Economic Policies in Greece During 1990-1993:

An Assessment
by Theodore Pelagidis *
Ph.D. Fellow at the Center for European Studies,
Harvard University
and
SPES Researcher of the European Communities in the
University of Paris VIII
(November 1993)
Working Paper Series #46
Abstract
This paper deals with the assessment of the economic policy followed during the period 1990-1993 in Greece. It
analyzes in particular the evidence and the results of the applied conservative prescription at that time. While
the results of this policy proved to be negative according to the arguments as well as the findings of this paper,
a new policy agenda is sketched out. Proposed policy directions share the view that in order to break away from
the economic crisis in Greece, priority should be given to economic growth, paying attention to public invest
ments in infrastructure in order to generate productivity increase of the private sector, raise the level of business
activity, and reduce the risks facing individual firms. A differentiated, selective and, according to market sig
nals, gradual sliding of the national currency is this paper's proposal for the crucial field of exchange rate pol
icy .
..
The author would like to thank the E.U. for its financial support through SPES funds. An oral version of this p a ~ r was
presented at the Center for European Studies at Harvard University on November 30 and at the Fletcher School at Tufts
University, Boston, on December 1, 1993. Comments from the audience are gratefully acknowledged as the source of
improvements in this paper. Of course, the responsibility for the arguments presented remains mine.
INTRODUCTION
It is widely supported in Greece that excess demand and extremely
high publ ic debt and budget deficits constitute the main problems of the
economy, responsible for the poor macroeconomic performance since the
'80s and beyond. The conservati ve party which took power early in the
'90s, facing intense macroeconomic imbalances. adopted at once a
package of hard austerity measures in order to cut down the budget
deficit and restrict domestic demand. The persisting economic crisis and
the failure of sustainable growth were considered the outcome of past
policies which had increased wages above inflation and productivity and
promoted state intervention especially through the increase of
unproductive public consumption expenditures. Three and a half year
later, a political crisis provoked by the unpopular austerity measures,
brings back to power the Socialist Party (Pa.So.K.), which as believed,
will put an end to the "extreme monetarism" applied before. Despite this
clearly declared intention, it seems that even within the socialist party. it
is widely accepted that the government's new economic policy should,
more or less, run on the same lines. Pro-socialist policy makers advise
that general stabilisation measures, backed by a social concensus, are
needed to bring the economy back to a stable macroeconomIC
environment. Carefully devised political movements and delicate words
seem to be up to now the way of implementing and applying a "mild
monetarist policy". Notwithstanding. it is unfOltunate that fe\v of the
policy-makers who SUppOit conservati ve ideas even \vithin the socialist
party, present detailed and convincing arguments to justify the rationale
behind the measures taken while, at the same time, this '''ala mode" blind
devotion to a mania for austerity prevents them from keeping a cool head
to evaluate the existing 3.5 year results of such a policy. In response to
such an attitude, this paper makes an attempt to present and explain the
goals and the rationale of the economic policy followed in the last three
and a half year in Greece and more importantly, seeks to analyse the
evidence and the results of this applied extreme monetary perscription.
1. Poor Macroeconomic Performance and Prevailing Diagnosis
It will not be news to anyone that the macroeconomic performance
of the Greek economy during the '80s \vas not impressive. Real GDP
grew at an average annual rate of 1.1 % which is a low percentage both
per se and compared to the GDP increase of the European Union (E.U.),
around 2% (Spraos 1991: 1). Taking into account that Greece as a full
member of the E. U. has both the obligation and the ambition to approach
European standards, the increase in Greek GDP was rather disappointing.
Despite periods of intense income restraints (1983, 1986, 1987, 1990),
inflation proceeded at an annual average rate of 18% in the past decade.
The current account deficit averaged -5.2% of GDP in the years 1980
1989, while the foreign currency debt increased from 10.6% in 1980 to
31 % in 1989. At the same time, unemployment rose from 4% (1981) to
7% (1989), an almost double increase although still below the European
peak rate of 11 %. Industrial production remained almost stagnant - 0.8%
average change during 1984-1991 - \vhile the share of manufacturing
production as a percentage of GDP retreated from 17.2% in 1975-1979
to 15.8% in 1985-89, facts which are both attri buted to poor industrial
productivity performance especially in the first five year period (-1. 0%
in 1980-84 and 2.4% in 1985-89).
