By Renate Neubäumer
University of Landau
In the 15 years following Greece’s accession to the EU in January 1981, its economy grew by less than 1% per year and thus much less than in other EU-member countries. What were the reasons for this?
Firstly, investments showed a strong negative growth of 2.2% per year, i.e. less and less capital was accumulated. Because of this, capital per worker did not improve and labor productivity stagnated over a time of 15 years. The background was that profits “collapsed” due to a multitude of regulations, which led to a lack of incentives for domestic and foreign companies to invest. For example, the rules governing dismissals were very restrictive, and in 1982, an automatic indexation of wages to past inflation was introduced. Accordingly, high inflation rates led to high pay rises, which, combined with stagnating productivity, resulted in a substantial rise in unit labor costs in manufacturing: In the space of 15 years they had multi-plied more than tenfold, and thus had reached a much higher level than in other EU-member countries. In addition, heavily regulated and inflexible product markets contributed to the low profit margins.
Secondly, the Greek government increased its spending very quickly after joining the EU, without increasing its receipts accordingly. Between 1980 and 1990 alone, the percentage of public spending in the GDP increased by 18.5 percentage points to a total of 48%, while the percentage of public receipts only rose to 32% of the GDP. This resulted in very high fiscal deficits, a rapidly increasing public debt, and, consequently, a strong expansion in debt ser-vice. In addition expenses for the health and pension system and expenditures on civil serv-ants rose substantially. The high and increasing fiscal deficits contributed substantially to the high inflation rates in Greece.
Thirdly, due to the above-mentioned structural weaknesses – overregulation of the econo-my, too low investment and too high price and wage increases – Greek foreign trade did not profit from the common European market, in marked contrast to the other new EU-member countries.
In November 1993, the Maastricht Treaty offered Greece the possibility of entering the coming Eurozone. Therefore, the country implemented a series of reforms. It deregulated col-lective bargaining, introduced a monetary policy aimed at more price stability, restructured its financial markets and deregulated its product markets. However, the fall of long-term interest rates – from nearly 21% in 1994 to 5.5% in 2000 – were crucial for “fabulous” growth rates. From 2000 to 2007, Greece’s GDP increased by one third or by an average of 4.2 percent per year.
The trigger was a housing boom that already started before the Eurozone entry: Between 1999 and 2007, real estate investment nearly tripled, and its share in the GDP rose from 6 per-cent to 12.5 percent. There were several reasons for this. Not only interest rates for mortgage loans were at a historic low, also Greek banks were generously giving out credit. They attract-ed a lot of capital from other European countries, and securitization of mortgage loans al-lowed them to displace the risk to third parties. Finally, the Greek property market received another boost through the housing buyers’ tax legislation changes that were being discussed in the media and used as a sales argument by property agencies. As a result incomes in the build-ing sector nearly doubled due to many new jobs and disproportionate wage increases. This, in turn, led to higher consumption and to prosperity in other sectors of the Greek economy. Fur-thermore, the boom was fueled by additional consumption financed by consumer loans and a substantial increase in public expenditure which was mainly due to the rising pension costs and the enlargement of public administration. After joining the Euro, the number of public employees increased by almost a quarter, and their wages were raised substantially.
The steep increase in GDP, however, did not result from innovations and firms’ expansion of their capital stock. Firms’ fixed investments were still low. Greece had not continued its reforms after joining the Eurozone. All in all, the country did not achieve sustainable growth. Instead, its GDP was “inflated” in 2007 due to high capital inflows that led to a demand-side boom. Therefore, a sharp fall of its GDP was “preprogrammed” as soon as capital flows from other Euro countries “dried up”, resulting in this Greek tragedy: In 2007 the real estate bubble burst, and the GDP fell as quickly as it had risen after the Eurozone entry, arriving back at the 2001 level in 2013.
*This article is part of a feature regarding the Greek crisis, within the context of a cooperation between "Naftemporiki" and "DIW Berlin". It is based on the research "The Greek crisis: A Greek tragedy?" and expresses the personal opinion of the author.
