter

7. Greece: Why Did the Forceful Internal Devaluation Fail to Kick-start an Export-Led Growth?

Abstract
Much has been said about the results of the austerity program implemented in Greece by the “Troika.” The official creditors initially sanctioned an implementation of the agreed conditionality program (included in the MoU that also provisioned the official loans to the Greek government) that principally focused on increasing taxes and labor market reforms that facilitated the fall of private sector wages. As already described, only during the third year of the implementation of the program did they try to complement this tax spree with horizontal cuts in pensions, medical benefits, and public sector wages,1 that failed to touch the key distortions of both the pension system2 and the public sector wage structure. Growth-enhancing structural reforms, as defined by deregulation of network industries, professional services, reduction in red tape and corruption, and the privatization of assets that are important for the functioning of the economy, like infrastructure, were not deemed a priority, at least as far as the release of payment tranches to the Greek government was concerned. They were effectively off the agenda, with the exception of a few half-hearted and therefore incomplete attempts. To make matters worse, a number of ill-advised policies and strategic political decision directly undermined the ability of the productive part of the economy to contribute towards the stated goal of an export-led recovery of the Greek economy.
Theodore Pelagidis, Michael Mitsopoulos

8. Giving Greece a Chance to Succeed

Abstract
The causes of the Greek crisis have been widely documented now, as well as the profligacy of its political elite along with its preference for closed markets that create rents, which it can then distribute as part of a horse-trading game. A well-documented need to cut waste in the general government and to deregulate the economy, that was initially included in the list of reforms the official creditors asked the Greek government to undertake, was pushed forward only slowly and reluctantly. In the end, even though the number of reforms ultimately implemented and the fiscal measures taken sum up to an unprecedented scale, the way these measures were implemented and their timing implied that whatever was done within the context of a rapidly deteriorating political and economic reality was always “too little, too late.” During this slow process in which markets anticipated reforms, and their growth-enhancing prospects, which never materialized or materialized reluctantly and with great delay, the financial system of the country was put under unprecedented pressure.
Theodore Pelagidis, Michael Mitsopoulos

9. How to Design a Closer and More Democratic Union

Abstract
There is no particular need to describe how the compromise on which the birth of the European common currency was based formed the foundation of the current crisis: the common monetary policy was accepted easily by national politicians but turned out to be incompatible with the maintenance of the national control over structural and fiscal policies, as predicted by the work cited in Chapter 2, and with added consequences in financial markets that surprised specialists and policymakers (Pisani-Ferry 2012). This core weakness in the design of the Union is described elegantly by Habermas (2011): member states are functioning as the legislative and executive bodies of the Union, depriving that way the prerogative of power and implementation from the supranational bodies over the national legal systems.
Theodore Pelagidis, Michael Mitsopoulos

10. Conclusions

Abstract
In this book, after a necessary introduction to the economics of the monetary union and the relative debate in the academic literature regarding the difficulties that the weaker member states might face specifically in an incomplete union, we have examined the parliamentary debate in Greece ahead of the ratification of the Maastricht Treaty. We also examined the main policy declarations of the government that introduced the Maastricht Treaty for ratification, along with the main published laws that implemented these policy declarations from a legislative perspective. We further interviewed key policy makers of the time to verify the extent of actual implementation of these.
Theodore Pelagidis, Michael Mitsopoulos

Afterword

Abstract
After the NO prevailed in the referendum of July 2015, Tsipras made a 180° U-turn1 and after a couple of weeks reached an agreement with the creditors, substantially surrendering to their demands. Now, after that preliminary deal, economists and analysts around the world, believing a Grexit almost inevitable just a month ago, insist that the proposed deal between the Greek government and the creditors is only band aid for Greece’s economy and so, it will not work. Of course, after five years of depression, having the troika back in Athens to discuss a new package of what we call “reform austerity” is not the easiest thing in the world. However, this time it seems those preconditions for a viable solution are well in place — with one big “if.” Let us explain why.
Theodore Pelagidis, Michael Mitsopoulos

Backmatter

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