The deterioration or at least the relevant stagnation of the main
macroeconomic indicators is considered as a result of a huge public
sector deficit \vhich run at an average rate of 17.7% of GDP during
1984-91, and reached a record level equivalent to almost 19% in 1990,
by far the highest level in the OEeD area (Barkleys 1993: 12).
Since 1990, a year in which the conservative palty took power,
tough austerity measures have been taken \\lith the goal of stabilizing the
economy and bringing Greece closer to its European partners. Economic
policy focused on the - believed - sources of macroeconomic
disequilibrium: the huge budget deficits and the excess demand coming
mainly from increases of wages above productivity during the last
decade. Budget deficit, a concept familiar to economists, is constituted by
the amount by which expenditures exceed tax revenues and regularly this
amount must be borrowed or added to the total debt. Hence, debt is the
sum of all past net borrowings. In the case of Greece, the applied neo
conservative analysis (Alogoskoufis 1990, 1991, Papademos 1989,
Pavlopoulos 1986. 1989. Pavlopoulos and Kouzelis 1990. Economou
1991) attIibutes massive deficits to excess spending expenditures, refering
in particular to excess public consumption and increase in private and
public sector wages. !viost of these expenditures are considered as a \vaste
of resources which indeed provoke crowding-out effects in the private
economy. As a result, nominal interest rates are going up so that the state
may be able to pull capital resources in order to cover its deficits. One
must remember that during the '80s the short-term nominal interest rates
....
\vere at an average rate of :20%, a fact that, as it is argued. pulled
resources away from private investment. On the other hand, excess
domestic demand is considered to be the primary cause of high inflation
as well as of the significant reduction of private sector profit rates which
had a negative side effect on investment decisions and, as a result, on
productivity performance. Authors who support these arguments
characteri stically menti on that publ ic ex pend itures reached the
unprecedented 49% of GDP at the end of '80s, fact which, together with
excess public consumption rates, had negative effects on inflation as well.
In the reports of the influential conservative Institute of Economic
and Industrial Research (lOBE), the enormous increase of the wage
income share during the '80s, is palticularly emphasized. Vice-director
of the Institute Professor Economou (1991), points out that the income
share of wages increased from 58.2% in 1981 to 66.8% in 1985, an
increase which continued for the rest of the decade (1986-1989). The real
wage in manufacturing increased cumulatively 4.4%, while productivity
decreased -2.2%, having as a result a total net i Hcrease of the real wages
for the whole decade of 16% (Economou 1991: 58 and : 72). G.
Pavlopoulos (1986, 1989), Professor and Director of the same Institute
and an advisor to the conservative government, estimates in detail the
negative impact on profits due to an increase of real wages, a fact that is
considered of cardinal impOitance for private investment decisions and
hence for productivity increase and competitiveness. The same authors
argue that real wage increase had a negative side effect to the marginal
propensity to save, which from 22% of GDP in the '70s went down to 6%
in 1987.
2. The Conservative Policy Perscriptioll
Having suppOlted the above diagnosis, the conservative government
proceeded since 1990 to implement tough stabilisation measures focusing,
in the first place, on efforts to reduce the deficit from 19%, of GDP
(1990) to 3%, and the total debt from 76.3 % (1989), to 60% (Epilogi
1993), so as to meet two of the most central convergence criteria of the
:Maastricht Treaty. Hence, to bring the economy closer to European
standards, and to break away from the economic inertia provoked, as was
believed, by the extremely high public sector borrowing requirements
(PSBR). the conservative government announced a number of drastic
fiscal measures. Besides a drastic overhaul of social security expenditures.
higher indirect taxes and public utility prices were soon applied to
increase state revenues and to compensate for the tax short-fall especially
in the 1992-93 years, together with an urgent plan to de-nationalise state
owned enterprises like the cement company "AGET-Hercules", the Greek
telecommunications corporation "OTE", shipyards, public transpOltation.
etc. With the speeding-up of the privatisation process it was hoped that
the state would get rid of public enterprises' deficits and get money from
their sale so that the primary budget balance could show a surplus of 5%
of GDP in 1993, rising to 7.7% until 1997. However, in the measures
applied we should emphasize the corporate tax reduction to 35% and the
personal income tax highest rate reduction to 40% (Barkleys: 6), in order
to increase profits and as hoped, investments.
