From Austerity to
Growth or Grexit
London • New York
Published by Rowman & Littlefield International, Ltd.
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Copyright © 2015 by Nicos Christodoulakis
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British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN: HB 978-1-78348-523-9
Library of Congress Cataloging-in-Publication Data
Christodoulakis, N. M. (Nicos M.), author.
Greek endgame : from austerity to growth or Grexit / Nicos Christodoulakis.
ISBN 978-1-78348-523-9 (cloth : alk. paper) — ISBN 978-1-78348-524-6
(pbk. : alk. paper) — ISBN 978-1-78348-525-3 (electronic)
1. Debts, External—Greece. 2. Debts, Public—Greece. 3. Financial crises—Greece.
4. Greece—Economic policy—1974–5. Greece—Economic conditions—1974–6.
European Union—Greece. I. Title.
∞ ™ The paper used in this publication meets the minimum requirements of American
National Standard for Information Sciences—Permanence of Paper for Printed Library
Materials, ANSI/NISO Z39.48-1992.
Printed in the United States of America
List of Illustrations
Calendar of Main Crisis-Related Events
PART I: THE RUN-UP TO THE CRISIS
1 Origins: How Greece Was Engulfed in the Crisis
2 Complacency: Was the 2010 Bailout Really Inevitable?
3 Reinventing the Past: Should Greece Have Joined the Euro?
PART II: THE BAILOUT YEARS
4 Getting It Wrong: An Appraisal of the Austerity Programme
5 The Vicious Circle: Snowballs, Haircuts and Hazards
PART III: THE ILLUSIONS
6 Change Currency? Illusions and Miscalculations
7 History Lessons: The Collapse in Interwar Greece
8 Modern Lessons: Default and Collapse in Argentina
PART IV: THE ESCAPE
9 Getting It Right: End Recession and Stabilize Public Debt
10 A Road Map for Growth: Some Key Fiscal Reforms
11 The Feasible Prosperity: A New Contract for Greece
12 The Political Economy of Drachma: Lower Wages,
Epilogue: After the Left’s Victory in Greece
Relevant Books and Research by the Author
List of Illustrations
Figure 0.1 Real GDP Index, Base 2007=100
Figure 0.2 Public and External Balances
Figure 1.1 Greek Public Debt as Percent of GDP
Figure 1.2 Current Account as Percent of GDP
Figure 1.3 Primary Public Expenditure and Net Total
Revenues as Percent of GDP
Figure 1.4 The Wage Share in the Greek Economy
Figure 1.5 Competitiveness Indicators Based on Unit Labour Cost
Figure 1.6 The Global Competitiveness Index
Figure 3.1 Comparing Greece with Other Non-Euro EU Economies
Figure 4.1 Pre- and Post-crisis Growth Rates and Debt Burden
in the Eurozone
Figure 4.2 Updating Projections: From Optimism to Harsh Reality
Figure 4.3 Key Rates of, and Revenues From, VAT
Figure 4.4 Average Income Statements by Wagers and Pensioners
Figure 4.5 The Collapse of Income Tax Revenues in 2011
Figure 4.6 World Bank Governance Indicators
Figure 5.1 The Snowball Effect in Greece and the Euro Area
Figure 5.2 Greek Public Debt, Actual and Counterfactuals
Figure 5.3 The Fall of Investment in Greece, by Sector of Activity
Figure 5.4 Gross Fixed Investment and the Unemployment Rate
Figure 8.1 Hourly Wage Rates in Argentina, in Purchasing Power Terms 97
Figure 8.2 Inequality Index in Argentina, by Income Deciles
Figure 8.3 Total Investment Shares in Argentina and Greece
List of Illustrations
Figure 8.4 Bank Deposits in Greek banks
Figure 9.1 Greek Public Debt 2014–2020, Under Alternative
Figure 9.2 The Changing Landscape in the Labour Market
Table 0.1 Election Results in Greece 2007–2015
Table 4.1 Comparing Pre-crisis and Post-crisis Indicators
Table 9.1 Debt Projections by the European Commission, 2012
Table 9.2 Revised Debt Projections by the European Commission,
Table 9.3 Restoring Investment Activity in Greece
Table 9.4 Required Investments in Greece, by Sector and Source
The currency code for Argentinean Peso; the symbol is $.
The currency code for British Pound Sterling
Consumer Price Index
European Central Bank
European Economic Community
European Financial Stability Facility
Economic and Monetary Union
The exchange rate of joining the euro, set at 340.5 drachma/€.
