This blog publishes articles by leading academic economists on issues relevant to economic policy and reforms in Greece. The crisis in Greece is also a time of opportunity: ambitious reforms can be undertaken that will not only stave off bankruptcy, but also modernize Greece’s economy and raise the productivity and incomes of Greek citizens on a sustainable basis. The articles in this blog aim to offer constructive proposals and impartial analysis of potential, proposed or implemented reforms that are based on the principles of modern economics and on lessons from recent cutting-edge research.

The editors of this blog do not necessarily endorse the opinions expressed by other contributors to the blog, the agenda of any political party, or the views of those who link or otherwise refer to the blog and its contents. Comments that do not concern the ideas and arguments published in this blog, but consist of personal attacks will be deleted.

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Greece & Europe: Beyond the Financial Crisis

Gikas A. Hardouvelis (University of Piraeus) gave a keynote address at the Harvard University Center for European Studies in the 2nd Annual Summit on the Future of Europe (September 22-23, 2015), where he addressed two main questions:

  • Will the Euro Area survive the next economic crisis?
  • Will Greece be a member of the Euro Area over the next decade?

The two questions are interrelated, as the Greek crisis has laid bare the faults in the architecture of the Euro Area and forced policy makers to address some of those faults. You can read a summary of the speech, written by Hardouvelis, here.

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The Greek NPL Issue and a Possible Resolution Path

Andreas Koutras argues that the creation of an Asset Management Company or bad bank that would acquire most if not all of the 100 bn NPL would be advantageous to the Greek economy the Greek banking system and the society, provided, it is structured so as to minimise political influences and hazards. The AMC would operate for 15-20 years, allowing for a smooth work out of the loans and maximizing recovery rates. The cleaned banks would be recapitalised from the private sector. The proposal would cost less to European and Greek taxpayers and can be an engine of economic growth. Similar solutions have been applied to many countries the most recent in Italy and can be adapted to Greece.

Read the post.

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Is the Greek Crisis One of Supply or Demand?

Yannis M. Ioannides, Tufts University

Christopher A. Pissarides, London School of Economics and University of Cyprus.

The Greek crisis is more difficult than just fixing debt; Deeper reforms needed. 
Greece’s low productivity and competitiveness will hamper growth. Even if Greece’s debt were eliminated tomorrow, the Greek economy will still not grow substantially enough to catch up with the rest of Europe.

While the Greek debt is too high to allow the government flexibility in its budgetary policies, Greece also suffers from serious structural problems such as low productivity and lack of competitiveness. Since joining the Eurozone, the Greek government collected less in taxes than it spent, the country consumed more than it produced, and had to import well above its exports. For implementation to succeed, market reforms need to be “owned” by the Greek government and public and eased in gradually to give affected workers alternative means of support in the transition.

Despite the availability of ample finance for this purpose and more than five years since the initial agreement with the Troika in May 2010 to free up competition, several professions continue to jealously guard their privileges, by restricting access to licensing and only slowly letting go of gross over-billing practices for services provided through public sector projects.

With sticky prices and barriers to entry the fall in wages and unit labor costs so far have contributed to the recession instead of reversing it. In such circumstances it makes much more sense to target first product market reforms, which would improve price flexibility and the structural competitiveness of the Greek economy. Labor market reforms are also essential but they can come later, when the economy is performing well and they are easier to implement. That said, wages did fall by over 20%, much more than in the other
EZ program countries. The associated fall in unit labor costs was consistent with the improved performance of exports but was slow to translate into a fall in prices. Wage reductions reflected in greater increases in profit margins rather than reductions in prices.

The Economic Adjustment Program has been a major “demand” force in the severe contraction since 2009, but there is also a “supply” force. Greece must further improve its competitiveness vis-a-vis its EZ partners, and debt relief in and of itself cannot address the competitiveness problem. That requires a targeted approach that involves structural reforms, especially ones that improve competitiveness in the market for goods and services and have long lasting effects through total factor productivity growth. Reforms are necessary to make Greece more productive, help it attract investment and develop forward-looking export industries. This will inevitably require deep restructuring of the economy, a process that typically follows crises, and is to some extent already under way in Greece.

Full paper, as presented at the Fall 2015 Brookings Papers on Economic Activity Conference, September 10-11, 2015. PDF  Full Brookings conference site


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Could a Return to the Drachma Help Greece Regain its Competitiveness?

Vasilis Sarafidis (Monash University) recently posted an article discussing the thesis that a return to the drachma would help Greece regain its competitiveness. His main can be summarized as follows.

The basic argument for returning back to the drachma is that the ability of a country with sovereign monetary policy to occasionally devalue its currency can help it regain its competitiveness in international markets. This article examines, with the help of time series plots, the effect of 3 distinct events of currency devaluation that took place in Greece during the period 1974 – 2001. It appears that currency devaluations have had only a small and short-lived favourable effect on the competitiveness of the Greek economy. By contrast, there exists a long term deterioration in the trade and current account deficits, which appears to be moderately halted in the short term through application of stabilization policies rather than currency devaluation alone. This is consistent with the popular view among economists that competitiveness is a structural feature of an economy and it mainly depends, among other factors, on the ability to exploit comparative advantages, which requires high productivity, business agility, skilled human capital, an efficient public sector that does not work to the detriment of the rest of the economy, and a fair and efficient tax system.

Read the post (in Greek) here.

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Capital Controls and Transactional Culture

Antonis Kotidis (Bonn Graduate School of Economics) documents that the recent imposition of capital controls led to an increase in the number of debit cards issued and in POS (point-of-sale) terminals installation. Although these developments are encouraging for the future of transactions efficiency and tax compliance, the available data on payments statistics over the entire period 2000-2013 shows contradictions in the transactional culture of Greeks and suggests only modest optimism.

