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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The Greek Crisis: Origins and Implications

This paper argues that the deep causes of the Greek and Eurozone crisis are the large external imbalances (trade deficits) of the countries of the European periphery. Their fiscal imbalances exacerbated but did not cause the crisis and therefore fiscal adjustment is a necessary but not sufficient condition for economic recovery. For their economies to grow the countries in crisis, and especially Greece, need to regain competitiveness which will lead to rebalancing of the external account. Read more

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Greece should issue new bonds before the European elections

In an article published in Kathimerini, on February 9, Prof. Nicholas Economides proposes that Greece issue new 5-year bonds immediately, that is, before the European elections. This would be the first time Greece would issue bonds since its crisis in 2009 and subsequent bankruptcy. Economides argues that the time is ripe for such an issue that will be well-accepted by financial markets at a 5-6% coupon. Economides notes a number of advantages of such an issue, including (1) solving short term liquidity problems; (2) allowing Greece to invest in new projects that would grow the economy and create jobs; (3) show to all that Greece has finally got out of the crisis, and attract foreign and domestic investment; and (4) end the dependence of Greece to the Brussels bureaucracy. Economides underlines the risk that moneys from the new bonds may not be invested but rather given as cash to pensioners, as was the realized primary surplus. He also warns that there is a need for temperance and a firm hand once the EU supervision ends so that Greece does not deteriorate to its old corrupt habits and go bankrupt again.

See Kathimerini in Greek: http://www.kathimerini.gr/752934/opinion/epikairothta/politikh/h-ellada-na-vgei-stis-agores-prin-apo-tis-eyrwekloges

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Attracting Top Research and Innovation Performers: A Way Out of the Greek Crisis

Alexander Kritikos and Odysseas Kartalos argue forcefully that, for Greece, the way out of the current economic crisis is not austerity but a long-term plan focusing on innovative industries with high added value. However, in comparison to other countries in the EU currency union, the country has invested very little in developing a knowledge-based economy. Still, the weakly performing Greek innovation system has important “hidden” assets, including niches of strong academic research, some small hi-tech companies that manage to compete at international level and an impressive diaspora.

The Greek authorities need to use the next EU programming period, beginning in 2014, to invest into high-class research with the major aim of attracting top research and innovation performers. The paper proposes how such initiatives could be designed, taking into account the broader challenges the EU is facing with regards to the international competition in science and technology. More…

Posted in Economic development, Economic research, Education, Product market | 1 Comment

Reprisals Remembered: German-Greek Conflict and Car Sales during the Euro Crisis

by Vicky Fouka

Universitat Pompeu Fabra, Department of Economics and Business, Barcelona, Spain. vasiliki.fouka@upf.edu


Hans-Joachim Voth

CREI and Universitat Pompeu Fabra, Barcelona, Spain. jvoth@crei.cat

During the Greek debt crisis after 2010, the German government insisted on harsh austerity measures. This led to a rapid cooling of relations between the Greek
and German governments. We compile a new index of public acrimony between
Germany and Greece based on newspaper reports and internet search terms. This
information is combined with historical maps on German war crimes during the
occupation between 1941 and 1944. During months of open conflict between German
and Greek politicians, German car sales fell markedly more than those of cars from
other countries. This was especially true in areas a ected by German reprisals during
WorldWar II: areas where German troops committed massacres and destroyed entire
villages curtailed their purchases of German cars to a greater extent during con ict
months than other parts of Greece. We conclude that cultural aversion was a key
determinant of purchasing behavior, and that memories of past con ict can a ect
economic choices in a time-varying fashion. These fi ndings are compatible with
behavioral models emphasizing the importance of salience for individual decision-
making.  english_version

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A debate between German and Greek economists on growth and austerity in Greece

On 10 July 2013, an interesting debate on the Greek crisis took place between Daniel Gros, the director of the Brussels-based research institute CEPS, Gikas Hardouvelis, professor of Finance at the University of Piraeus and Chief economist at Eurobank, and Aristos Doxiadis, a venture capitalist. The debate was organized by IOBE, a Greek research institute, and the Athens office of Konrad Adenauer Stiftung, a German research institute.  The speakers’ presentations can be found at the Konrad Adenauer Stiftung site: http://www.kas.de/griechenland/en/publications/34976/, as well as here (Doxiadis, Gros, Hardouvelis). All presenters agreed on the diagnosis of the severity of the Greek depression, which has been going on for the last 6 years. But they disagreed on the policy mix going forward. In particular, Greece-based presenters felt that additional austerity measures in the short run would be counterproductive and would deepen the crisis, but Daniel Gros strongly endorsed such measures. Gikas Hardouvelis gives his take on the event. Continue reading

Posted in Banking and finance, Economic development, Europe, Labour market, Product market, Public finance, Public sector productivity | 1 Comment