Shifting to the income policy, tough real wage cuts were adopted to
diminish labour costs so as to decrease domestic demand and slow
inflation. Pressuring demand and so keeping down inflation was
considered as a precondition to cut interest rates and, as a result, state
back payments and deficits. In fact, with inflation pressures persisting at
the high levels of 15.8% and 14.5% the last two years 1992 and 1993
respectively, the public sector pay award of 5% in 1992 and 4% in 1993,
brought down relative wage levels and did positively influence private
sector profits. After tough real wage cuts in 1991-1993, payroll cuts are
expected to reduce the state wages bill from 12.4% to 11 % of GDP by
1996 (Barkleys 1993: 6).
As regards exchange rate policy, the scope was to keep the national
currency within a Vel)' narrow range of fluctuation, around the ECU
parity, with the prospect of entering the drachma into the European
Exchange Rate Mechanism (ERM), as a first step of Greece's
participation in the process of the European Union (EMU).
Recent estimates put the overval uation of the drachma at 20-30%, fact
which has partly been the result of an anti-inflationary "crawling peg"
policy in the last two years (Alogoskoufis 1993).
Finally, as for the liquidity of the economy, interest rates were
supposed to enter in a process of gradual cut down by early 1994, along
with a decrease of public debt. Money supply and credits to the economy
also contracted. From 16.9% annual percentage change in 1990, credit
expansion slowed to 10.8% and 9.8% in 1991 and 1992 respectively from
its peak rate of 23.6% in 1989 (GECD 1993a: 60). M3 grew by 15.3%,
12.3% and 15% for 1990, 1991 and 1992 respectively, from 24.2% in
1989, following the same lines (op.cit.: 62). According to conservati ve
policy-makers this would contribute to a drastic decrease of the liquidity
of the economy, a fact which usually contributes to a deceleration of
inllation and in a way counterbalances considerably liquidity issuing from
the huge budget deficits and the massive debt.
Concluding the above policy perscription, we would say that during
the years 1990-93, the conservative government adopted a total of tough
austerity measures to slow inflation and to reduce the budget deficit. This
type of irreconcilable monetarism was considered as the only way to
succeed in the above goals, bring the country away from economic crisis,
and also to meet ?v1aastricht criteria. But other things are not equal. The
i\1aastricht treaty defines concrete nominal economic targets to be reached
and sets deadlines for these to be achieved. It does not spell out the right
policy to meet the goals. It is supposed to leave free ground to each
member-State to apply the suitable policy perscriptions in order to
succeed the targets, although the latter are subject more to political
criteria and they are not designed according to purely economic logic.
Notwithstanding, leav ing aside the t\ilaastricht treaty per se, we will make
an attempt to assess the policy applied since the early '90s examining in
the first place whether the govemment achieved the objectives set.
3. Results and Critical Assessment
Our first task is to consider the diagnosis for macroeconomic
disequili brium. Is it true that excess demand is found at the heart of the
problem? It is reminded again that excess demand is believed to be
created by extraordinary wage and public consumption expenditure
increases during the decade of the '80s.
