Among the euro zone (EZ) periphery countries hit by the world financial crisis of 2007-8, Greece has experienced the worst decline and the biggest need for international support. Between 2008 and 2016, Greece lost more than one fourth of its GDP. Also, since the eruption of the crisis, it has had to rely on a number of official or unofficial programs of financial assistance provided in various forms by the EU, the ECB and the IMF; only the three official fiscal bailouts between 2010 and 2015 amounted to around 290 billion euros.
Although GDP growth has managed to rebound since 2017 and there has been an improvement in economic sentiments recently, the recovery is still fragile driven mainly by net exports and a rise in private consumption. Private investment remains at around 11% of GDP only, public debt is around 175% of GDP, external liabilities are around 140% of GDP with the current account still in deficit, and unemployment is around 17%. Besides, as part of bailout programs, around 70% of Greek public debt is nowadays owned by public institutions of the EU and the ECB, while the country has agreed to achieve a number of ambitious fiscal surpluses in the years to come. At the same time, Greece scores poorly in institutional quality vis-à-vis other EU and OECD countries.
In light of the above, it is imperative to strengthen the ongoing recovery and improve the growth potential. But, before we search for engines of growth, we need to identify the barriers to growth.
Our simulations – based on a micro-founded macroeconomic model calibrated to Greece – show that the adopted adjustment program (namely, the fiscal austerity mix combined with the fiscal and monetary bailouts by the EU, ECB and IMF), jointly with the observed deterioration in institutional quality (specifically, in the degree of protection of property rights) can explain most (around 22% of GDP) of the cumulative loss in GDP in the data (around 24% of GDP) between 2009 and 2016. In particular, the adjustment program can explain a fall of around 12%, while the deterioration in property rights accounts for another 10%.
Counterfactual simulations, on the other hand, show that the cumulative output loss could have been around 9% only, if the country had followed a different fiscal policy mix; if the degree of product marker liberalisation was closer to that in the core euro zone countries; and, above all, if institutional quality in Greece had simply remained at its pre-crisis level.
On the other hand, we show that, in the absence of the official fiscal bailouts, the depression would have been much deeper, while the accommodative role played by the quantitative policies of the ECB since the early days of the crisis has been vital to the Greek economy.
A research seminar on the topic took place on 25 February 2020 at the LSE, organised by the Hellenic Observatory. For more information please visit the event page.