Exchange Rate Mechanism
European Stability Mechanism
Euro Interbank Offered Rate
Council of Finance Ministers of the Eurozone countries
European Statistical Service
Foreign Direct Investment
Foreign exchange market
Former Yugoslav Republic of Macedonia
Gross Domestic Product
Gold Exchange Standard
Debt reduction by cutting the nominal value of issued bonds
Hellenic Financial Stability Fund (ΤΧΣ)
Hellenic Republic Asset Development Fund (ΤΑΙΠΕΔ)
International Monetary Fund
Initial Public Offering
Memorandum of Economic and Financial Policies
The programme of Specific Economic Policy Conditionality
Master Financial Assistance Facility Agreement
Open Market Transactions
Official Sector Involvement
Private Sector Involvement
Public Utility Corporation (ΔΕΚΟ)
Quantitative Easing (by the Central Bank)
The representatives of IMF, European Central Bank and the
Unit Labour Cost
The currency code for US Dollar
Value Added Tax (ΦΠΑ)
World Economic Outlook, IMF publication
Calendar of Main
August 2007: A snap election is called by the incumbent New Democracy
Party (centre-right) on the grounds that public finances are getting out of control and a new consolidation policy is needed. Shortly after the announcement
in mid-August, devastating wildfires claim dozens of human lives and cause
extensive environmental damage. The government pledges compensations
and a relief fund is set up.
September 2007: Elections are won by the incumbent government, albeit its
majority is slashed. No special measures are taken.
January 2008: The international credit environment deteriorates, but the government announces that the Greek economy is sufficiently fortressed against
external shocks. Emergency fiscal measures are ruled out.
September 2008: The global economic crisis erupts, but Greece does not suffer any serious recession at first. Greek banks are capitalized by €5 billion.
The government says that this is only a precautionary measure.
December 2008: Serious riots in Athens and other cities in Greece after a
youth is shot dead by police. Clashes last for two weeks and are extensively
covered by world media; several of them mistook the events as being a
reaction to the crisis and interpreted them as a prelude to similar protests
elsewhere. A government reshuffle in January 2009 includes the Ministry of
May 2009: In the European elections, the incumbent party loses by landslide
and soon opts for yet another snap general election, just two years after the
Calendar of Main Crisis-Related Events
previous one. Economic policy is virtually abandoned and public deficit gets
out of control. Wildfires occur again in the summer.
October 2009: The socialist party wins the elections by landslide, and, immediately afterwards, the government announces that the public deficit is running above 11% of GDP versus an initial target of 3.7%. The figure is later
finalized at 15.4% of GDP.
December 2009: The 2010 Government Budget Plan endorses several preelectoral promises. Rating agencies Fitch, Moody’s and Standard & Poor
serially downgrade Greece, but the government remains hesitant in coping
with the looming crisis.
January 2010: After taking part in the World Economic Forum at Davos,
Switzerland, the Greek government talks increasingly in favour of inviting
IMF to Greece. Spreads on Greek bonds are rising, but the government insists
on issuing bonds with long maturities instead of short-term ones, whose costs
remain low, thanks to the ECB liquidity facilities.
April–May 2010: Greece seeks a bailout. Following the request, a joint IMF/
Eurozone/ECB mission visits Greece and the First Memorandum of Economic and Financial Policies is signed. A financing package of €110 billion is
disbursed. Clashes erupt in Athens and three people are killed when demonstrators attack a small private bank.
June 2011: The Memorandum is extended by the medium-term fiscal-adjustment strategy. It aims at primary surpluses and privatizations of up to €50
billion to control the dynamics of debt.
September 2011: The government breaks talks with Troika members. To
return, they demand the introduction of a special property levy payable
together with the electricity bill. Wide protests follow and many refuse to pay.
February 2012: The Second Memorandum of Economic and Financial Policies is ratified by Greek Parliament amid serious clashes in Athens and party
splits. The programme provides for financial assistance of €164.5 billion until
the end of 2014.
March 2012: The debt reduction (‘haircut’) is completed. Greek banks are
recapitalized through the Greek Financial Stability Fund, which becomes the
major shareholder, while the capital injection is recorded on the Greek public
Calendar of Main Crisis-Related Events
May–June 2012: Two successive general elections are held after the first fails
to produce a governing majority. In June, a coalition government is formed
by the conservative, socialist and Democratic Left parties. The left-wing
opposition rises; the far-right party (‘Golden Dawn’) is elected to Parliament.
December 2012: The Memorandum is amended. Its main aim is to overhaul
the tax system and introduce a new property tax.