Contrary to what is commonly believed, during the '80s (1980
1990), the average annual change of total domestic demand in Greece was
1.3% (OCDE 1991), while the GDP per head grew at an annual rate of
1.7% during 1981-1991 (European Economy 1990: 239). Private
consumption cumulative change in constant prices grew in Greece at 21 %
(1979-1989), while in the E. U. it grew at 24% in the same period (OECD
1991: 56). Private consumption in Greece was 51 % of the community
average in 1981, but dropped to 41 % in 1991, a fact that \ve should
attribute to the fall of the relative wage levels from 55-56% of the OECD
and E. U. averages (in common currency), to 42-45% in 1991 (OECD
1993a:29). Therefore, as Vergopoulos (1991, 1992, 1993) rightly observes
the above evidence is highly incompatible with the overconsumption
theorem and interpretation of crisis as perceived by conservative policy
makers. On the other band, Greece presents the highest saving propensity
of households (around 20%) among the E.lI. countries (14% average)
(AGI 1992: 12-13), so we can certainly support that there is neither
insufficiency of saving nor overconsumption tendencies at the expense of
sav ings and investments. As for public consumption, although it is true
that consumption grew constantly during 1980-89, it certainly remained
at European levels, around 19% of GDP against 18.5% in the E. U.
(OECD 1991: 66). The cumulative growth of real public consumption
expenditures during the years 1982-1992 was 19.80/(. for Greece against
21.0% for the E.U. (OECD 1993b: 204). \Ve should also mention that
public expenditures as percent of GDP reached the European levels only
in late '80s (around 50%), although what the state receives from the
economy (around 350(.' of GDP) is far behind the European standards
(45%), a fact which. according to our interpretation for the economic
inertia today in Greece below. proves to be of cardinal importance.
The above evidence, which primarily refers to the excess domestic
demand issue, is pelfectly matched with the evidence concerning labor
wages and costs. The real average wage per head grew in Greece at an
annual average rate of 0.9% during 1983-90, while in the E. II it exceeded
1.5% (CO!v! 1989: (0). The relative labour cost - per unit of product - in
TABLE 3.1
RELATIVE LABOUR COST PER UNIT OF PRODUCTION IN A COM:MON
CURRENCY (1961-73=100) IN RELATION TO E.lT.
YEAR 1984 1985 1986 1987 1988 1989 1 ~ 0 1991 1992
GREECE 83.7 82.2 67.4 63.7 68.5 71.1 72.6 68.1 65.2
Source: European Economy (1992: 258).
common currency, as can be easily seen b} table 3.1 above, was 83.7 in
1984 of the European one, while in 1982 it fell off to 65.2%. Finally,
Eurostat statistics show that, real wages in Greece are going down by
1.6% per year since 1985, while in all other E.l1. countries real wages
increased, from 2.8Sf.' in Germany - the higher % - to 0.7% in France
the lowest % (Eurostat 1992: 1).
After presenting and analysing so much data which deals with
various aspects of the so-called "domestic demand" in the economy, we
can definitely maintain that any problems of macroeconomic
disequilibrium can not be attributed to excess demand, overconsumption
and generally unproductive waste of resources coming from excess public
or private consumption. \Ve saw that, contrary ~ o what is commonly
believed, domestic demand was kept at low levels, in fact lower than the
slight increase of GDP; public consumption and expenditures are at
European standards showing convergence with the E. U. and not
imbalance: at the same time, divergence is observed on state revenues and
on wages, although the government in power during the '80s was a
socialist one.
Let me now embark on the more complex issue of public debt and
deficit. which, as mentioned above became the main concern of the
policy-makers during 1990-93. As has been noted before, conservative
authors still consider the annual public sector borrowing requirements
(PSBR) as responsible for high inflation rates as well as for keeping
interest rates up, a fact that it is commonly believed, pulls resources away
from private economy and provokes dis-investment and crowding-out
effects. I am not going to enter territory concerning theoretical issues
about the relationship between interest rates and budget deficits, but I am
almost urged to point out that government deficits do not necessarily
affect interest rates and investments. As Prof. Barro at Harvard
University states clearly, government budget deficits do not necessarily
affect interest rates, investment or anything else because the increase in
private saving exactly offsets the fall in public saving. Along the same
lines, we would say that the deficit affects interest rates only when the
economy is near its potential level of output, which means that only from
the point of full employment does it pull resources away from private
investment. Deficit reduction stimulates investment through the freeing
up or resources only in the case in \vhich the latter is not available. In any
other case. problems are getting worse by excessive deficit reduction and
we suppol1 that this is the case of Greece in the last three years or so.
