A Great Depression for Greece?

Costas Azariadis looks at the most recent “vital signs” of the Greek economy and argues that austerity measures without investment or market reform will not succeed in balancing the government budget. He finds that private economic activity has already dropped by 20% since 2008, and concludes that austerity by itself has brought the country to the brink of a Great Depression similar to the one that gripped Britain in the 1920’s and 1930’s.

The full article of C. Azariadis

Austerity without Growth

At the end of World War I victorious Britain took a momentous decision– return to the gold standard at the prewar exchange rate between paper money and gold, despite having printed a lot of paper money to pay for the war. To achieve this wrongheaded aim, the UK cut government spending–including investment and defense–to the bone and plunged the economy into a period of austerity that sapped British society to the marrow, and lasted until World War II.  George Orwell’s The Road to Wigan Pier gives a vivid account of social conditions in the 1930’s.

As the unemployment rate climbed above 22% in the early 1930’s and days lost to strikes peaked at 6 times their post WWII maximum, Britain surrendered its status as one of the richest nations on earth and the greatest of the great powers.  In 1931 the British Empire became a Commonwealth and the Gold Standard was dropped. On a much smaller scale than Imperial Britain, Greece faces today a similar dilemma.  Is it sensible, or even possible, to stay in the Eurozone at the original exchange rate of 341 drachmas to the euro? How deep must Greek society cut spending to remain in “core” Europe? Is austerity pushing Greece into a depression as it did Britain ninety years ago?

The answers depend a lot on the future state of the EU and world economies, and even more on Greece’s willingness to implement reforms that will get its economy growing again, as suggested repeatedly by many members of this blog in earlier posts. To diagnose where Greece is headed we’ll have to take its “vital signs” from Eurostat and ELSTAT (the EU and Greek statistical authorities) with an assist from the National Bank of Greece Economic Bulletin.

Where Is The Greek Economy Now?

Greece’s vital signs are not those of a healthy or even a mildly sick society. The production sector of the economy has taken a back seat to accounting and finance in the public opinion brouhaha that obsesses about rating-agency downgrades, panicky lenders, bailout packages and default rumors.  Amid the comings and goings of grim-faced experts, ordinary people are having experiences that bring to mind John Steinbeck’s The Grapes of Wrath.  This time the victims and the heroes are shopkeepers in Athens instead of farmers in Oklahoma.

To spare you the gory details, I’ll sum up the situation in a few numbers. Four hundred thousand jobs have been lost since 2008, virtually all of them in the private sector; the unemployment rate has shot up from 6.5% in 2007 to 18.3% in August 2011. Gross domestic product will have fallen 13.8% from its peak by the end of this year. The private economy—consumption, investment plus net exports–has dropped nearly 20%; sixty thousand small businesses have closed, with another sixty thousand expected to go by the end of 2012.

Irish statistics look almost as grim as Greek ones, but the Irish economy seems to have bottomed out. Greece has not. As the Greek economy continues to plummet, the odds become longer that the government can balance its books and avoid an uncontrollable default. Ignoring interest payments on national debt, Greece was close to a primary budget balance in 2010 but not in 2011 (the deficit is slated to rise from 0.3% of GDP to 1.7%).  Next year looks worse still. As of now the government could not pay its bills even if creditors forgave all public debt because tax hikes are rapidly shrinking taxable income.  No politician wants to think about selling or leasing– to developers, hotelkeepers and other investors–even a small fraction of the government’s vast holdings of public land.

Without the spark of economic growth, it looks like sheer belt tightening is defeating itself. Austerity without investment did not work for Britain in the 1920’; chances are that it will not work for Greece in the 2010’s.

The Next Couple of Years

Both Eurostat and the National Bank of Greece predict that the economic freefall will taper off in 2012. They forecast a 3% drop in GDP, and the economy back to growth in 2013. Are they right?  Last year’s predictions for 2011 were also for a 3% drop; it will likely be double that.

The reason analysts are hard put to forecast the course of the Greek economy is that it all depends on two volatile factors: the health of the country’s trading partners, in the eurozone and elsewhere, and the progress of internal economic reform. Greece is too small to influence Europe and very reluctant to reform itself.

Wages and salaries have been cut 10% or more, but deeper reforms are hitting a brick wall. Labor unions are dead set against them and public opinion is not sure reforms are needed. As a result, government commitments to sell public-sector firms, improve tax collection, liberalize markets, open closed professions, foster competition, and remove hurdles to investment have foundered on the shoals of daily strikes and petty acts of urban terrorism. Parliament legislates reforms, the street vetoes them, and the economy goes into a freefall.