June–September 2013: The government shuts down the National Television
and the Democratic Left party leaves the coalition. Following the murder
of an activist, the leadership of the far-right party is arrested on conspiracy
April 2014: Four years after the bailout, Greece holds its first government
bond auction. Part of the primary surplus is distributed to selected public sector groups, mainly the police and armed forces personnel. The property tax
is introduced to replace the special property levy. The government is heavily
criticized for mistakes and excessiveness.
May 2014: In the European elections, the Radical Left coalition (Syriza)
comes on top. The far-right party gets nearly 10% of the vote.
September 2014: The coalition government pledges that it is about to complete the programme and tap the markets. Meetings with the Troika are not
productive and new austerity measures are demanded. Debt sustainability is in
doubt and proposals for rescheduling and/or reduction appear. Wide protests
on the property tax force the government to allow payments in instalments.
December 2014: Second Amendment of the Second Memorandum. The
government asks for a two-month extension and access to the precautionary
credit line facility by the ESM. An early presidential election (normally due
in May 2015) is inconclusive and new general elections are announced. Talks
with creditors stall.
January 2015: The Syriza party wins the general election with the mandate to
abolish the Memorandum and keep the country in the Eurozone. A coalition
government is formed with the Eurosceptic nationalist party of ‘Independent
Greeks’. Amid protracted negotiations between Greece and the Euro group,
Grexit is viewed as increasingly likely.
The dilemma of a Greek exit from the Eurozone (Grexit) acquired a new
momentum both in Greece and abroad after the Radical Left coalition
(Syriza) won the January 2015 general election and formed a government
with a Eurosceptic nationalist party. Even though before the elections the
party had pledged its unequivocal endorsement of the euro, the government
has since sought to relax the existing policy mix, and this led to protracted
disagreements and negotiations with the European lenders and the IMF. It
was only a matter of time before the Grexit scenario returned full-scale to the
fore, to be discussed as the likely outcome of Greece’s failure to reach a new
agreement. At the time of completing this book, the debate was fervent and
all options were open. Domestic public opinion appeared to be in favour of
keeping the common currency, but several analysts openly suggested that the
political and economic obstacles lying ahead were insurmountable and would
eventually lead to the unthinkable. At the same time, several international
commentators—through a frenzy of media coverage—either openly supported or, at least, entertained the idea of a return to the historical currency
of the drachma.
For all these reasons, it is imperative to rekindle the debate regarding the
comparative advantages of the euro and the drachma for the country. First and
foremost, to separate the effects of economic policy implemented in Greece
from the constraints actually imposed by the single currency; second, to demonstrate that the euro remains by far the most beneficial option for Greece,
as compared to an unstable and deeply devalued currency that may replace
it. Escaping from the current recession and unemployment requires the
implementation of another policy mix within the Eurozone, and not another
currency by leaving it.
This volume is based on books that I have published in Greece and on
my numerous research articles published in international journals, plus new
material and policy assessment. The links between current text and previous
work is delineated in the Appendix.
Unavoidably, in a book focusing on a situation that potentially may change
rapidly as current affairs and political vicissitudes in Greece are still unfolding, there are aspects that may be superseded by events during the process of
its preparation. As the purpose of this work is to give the reader a clear background to the current economic situation in Greece and to provide the justification for certain approaches to tackling the problem, it is hoped that any
such events may render the work useful in terms of anticipating what might
happen with certain policy decisions or could have been avoided with others.
The book contains many economic facts that some readers may find tedious
or abstruse. However, they are indispensable because this is exactly what differentiates this text from other descriptions, which gloss over these facts. In
order to provide for easier reading, economic tables and charts have been
set apart from the main text, while all notes appear as endnotes. Although
the analysis is based on the best available statistical data, responsibility for
processing and evaluating them lies solely with the author.
In preparing the book, I have greatly benefited from the comments and
suggestions by two anonymous referees on an earlier plan of the book, and
the continuous support and help by Alison Howson. I am deeply thankful
to Nicos Roussos for translating substantial parts from two books that I had
published in Greek, and also to Anastasia Tsadaris for editorial assistance.
Naturally, I remain solely responsible for any errors and omissions that may
still exist in the text.
Athens, May 2015
THE SPECTRE OF GREXIT
In May 2010 and after months of credit shortages and looming repayments
of public debt, Greece finally sought a bailout agreement with the European
Union (EU), International Monetary Fund (IMF) and European Central Bank
(ECB), henceforth code named as ‘Troika’. In return for the bailout funds,
Greece accepted the Memorandum of Understanding on Specific Economic
Policy Conditionality (the Memorandum), a blueprint with specific policies to
be implemented in order to reduce indebtedness and promote growth. Things,
however, did not go as smoothly as planned nor as initially expected.