Gross household savings as a percentage of disposable income was 20.1 %
in 1991 in Greece and 14% in the E.U. (AGI 1992: 12-13). Therefore,
the economy, despite high public borrowing, does have idle resources
available indeed at such a level so that the view that private economy
suffers from crowding-out effects can not be supported.
As I have cited before, contraI)' to the demoralizing syndrome
about the wasteful, consumption-natured and unproductive Greek State,
public consumption and expenditures do remain around the European
standards. But if this is true, then what provokes the continuing increase
of the total debt from the early '80s Ol1\vards, a fact that according to
some academic. analysts confirms "State hypel1rophy" in Greece?
It is at first glance paradoxical that the highly restrictive policy
adopted since the early 90s, while slightly reducing the PSBR at the same
time massivelly increased the total debt, as you can realise for yourselves
in table 3.2. But let us take things from the start. Looking at the
composition of public expenditures and revenues one can easily realize
why the debt explosion of 1990-93 can no longer be a mystery. As we can
see from table 3.3, public expenditures as a % of GOP have risen from
28.9% (1981) to 32.1 % (1985), 37.5% (1988) and 47.8% (1992). Other
TABLE 3.2
PSBR AND TOTAL DEBT AS % OF GDP
YEAR 1988 1989 1990 1991 1992 1993+ 1993
PSBR* 13.S 19.6 21.0 IS.6 10.9 9.0
PSBR** 18.6 16.1 13.2 10.6
DEBT*** 71.S 76.3 88.8 9S.9 101.4 lOS.0
PSBRff IS-18
+Predictions, estimations.
Sources: *OECD (1993a: Sl).
**Barkleys Economic Dpt: Greece (1993: 12).
***Epilogi (1993: 24).
#\\7Jrile 1993 is ending, evidence announced just before submitting this
paper. shows that the budget deficit for 1993 finally reaches 14-1S%. Prof. L. Katseli,
member of the cmmdl of economic advisors, person in charge of the 1994 budget report
and personal advisor of the prime minister A. Papandreou, in a talk given in the KeIllledy
School at Harvard in November 1993, puts this number at 18%.
TABLE 3.3
PUBLIC EXPENDITURES AS % OF GDP
YEAR 1981 1988 1990 1992
Total 28.95 37.53 43.65 47.81
Interests & 8.56 11.91 9.92
Amorti zati on 2.03 3.36 12.35
Primary expend. 25.21 26.95 28.38 25.54
Source: ivlinistry of Finance (1992).
reports like the European Economy (1990), raise the above number to
46.'2% of GDP as average annual rate during the period 1981-1990.
vVhichever report is closer to the reality, one can easily realise that
46.2% is even lower than the relative E. U. rate of 48.0% - the average
annual rate in the same period. Looking at the composition of public
expenditures we observe that primary expenditures as a % of GDP
remained relatively stable: from 25.2% in 1981, rising only to 28.38% in
1988 and dropping again to 25.5% in 1992. Thus, even this legitimate,
accordi I1g to European standards, increase of public expenditures since
the early '80s is definitely not due to new/added primary expenditures. It
is evident from table 3.3 that the increase arises from the explosion of
interest and amortization payments \vhich grew from 10.59% of GDP in
1988 to '2'2.25% in 1992. Total payments for interests and amOltization as
a % of public expenditures alone, also rose from 17.5% in 1988 to 42.2%
in 1992 (Epilogi 1993: 24). To counterbalance the huge interest payment
increases the share of wages and pensions in GDP - again contrary to
what is commonly believed - decreased from 14.07% of to 12.45% in
199'2. To cover the widening deficit, policy proceeded during
TABLE 3.4
PUBLIC REVENUES AS % OF GDP
YEAR 1981 1988 1990 1992
Indirect taxes 13.1 16.8 17.6 19.3
Direct taxes 6.1 6.9 7.7 7.9
Total tax revenues 19.3 23.8 25.3 27.2
Non-tax revenues 1.3 2.0 1.7 3.1
Total revenues '20.6 25.8 27.0 30.4
Source: NIiniStry of Finance (1992).