Growth or Bust?

Why is Greece refusing to reform itself against all economic advice from the international organizations like the IMF, the EU, the ECB, sensible politicians, and experts of all stripes? Every pundit is for reform, and yet reform is not in the air. One reason could be a utopian strain in Greek society, much like the Occupy Wall Street movement in America but bigger. Recent polls show left-wing parties are getting roughly a 25% vote share. Part of that comes from people who yearn for a more egalitarian society in which government guarantees equal opportunity for all, fair prices and wages, and a job for anyone ready to work.

A bigger reason may be cynicism from a jaded electorate that refuses to believe things will be put right by the same spendthrift politicians and profligate labor leaders who spread corruption like algae and ruined the economy. As an aside, the latest sampling from Transparency International makes Greece the undisputed corruption champion of the eurozone, on a par with some really shady countries.

What will it take to get the economy moving? My colleague Yannis Ioannides calls the shock that’s needed an expectations jolt: combining a war on corruption with a flood of public works to persuade public opinion that times are indeed “a-changing” as Bob Dylan so eloquently claimed in the 1960’s. Will that happen? And, if it does, will it work? Stay tuned to this blog.

About C_Azariadis

Washington University at St. Louis

This entry was posted in Macroeconomics. Bookmark the permalink.

14 Responses to A Great Depression for Greece?

  1. GEORGE A. GRATSOS says:

    In my previous lengthy diatribe I forgot to underline the obvious. What is important for the Greek economy is to go for the higher multipliers and growth. It is more productive to sacrifice projects and expenditure with lower sectoral multipliers in favor of those with higher multipliers. Investing, for example, in necessary infrastructure gives a higher multiplier. Retail sales have a lower multiplier.

    It is therefore more beneficial for the overall economy to sacrifice public sector jobs for infrastructure projects. All expenditures do not produce the same overall financial results.

    These will create the jobs that will pull us out of the hole that we have dug ourselves into.

    George A. Gratsos

  2. GEORGE A. GRATSOS says:

    To: Greek Economists for Reform.com

    Sorry for the following comment which may be too long:

    With reference to your very good article of Dec. 7, 2011 and, whereas I am not an economist, I wish to point out certain things I consider important. Your analysis is good for a market based democracy. That unfortunately is not true of Greece.

    The problem with Greece is its operational system (laws, bureaucracy they impose etc.). The necessary changes, generally termed as structural reforms, are very difficult to implement as the “system” is based on unrealistic “quasi egalitarian” ideologies which require a benign, efficient government. This can never exist in practice. Power corrupts. Human nature, being what it is, result in such governments developing into bureaucracies with feudal power, creating something akin to what has been described as socialist/stalinist provisions which manifest themselves in any new, or older Greek laws. Having three prime ministers, grandfather, father and son, albeit with others in between is reminiscent of other, peculiar systems. The same applies to generations of M.P.s. Greek politicians base their re-election prospects on the patronage of the public servants they hired. What can function is a liberal democracy modeled after the United States with all the checks and balances the American system incorporates.

    In Greece, job protection is paramount. It conveniently escapes everyone’s thinking that to protect a job means that the job is uncompetitive. Therefore the mere existence of such legislation makes a country, or a business, expensive and uncompetitive. It eventually goes out of business and jobs are lost. The existence of “tenure” (jobs for life) in the public sector ensures indolence, graft and high costs. That is the operational environment that we Greeks are expected to function in. No wonder that Greece’s competitiveness has been sinking since 2005 when I started following it.

    A case in point: the Ferry Boat tickets could be reduced by between 11% and 18% if the European regulation 3577/92 and other were applied. In Greece high speed ferries, which were manned by 17 people in northern Europe, need a complement of 31. This makes Greek island destinations uncompetitive and reduces their growth. The Hellenic Chamber of Shipping (HCS), of which I am President, has been pointing this out for a very long time, to no avail.

    According to recent European statistics Greeks work 42.2 hours a week but their productivity is 76.3%, the British work 36.3 h/w with a productivity of 107.2% and the Germans 35.6 h/w with a productivity of 123.7%. Therefore we Greeks are, on average, hard working. Why are we unsuccessful? Another statistic shows that Greek bureaucracy saps 6.8% of GDP whereas British 1.5% and German 3.7%. This clearly shows that Greek competitiveness is hampered by the operational system. The system must change.