The Unforeseen Transformation of Greece
The dogged implementation of austerity programmes in Greece in exchange
for the bailout in May 2010 has brought about tectonic shifts, not only in the
economy but also in the political structures and social dynamics, even in the
geopolitical perception of the country on the global stage. Table 0.1 demonstrates the outcome of the national and European elections held in Greece
since 2007. The two mainstream parties that were alternating in power since
the restoration of democracy in 1974 saw their influence dither away from
around 80% of the vote to little more than 30%. Their ex-supporters either
followed splinter groups or voted en masse for the Radical Left coalition
(Syriza) that was catapulted from just 5% of the vote in 2007 to over 36% in
2015, forming a government with radical left-wing leanings for the first time
in Greek history. An ominous outcome was the electoral consolidation of
‘Golden Dawn’, the far-right party that managed to rise from non-existence
to the third position in the Greek Parliament.
Table 0.1 Election Results in Greece 2007–2015
41.84% 32.30% 33.47% 18.85%
29.66% 22.72% 27.81%
38.10% 36.65% 43.92% 13.18%
26.89% 26.56% 36.34%
(ND & Laos)
(Pasok & Demar)
National (N) and European elections (E). Source: Ministry for the Interior, Greece.
Party acronyms: ND (New Democracy); Pasok (Panhellenic Socialist Movement); KKE (Communist Party of
Greece); Syriza (Coalition of Radical Left); Laos (People’s Orthodox Alert); XA (Golden Dawn); Anel (Independent Greeks); Demar (Democratic Left); Potami (River); Drasi—Xana (Action—Construction Again);
Kidiso (Movement of Democratic Socialism).
Note: The origins of splinter parties are attributed by the author.
The background of these developments is the deep economic downturn.
The end result of the austerity programme has been the largest depression
experienced by any other European country during the twentieth century in
non-war years. One of the consequences of the adjustment failure has been
the emergence of a potential Grexit, that is to say Greece exiting the common currency, defaulting on its debt and re-establishing competitiveness by
a drastic devaluation of its currency.
Very few people were concerned about such potential ramifications at the
beginning. The policies that began to be implemented under the aegis of the
Troika aimed at dealing with a huge fiscal and a large external deficit, in order
to control the ballooning debt and enable the country’s swift return to international markets. The implementation horizon was brief and benefits were
expected to be evident quickly, whereas any adverse consequences would be
limited and temporary.
When the first stage of the adjustment programme failed, the policy was
neither revised nor was the intensity of its implementation called into question. Instead, amidst a pandemonium of political bickering and social unrest,
the first programme was replaced by a second one in 2011, which also proved
insufficient to get the country out of the crisis. The new measures were
identical to those of the first stage in terms of character, style and outcome:
namely, across-the-board wage cuts, a new wave of taxes, an abysmal failure
to privatize public assets and a systematic aversion for any real change in the
Apart from other reasons, the key factor was that, despite the fiscal adjustment, the economy did not come out of recession nor was the debt burden
harnessed. On the contrary, the economy, after contracting by a further −4%
in 2013, barely changed in 2014 and showed no sign of a systematic return
to growth. As depicted in Figure 0.1, Greece suffered from a recession that
was much harder than that experienced by the other economies of Eurozone’s
periphery during their own austerity programmes.
Some Success, Too Late
Success came late but was still limited in scope and far from being robust.
Most importantly, the performance of the Greek economy in 2014 checked
somewhat Europe’s censure of Greece as a country in permanent failure (see
Figure 0.2). Based on the latest data for 2014, Greece is no longer the worst
fiscal performer in the Eurozone: government deficit fell at 3.5% of GDP,
Figure 0.1 Real GDP Index, Base 2007=100. Source: AMECO Eurostat, rebased.
(Figures for 2014 are estimates).
Author Nicos Christodoulakis Isbn 9781783485246 File size 8.2MB Year 2015 Pages 202 Language English File format PDF Category Economics Book Description: FacebookTwitterGoogle+TumblrDiggMySpaceShare Written by a former Greek Minister of Finance, this book analyses the past, present and future of the Greek Crisis. Download (8.2MB) The Limits Of Stabilization: Infrastructure, Public Deficits And Growth In Latin America A Diet Of Austerity: Class, Food And Climate Change Against The Troika: Crisis And Austerity In The Eurozone Selling Our Death Masks: Cash-for-gold In The Age Of Austerity Elites On Trial Load more posts