1990-93, to a large increase in taxes (revenue side). Total tax revenues
increased from 22.3% of GDP in 1989 to 27.2% in 1992 (table 3.4). It is
worth mentioning that this increase came mainly from indirect taxes
(OECD 1993a: SO), while revenues from direct taxes shows only a 1 %
increase during this period, coming mainly from taxes on deposit
interests (?v1inistry of Finance 1992). On the contrary, it is reminded that
corporate tax was reduced to 3S% (Barkleys 1993 :6). Despite indirect
tax increase, Greece is still considered to be around the European levels
(E.lI '19.0%), that is 19.1% of GDP for 1991 (AGI 1992: 12-13),
although an important increase in indirect taxation with the measures
taken in August 1992 should have slightly risen the figure.
Concluding from all of the above, two things are beyond any
doubt. The existing big deficit should be attributed to a large extent to: a)
the low level of state revenues, which were mainly a result of low direct
taxes especially on incomes and profits. State revenues in Greece which
come from taxation on incomes and profits constitute only 6.S% as a
percent of GDP, while in OECD the correspondent figure is 14.S%
(OCDE 1990: 141) and, b) to a serious increase of expenditures for debt
service payments. Notwithstanding, in case we add to the official GDP the
one that is produced in the so-called "atypic economy", and which is
estimated around 30% (Pavlopoulos 1987), or even SO% of the official
GDP according to Professor Angelopoulos and Barkleys (1993: 6)
estimates. then state expenditures and revenues, as a % of GDP, are much
!o\ver than the official numbers indicate. Finally, at this point, it is worth
mentioning that there are studies which indicate that this percentage
should even be less when we estimate the inflation-adjusted PSBR (Spraos
1991) or when we modify calculations cmd leave aside state guarantees for
private sector's borrowing or include state-owned corporation deposits in
banks (Arsenis 1990, Vavouras 1992; see also: Heilbronen and Bernstein
1989, Kuttner 1992).
GI..)ing back to the issue at hand, that is the assessment of the
conservative monetarist policy applied in the last 3.5 year, we can now
definitely support that the diagnosis was wrong. There is no way to
support as proved, that macroeconomic imbalances stem from either
excess demand or a state that is. in size and intervention, consumptionist
and wastefully hypertrophic. The deficit should not be considered
structural since it is fed mainly by interest and amortization payments
(expendi tu re side) and from t he state's weakness, inability and
UInviliingness to impose and collect direct taxes (revenue side). The
conservative government predicts a decrease of the deficit to 10% of
GOP in 1993 (table 3.1), but even if this fall off comes true, total debt
keeps increasing and will, even by optimistic predictions, exceed 105% of
the GOP in 1993. On the expenditure side, we remarked that an ever
increasing percentage goes for interest payments while primary
expenditures remain stable. As long as the real rate of interest paid by the
state remains higher than the real GOP increase, the debt will keep
increasing for the forseeable future. It is estimated that under these
conditions it would need, from now on, high surpluses on the primary
budget of central government in order to cover every "new" deficit
coming from the deduction: real interest rates payments-increase of real
GOP. But raising indirect taxes as well as efforts to cut spending in order
to achieve a surplus in the budget excluding interest payments, it subtracts
income from business and consumers, reducing even more purchasing
power, profitability, consumer spending and investment (Galbraith 1993).
Besides, high interest rates are not only kept artificially high in order to
attract capital and compensate for low state revenues, but also because of
the need to prepare the national currency to formally enter the European
Exchange Rate Mechanism (ERM) and keep up with Maastricht
obligations regarding the creation of a common European currency
(ECU) and so, as is believed, fight inflation. First of all, a high degree of
exchange rate fixity requires correspondingly high levels of real interest
rates, which further speeds-up the debt accumulation process both
directly by increasing the interest payments on debt, and indirectly by
reducing the demand for high-powered money and the growth rate of
output (Papademos 1993: 153-154). Thus, this policy keeps the deficit at
high levels and balloons debt, while at the same time, high interest rates
hit the real economy and bring on economic ine11ia as the increase of
GDP can not counterbalance high interest rate payments. Moreover, this
has the result of an increase in the average rate of state services in order
to cover the deficit. and it leads to an increase in prices and inflation.