    In the ‘70s Greek cruise ships were the dominant power in the Mediterranean, now there are only two ships of moderate size. Despite the fact that Greece is the desired cruise destination no cruise ships homeport in Greece. The per passenger income from homeporting is at least 10 x that of visits. If Greece adopted similar legislation to other EU nations the HCS estimates that this would increase income by about €1.5 billion/yr (2009 prices) and 18.000 more jobs with an estimated 10% growth per annum, if the ratio of visits homeport embarkations was similar to Spain’s . This needs the cabotage laws to change asap.

    Yachts are anathema to socialists/stalinists. Greece, by enacting punitive legislation in 2009, lost 25% of the yachts berthed in marinas, mostly of foreign ownership, to Turkish and Adriatic marinas. The HCS estimates that over 100,000 people are directly or indirectly employed through pleasure craft in Greece, a study now in progress will give us a better estimate. Greece, with 16.300 km coastline and our fabulous islands is the Mediterranean’s preferred cruising ground yet we only have about 10.000 pleasure craft over 6m berthed here and only have 9.000 berths in marinas. France, on the other hand has 200.000 similar pleasure craft, 160.000 marina berths and only 3.427 km of coastline. This proves that Greek pleasure craft legislation is unfriendly, thus destroying Greek jobs.

    Unrealistic income assessment based on home, car etc., ownership, probably enacted in desperation and decided on with ideological criteria, will further work against attracting investment to Greece. For example the income assessed for a large displacement car is sometimes greater than its value and up to about 10 times its annual cost of operation. The income assessed for having a swimming pool is very many times its annual maintenance cost etc., etc. The prices of houses on which income is assessed is much higher than those presently prevailing particularly in up-market areas. Houses that have been inherited will have to be sold at such lower prices in order to cope. In reality home prices have been falling over the last two years with no end in sight. Despite this the taxman is still upping the “objective” values. About 200.000 new houses/appartments are for sale with few buyers and a large percentage of existing flats are not occupied.

    These “objective” income assessment criteria amount to further destruction of asset values and expropriation, communist style. Lenin would be proud of his Greek disciples. This is no way to attract investment of any sort in Greece,

    Whereas the Greek merchant fleet is the world’s largest, youngest, of the highest quality and the most cost competitive, only 25% of the Greek controlled ships fly the Greek flag.

    Piraeus’, once a thriving repair base is mostly idle, since the all-in cost of shipyard labor is €215/day and works only 27.5 hours per week. Other higher income countries in Europe build commercial ships but not Greece.

    The Greek politicians have once again found ways to increase taxes, despite the Troica’s outlines, so as to avoid sacking public servants.

    The railroad line from the Piraeus Ikonion container terminal to the railroad lines leading north represents a distance of less than 20 km. It is co-funded by the EU and has been under construction for about 20 years and is still not finished! This results in higher costs an substantially greater emissions per ton of cargo transported.

    I am sure that many similar examples of dysfunctional government can be given by others.

    Bad leadership, poor vision and risk aversion can destroy anything. Peer pressure and the invincible power in numbers of mental mediocrities, suffocates.

    Professional managers/interests ousted Steve Jobs and nearly bankrupted Apple. It took Steve Jobs’ comeback and the team he created to pick it up and propel it to the top. Greece needs to invent such a person.

    Greece has great possibilities because of its ancient heritage and culture, its unique archipelago, its natural beauties and its position. It also has good, hardworking, hospitable people. All it needs is an efficient operational system free of ideologies. It is clear that the people that brought us to this miserable point over the last decades cannot accomplish this. New leaders must emerge.

    George A. Gratsos Ph.D. (Aegean U.) B.Sc. (MIT)

    P.S. I only hope your blog can save our country

    • Costas Azariadis says:

      Thank you for your thoughtful remarks. One purpose of this blog is to encourage informed public debate.

      “Saving” Greece is quite another matter, and one that lies way beyond the power of a small group of academic economists. We are doing our best to advise the public. But it is up to citizens like yourself, your associates, their friends, and the electorate at large to bestir themselves, and express loudly and clearly their desire for change. Intense and sustained pressure from the voters is absolutely critical if Greece wants to leave behind the deepening misery of oligopolistic socialism for the better prospects of a thriving modern economy. Poland, Brazil and Turkey have been on this path in the last ten years with notable success.