Re-thinking my city

In a column published in Kathimerini, on August 13, 2013, Yannis Ioannides criticizes a proposed urban intervention that would convert Panepistimiou Street, a major thoroughfare in downtown Athens, into a pedestrian street. The Athens downtown has been hit hard by the crisis and its revitalization would bring major benefits to the entire Athens metropolitan area and indeed to the entire Greek economy, as well. The experience with urban renewal projects worldwide is that they typically help revitalize a city’s economy if they strengthen what makes a city’s economy “tick,” namely the coexistence of many different activities, resulting in boosting the productivity of any single one of them. The particular intervention being criticized has been proposed by a consortium of landscape architects and has been awarded the first prize by an international competition, titled “Re-think Athens,” that has been commissioned by the Onassis Foundation. The essence of Ioannides’ criticism is that the proposal redevelopment does not mesh well with the role that Panepistimiou Street plays in the urban fabric of modern Athens. The proposed intervention is of minimal urban complexity, accentuates the monumental character of that particular part of modern Athens, and does not offer elements of economic renewal because it fails to link with principal economic activities in the city of Athens. Furthermore, by rerouting traffic, it would further weaken the city center and create undue congestion elsewhere in several areas of downtown Athens.

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Warrants and the subsidy to private investors–a summary

The recapitalization of Greek banks has recently been completed. Three out of the four large banks (Alpha Bank, National Bank of Greece, Piraeus Bank) managed to raise private capital exceeding 10% of their assessed capital needs. According to the rules set for the recapitalization process, this enabled the three banks to remain under private control. The fourth bank (Eurobank) went under the control of the Hellenic Financial Stability Fund (HFSF), which represents the state.

Because of the losses that banks realized on their holdings of Greek bonds (PSI), and the expected losses on their private-sector loans, bank capital was negative prior to the recapitalization process. That is, banks had more debts (in the form of deposits, bonds, etc) than assets to back up these debts. Therefore, if new private capital had to come in the banks at the same terms as new HFSF capital, it would have been impossible for the banks to raise any private capital: the new capital would have been used to pay the banks’ old debts.

One reason why banks were able to raise new private capital was an implicit subsidy: private buyers of shares received warrants (options to buy additional shares in the future), while the HFSF shares, bought at the same price, carried no warrants. A recent article in the New York Times argues that the warrant subsidy was unnecessarily large. This issue is not obvious, especially given that without any subsidy the banks would have gone under state control, with the perils that this entails (political interference, etc). In a recent post to our blog, Spyros Pagratis finds that the warrant subsidy was about 1.7 billion Euros for the three banks that raised private capital. Given that the private capital raised by these banks was about 3 billion Euros, the subsidy could explain fully why the banks managed to raise private capital. Pagratis’ post is available here, and a recent related post by the same author is available here.

Posted in Banking and finance | 1 Comment

Warrant(ed) subsidy?

At a recent New York Times article, it was argued that the value of free warrants offered to participating shareholders in the capital increases of the big three Greek banks constitutes a large wealth transfer from the Greek state to shareholders. Spyros Pagratis contributes to the debate about the actual merits and level of this subsidy by computing some updated estimates in view of market developments over the past week. He also calculates the contingent subsidy under alternative scenarios to give a better feel of how its value relates to the underlying share prices going forward. Based on closing prices for warrants and shares on June 28, 2013, the level of subsidy is currently estimated at around 1.7 billion euros. And could be a multiple of that should share prices gain some positive ground from today’s all-time lows. But despite the cost to the Greek state, in terms of foregone income, such a subsidy may fall far sort of achieving its primary objective, i.e. a successful transition of core banks to full private-sector ownership, at no extra cost to taxpayers. Pagratis suggests some modifications to the current provisions for HFSF exit from core banks, which could help achieve this objective. Such modifications could give some merit to the wealth transfer from the Greek state to bank shareholders and, possibly, a valid justification.  Pagratis’ full article is avalable here.

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Beware the Warrants

Current provisions for a too-early exit of the Hellenic Financial Stability Fund from Greek banks risk creating self-reinforcing market dislocations. By offering too many free warrants to private investors, at predetermined exercise prices, share prices of Greek banks could be driven consistently away from fundamentals. That could undermine the smooth transition to full private-sector ownership of the Greek banking system. Spyros Pagratis comments on these issues and suggests policy responses. The full article here.

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Industrialization: A Special Feature of Greece

Professor John Spraos, a distinguished Greek economist, Professor Emeritus at University College London and former economic adviser to Prime Minister Constantinos Simitis, kindly agreed to contribute to our blog. He writes:

I was discussing industrialisation with Michalis Haliassos and he suggested I contribute to the blog on the subject of its anaemic development in Greece.  Instead of writing something new, I submitted an article which I wrote for Ta Nea in 1984 (published on August 9, 1984).  While parts are dated, three key elements have continuing relevance: (1) cost competitiveness; (2) invisible earnings – tourism, shipping, emigrants’ remittances – as the source of the crowding out of industry (along the lines of what has become known as the Dutch Disease); (3) the late starter disadvantage.  At the time, the novelty element (for Greece) was the middle one.  In the current situation, industrialisation is on the agenda as part of the thinking associated with shifting the emphasis from austerity to growth. Greece has more than recouped the loss of competitiveness since pre-euro. Only Germany has done significantly better in the Eurozone.  Cost competitiveness is not a sufficient condition for industrialisation.  But it is a necessary condition.  Are we close to satisfying it?

The article in Ta Nea was originally drafted in English, as published here. A scanned copy of the newspaper page where the article appeared in Greek can be downloaded here.

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