Inflation today remains around 15% and a recent tendency to fall by 2-3
points rapidly overturned by a need to increase taxes (from 22.3% of
GDP in 1989 went to 27.2% in 1992) in order to cover an unexpected
high deficit in the end of 1992. The fight against inflation does not take
place neither by keeping the drachma parity high because a "hard
currency" policy weakens trade balance. From -1l.9 as % of GDP deficit
in 1988. trade balance grew at 15.8 % in 1992 (OECD 1993a: 71) and
thus. deterioration continues. \Vhile the trade deficit is growing. the
artificial nominal drachma parity is seriously undermined, while
sentiment about the drachma is dominated by the performance and
prospects of the current account. Then. real parity falls off due to
growing trade deficits, reinforcing market speculation over the national
currency and keeping inflation at high levels. despite the fact that
economy is in an unprecedented deep recession. This policy, combined
with excess disabsorption by highly restricting domestic demand, had as
an outcome even more catastrophic results on the real/industrial
economy. The fall off in domestic demand reduced the size of the
domestic market and diminished economies of scale for enterprises,
increasi ng the per unit cost - and fUlthermore boosting inflation once
more. Enterprises, even those with much potential, find it always more
difficult to compete in the international market arena when imports are
su bsidized \' ia the undervaluation of the f?reign currency while, at the
same time, expolts are taxed by an "expensive drachma". As a result, they
find only one way to restore competitiveness through the Blustonian
Harrisian (1988, 1990) "low road restoration of profits" which is based
on low ,,,,age labour force, and restores competitiveness in the short-term,
but definitely undermines it in the long-term by lowering investments and
preventing technological change (Cohen and Zysman 1987, Pelagidis
1989. 1993). It is estimated that only as a result of further wage cuts
alone, there has taken place a sharp increase in Greek profitability of up
to some 80% since 1990 (Barkleys 1993: 3), without actually increasing
investment rates correspondingly (see table 3.5), contrary to what
conservative policy-makers expected.
TABLE 3.5
GROSS PRIVATE INVESTMENTS*
YEAR ~ 1 I L . DR.
1985 56000
1989 64027
1990 73412
1991 65943
1992 64803
Source:OECD (1993a: 1(4). *In constant drachmas
The sharp increase in unemployment to 11 % should also be
considered equally damaging to the economy not only because this
threatens social justice and destroys society's cohesion and social
conditions for productivity increase, but also because it "represents" lost
potential output. According to Professor R. Eisner (1993), high
unemployment does not only means waste of resources, as I have stated
above, but also adds to the deficit in the short-term and the amount
grows over time as additional deficit adds more to the debt and future
interest payments. A loss of potential output means, furthermore, a loss in
potential future investments which w0l!ld increase producti v i ty,
competitiveness, having the side-effect of decreasing the debt and deficit
by enlarging and deepeni ng the taxable "base" of the economy and by
increasing GDP. Thus, the potential deficit of the so-called "full
employment budget", would be less. As a result, we can say that today's
fiscal policy in particular is even more restrictive than it appears to be
with the conventional calculation.
On the other hand, the healthy part of the Greek industry enjoys
extremely high profit shares which exceed 60% although the relevant
percent in the OEeD and in the G7 countries is around 44% (GECD
1989: 124). Since 1990, there has also been a sharp recovery in Greek
profitability, up some 80% as mentioned above (Barkleys 1993: 3).