      My colleagues and I have spent considerable time listing the reforms needed to get the economy onto a healthy growth path. This blog contains a rich inventory of what it will take to re-start the economy, beginning with an October 2010 post by Ioannides, Pissarides and myself.

      I beg to differ with you on why the country went astray. The standard explanation in social science is perverse material incentives not ideology, and that’s a story that Marx himself found compelling. In simple terms, powerful interest groups bribe politicians, with money and votes, in return for special privileges like higher wages or early retirement, guaranteed profits, protection from potential competitors, etc. This seems to fit well the behavioral pattern of the major Greek political parties.

      We are entirely in agreement that the country has the potential to enrich itself a great deal, and make a bigger mark on Europe and the world. That is unlikely to happen without drastic improvements in infrastructure and institutions. Those, in turn, require a new social contract, i.e., a brand new constitution, and better leadership from a brand new set of persons.

  3. dear Sir,
    I have the utmost respect for the economists who write lead articles on this site and I think yours is a very good article. Myself not being an expert on this topic, but an academic who lives in Greece since 1989 (after spending 15 years in the US) and has experienced first hand what happened in the last several years, I have a naive question, referring to your question “Why is Greece refusing to reform itself against all economic advice from the international organizations like the IMF, the EU, the ECB, sensible politicians, and experts of all stripes?” And I also have an answer.
    The question is, do you really mean that all austerity measures such as taxes upon taxes upon taxes, salary and pension cuts, and other horizontal measures which the Greek government has instituted since 2010 and which have brought the economy on its knees and on the brink of disaster, have not been dictated or at least been approved by the troika? Is the troika just a circumstantial adviser in Greece, standing by the sidelines and assuming the role of Pontius Pilate, or someone who imposes with an iron hand what measures shall be taken? I think the latter is the case. Well, everybody agrees that such measures have failed, and yet, troika’s response to failure upon failure has been to take more similar measures. The budget has gone astray, no big surprise. But they will fix it by more similar measures. Even a high school student can see that this is wrong. And even if troika’s role were purely advisory (which it is not), their advice has proven wrong. I refer you to Krugman’s recent article in the NY Times, that Keynes was right.
    To be sure, reforms are absolutely necessary and the Greek government has been reluctant if not dead against implementing them. The only explanation I have (and this is an answer to your question) is because these people have socialism (if not stalinism) IN THEIR GENES, pure and simple. To get rid of that you need to get rid of most of the ministers currently under Papademos. Why doesn’t he fire them? For instance, now they realize that Katseli’s supposed liberalization of cabotage in the cruise industry was a flop (I have been arguing about this ever since they proposed it) and now they say they will truly open the market, which will increase Greece’s GDP and create thousands of new jobs. As Greeks say, I hold a small basket, because it is not yet clear what socialist/stalinist provisions may be hidden in the new law.
    For the last 2 years, the government has been saying about a ‘development package’ so that the economy starts growing again. We are waiting for Godot, no question about it. In fact, most if not all measures taken so far are in the complete opposite direction. And these measures have the stamp of approval of IMF, EU, and ECB. So the troika should accept their fair share of the failure, and it’s a big one.
    I am trying hard to identify a measure taken recently or planned for the foreseeable future that has even a flavor of ‘development’ in it, but failed. You who are more knowledgeable, can you name one such measure?
    Wishing you and all contributors of this site a Happy New Year.
    Best regards,

    Harilaos N. Psaraftis

    • Costas Azariadis says:

      Thank you for your comment and best wishes for 2012!
      I think you are entirely correct that the root cause of the present troules is overtaxation in a vain attempt to bring about a primary budget surplus for the government, with no attempt to spur economic development. As you may remember, many people predicted this possibility, including an October 2010 article by Yannis Ioannides, Chris Pissarides and myself which was posted on this blog.
      As you note, the government refuses to implement ANY of the structural reforms which experts almost unanimously regard as necessary for development. The upshot is that Greece, despite its first-world status, retains the infrastructure and institutions of a mid-level emerging economy. In highways, education, property rights, public-sector corruption , and other dimensions, it often lags behind Mexico, Brazil and Turkey.
      Why do Greek politicians and their clienteles cling so stubbornly to the status quo of trading votes for favors? Why do voters let them? These are THE questions to ask. Your answer is ideology, i.e., stalinist genes. I would suggest self-interest, i.e., labor unions and other interest groups bribe politicians to delay reforms. This may explain why so many poorly paid retired politicians live in expensive Athens quarters.
      But I am not really sure about the correct answers . We may find out if and when the current members of the Greek political class are evicted from power,
      and prosecutors start delving into their accounts.