Read the article here.

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Lower VAT can tackle tax evasion

Nikolaos Artavanis (Isenberg School of Management – UMass Amherst) argues, in a timely article given the current proposed increases in VAT, that VAT increases do not go hand in hand with tax revenue increases in the presence of tax evasion

In industries, where tax enforcement is challenging, the increase of tax rates does not necessarily correspond to an increase in public revenues. The reason is that these firms tend to “adjust” the magnitude of tax evasion to new policies. The increase of the VAT rate in the restaurant industry in September 2011 increased evasion by at least 9%, while the reduction of the rate in August 2011 reduced sales under-reporting by at least 9.6%. Taking into account the effect of the additional reported sales on direct taxes, the final fiscal outcome of the VAT rate reduction becomes minimal.  Read the article.

Posted in Macroeconomics, Public finance | 1 Comment

In addition to “Today”, there is also “Tomorrow”

Professor Thanasis Stengos (University of Guelph, Canada) published an article in Naftemporiki on the current negotiations with the European partners.

The root of the problem is that the whole negotiation “game” has been approached by the Greek government as a static “once and for all” game. However, it is anything but that. The last four years have shown that a crisis of such magnitude is an ongoing dynamic process with memory. It will be to our advantage to recognise that even as late as now, since a mediocre agreement is always better that no agreement at all. It is a pity that we have come so far in the process as to not recognize the fact that the system has “memory” and there is also “tomorrow” and not just “today” in how one conducts negotiations especially if you find yourself on the “asking” side.

Read full article here (in Greek).

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A careful look at Greece’s options and why YES is the only one

Costas Meghir (Yale University) published a post in Huffington Post Greece that reviews Greece’s options and includes a rebuttal of positions recently voiced by Paul Krugman and Joseph Stiglitz.

You can read the post here (in Greek).

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Yes to the Euro!

30 internationally recognized Greek economists issued a clear declaration in favor of YES in the referendum of July 5, 2015 (published on the front page in Kathimerini, 30.6.15)

The referendum on July 5 is NOT for or against a specific agreement. It is for or against the European perspective of the country. A ‘Yes’ vote means “Yes” to Greece, and to staying in the euro zone and the European Union. A “Yes” vote guarantees that Greece will continue its effort to improve the economy and its institutions in order to bridge the gap to more developed European countries. “Yes” is the right choice! A ‘No’ vote would push Greece out of the Eurozone and possibly even out of the European Union.

This would have devastating consequences, both immediate and long-term. The immediate effects of a ‘No’ vote have already started to be visible in the closure of banks. After a “No” outcome in the referendum, the conversion of bank deposits into drachmas and the concomitant halving of their value, to say the least, will be a matter of little time. The ensuing turmoil in the banking system can be expected to lead many businesses to bankruptcy, and unemployment out of control. The new drachma would be strongly undervalued relative to the euro, and salaries and pensions would lose at least half of their value. The government, powerless to balance revenues and expenditures, will print inflationary money, destroying competitiveness of the weak currency. Both exports and imports will be reduced, and without humanitarian aid from Europe, there will be shortages of essential goods such as medicines and fuel. Austerity will be far worse than any agreement to stay in the euro, and it will mostly impact the weakest population segments.

The long-term consequences of a “No” vote will be equally important. Modern, prosperous economies in Europe and the world are based on the market and on healthy competition, and they use part of their wealth to fund a strong welfare state. They also have an efficient public sector, which operates independently of the current government and thus limits partisan influences. Greece’s participation in the core of Europe fosters long-term convergence to European institutions. By contrast, a Greek exit from the euro would strengthen the tendency to clientelist structures and aggravate the timeless pathologies of the Greek economy. This inevitably leads to a closed and impoverished economy with high corruption levels.

The last minute agreement will be mediocre, without many of the necessary structural reforms or the necessary debt and tax relief. However, it maintains the European perspective of the country, giving us also the opportunity to continue to negotiate with our European partners for better conditions, measures to promote growth, and ways to manage the debt. In this context, European institutions and the strong European economies must also respond quickly, assuming their fair share of responsibility for supporting the growth trajectory of Greece.

The Greek people should vote YES in the referendum. YES to the Eurozone and to Europe!

Marios Angeletos, MIT
Costas Azariadis, Washington University at St Louis
George Constantinides, 
University of Chicago
Harris Dellas, Universität Bern
Manthos Dellis,
University of Surrey
Nikos Economides, 
New York University
Manolis Galenianos,
Royal Holloway, University of London
Michael Haliassos, Goethe University Frankfurt
Yiannis Ioannidis, Tufts University
Lucas Karabarbounis, University of Chicago
Yannis Katsoulacos, Athens University of Economics and Business
Christos Kotsogiannis, University of Exeter
Miltos Makris, University of Southampton
Costas Meghir, Yale University
Stelios Michalopoulos, Brown University
Theodoros Palyvos, Athens University of Economics and Business
Stavros Panageas, University of Chicago
Elias Papaioannou, London Business School
Dimitris Papanikolaou, Northwestern University
Evi Pappa, European University Institute
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Christopher Pissarides, London School of Economics and University of Cyprus, Nobel Prize in Economics
Vassiliki Skreta, University College London
Thanassis Stengos, University of Guelph
Nickolaos Travlos, ALBA
Dimitris Vayanos, London School of Economics
Nikos Vettas, IOBE and Athens University of Economics and Business 
Tasos Xepapadeas, Athens University of Economics and Business
Nikos Yannelis, 
University of Iowa

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Enough is Enough!

Marios Angeletos, MIT, published a post in Huffington Post Greece, in which he explains the reasons why Greeks should vote YES in the referendum on July 5.

Read the post here (in Greek).

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