    • Demetrios Papaeconomou says:

      Taxes upon taxes have not been dictated by the troika. They have been the Greek government’s preferred alternative to the prescribed expenditure cuts.

      (Paul Thomsen, at the European Parliament, 27-03-2012):

  4. Very well written. I fully agree that the key lies in attracting investment and battling corruption, with the first being largely dependent on the latter. For example, to my opinion, tax evasion is a symptom of corruption so again the primary focus should be on broad measures against it. Corruption has brought down much stronger economies like Italy and and has afflicted Greece as a stage IV cancer, shutting down vital organs. The problem is that there doesn’t seem to be anyone who is willing and/or able to cut it out.

    • Costas Azariadis says:

      At this stage most experts are in general agreement about the nature of the structural reforms needed to cure what ails the Greek economy. Reforms are very difficult to implement as long as the country is led by the same people who are responsible for the present situation.
      Two important, and unanswered, questions are: Who will lead an effective reform effort? How can we jolt expectations out ot their current pessimitic state?
      Yannis Ioannides and I will have a post about these questions in a few days.

      • Sabina says:

        Drystone, I agree 100% with you. Maybe some Greek naval gnzaig would be good at this time instead of blaming everyone else for our troubles. And, yes, Greek-Americans (not all of us) are some of the worst Greece apologists. Sure, Greece is great, but don’t gloss over the negative either. It just makes us look foolish to the foreigners who are providing the money we desperately need to keep our way of life going. As my father always said, “Socialism is great, until you run out of someone else’s money”….

  5. Evangelos says:

    Situation in Greece is getting uglier day by day.
    I can ensure you that the Greeks don’t believe anyone during those days,no matter who are you, how good is what you say or how reliable or possible,simply it does not matter,hope has abandoned this place.
    Right now there is a big whip, but no carrot at all.IMF believes that this strategy will bring normality to the local economy,its a total madness and I m sure that no strong country like USA or Germany or China will ever try to put such pressure on themselves.
    If you are interested in following greek news you can check my account at twitter http://twitter.com/#!/Evangelos2012 , feel free to erase this last paragraph if you believe that is not appropriate.

  6. Demetrios Papaeconomou says:

    Yes, the “utopian strain in Greek society” as you so eloquently put it, is indeed an important reason why Greek public opinion has been so reluctant to embrace reform. Its origins may go all the way back to the civil war of the late ’40s, but after 1975 it has been sustained and nurtured by the electoral system. The left has had the privilege to an irresponsible “utopian” rhetoric, precisely because it was excluded by means of the electoral system from ever having to put it into practice. Abolishing favouritism from the electoral system and moving towards a more representative allocation of parliamentary seats could help put an end to utopian rhetoric and pave the way towards increased reform ownership.

  7. nicholas biniaris says:

    This is an excellent description of a bleak situation. The two causes referred to, the utopian orientation of greek society and cynicism, are both the end result of a social-historical subject, Greece which has lost its identity after the Civil War. We need a deeper analysis to discover why the Greeks, who can adapt and survive every where cannot survive in their own country. We cannot know all and we may not need to know all.
    An expectations jolt is a creative thought. At this point in time utopia and cynicism run inchecked together with a very strong isolationist spirit with fascist undertones. Nationallists and Internationalists are both for complete economic isolation and return to the good old days where poverty was the name of the game. The Greek psyche is deeply wounded. The present experience is traumatic and I am afraid at this point in time their is no one round to sooth the patient.

  8. An expectations jolt would be nice but — who is there to do the jolting?

    In the absence of an Alexander the Even Greater, I would suggest some more basic, common-sense-driven measures which could be taken very quickly and which would also lead to first results very quickly. They are summarized in this link: http://klauskastner.blogspot.com/2011/09/endgame-for-greece.html.

    Also, there are 2 documents (perhaps there are more but these are the only 2 ones which I am aware of) which could be used as a starting point for developing a long-term economic plan for the Greek economy. One thing is certain: without such a plan, there will be no future for the Greek economy. Below are the links for the McKinsey Report and the 1st Report of the EU Task Force:


    • Costas Azariadis says:

      No need for Alexander or Frederick. Voters are supposed to make all decisions in democracies. Yannis Ioannides and I will have a new post in a few days explaining what it will take to jolt the Greek economy out of its freefall.

Leave a Reply

Your email address will not be published. Required fields are marked *