Direct state aid to manufacturing as a percent of value added was around
20% in Greece, while in the E. U. it was lower than 4% during 1986-90
(OEeD 1993a: 16). Combining together at the same time, low taxation on
business, low state revenues - coming from low taxation on incomes and
revenues - high pri vate profits, low investment rates and high public
deficits, all these constitute a substantial state contribution to the private
economy. This, "hiden" state back up to individuals as well as to
industrial competitiveness in particular. together with its low size and
intervention to the economy, signifies in our 'v'lew a particular "state
atroph.V " in Greece. It should be repeated and emphasized at this point
that high interest payments by the state, in order to attract funds to
counterbalance diminished budget revenues. constitlltes in fact the way to
feed prinlte profits and makes the "crucial link" between the state and the
private sector. This unique manner of state contribution substitutes today
for the "old road" of state backing private revenues in Greece, namely the
high state subsidies and general protectionism which took place in the era
before Greek accession to the E. U. Significantly, this closed "vicious
circle" of financial flows between state borrowing from the private
cconotl'lY through bonds, and the state back payments to it at high interest
rates. in ['act feeds speCUlative in nature capital which is not invested
TABLE 3.6
SOURCES OF PSBR FINANCING
(Share in %)
YE>\R 1989 1990 1991 1992*
Intemal bon-owing 86.9 87.9 87.5 95.9
State Bonds purchased by:
Danks -l2,2 16.1 1.8 -27.9
Indi viduals & enterplises 18.9 43.1 68.0 93.7
Bon'owing by conullercial
banks 15.8 D.7 12.7 -2.8
Bank of Greece 10.0 15.0 5.0 32.8
External bOlTowing 13.1 12.1 12.5 4.1
Total 100.0 100.0 100,0 100.0
*Jan-Sept, predictions
Source: Central Bank of Greece (1993: 61).
productively but instead contributes to the well-being of a "neo
compradoric" class which seems to live from interest revenues alone and
at the expense not only of the agrarian and labour class but also of
industry. In table 3.6 we have the opportunity to consider the economy's
most serious problem which seems to lie in the increasing share of
indi "iduals and enterprises state bond purchase which reach at a peak
level in 1992. This table shows that funds, instead of being directed to
real investments on machinery and equipment - which increase
productivity and competitivcncss -. go' to the puchase of state bonds
simply because the latter are more profitable. Thus, industries learn to
rely more on lo\v wages, avoiding investments on new technologies and
investing more. on state bonds (on speculation capital see: Sweezy and
t'v1agdoff 1987. Cohen and Zvsman 1987. Bluestone and Harrison 1988,
~ .
Pelagidis 1993).
Policy Guidelines and Conclusions
Intervening directly at the source of the problem is the mam
pri nci pi e of ecol1om ic pol icy. It is really unfortunate that in Greece,
during the crucial years 1990-9:i when a new policy was applied, the rule
of optimal intervention was so much distorted by hitting domestic demand
and creating excess disabsorption when the source of the problem was
found in the supply side. Deficit reduction was the wrong criterion and
target to use in the first place ~ not that it was unimportant, only that it
was not the main issue. After 4 years of "wild monetarism", a slight
decrease in the budget and current account deficit. together with some
marginal decrease in the i nClation rate si nce 1990 - in 1988 it was around
13% - constitute unimportant and only temporary improvements which
indeed took place at the expense of the industrial base of the country. As
for the current account, it is esti mated that for 1992 -2.7% of GDP from
-4.7 in 1989 and -5,4% in 1990, although it was only -1.8% in 1988
(OEeD 1993a: 71). As \ve saw before. \vithin current account in non-oil
trade balance in particular. which mainly reflects competitiveness (terms
of trade non-inc! uded), things are getting \v<.xse From -11.9 as % of
GDP in 1988 negative non-oil trade balance gre\" at -15.0% in 1991 and
-]5.80(, in 1992 (op.cit.: 71) and this deterioration continues mainly due
to the hard currency policy. Indeed. deterioration would be even worse if
impOits were not hit by domestic demand restrictive policy. However,
you can overvalue one, you can overvalue a bit more a second time but
you c<ln 110t keep extending overvaluation indefinitely without avoiding
damages in the production sphere (Spraos 1991). Under a "hard
currency" regime, it is indeed very possible that after a long period of
recession. production could be so weak that it could not even respond to
any increase of demand at that time. In that case. the most possible effect
is that demand would be directed mainly on imports and then, trade
balance will worsen even more. Authors who support "hard currency"
policy believe that in any other case inflation will boost again, especially
the "imported onc'! and then it would not be possible to bring down
interest rates. We must mention at this point that:
a) it is very possible that in the case that we let the currency slide
accordi ng to market signals. foreign competitors will keep prices down so
as not to lose their domestic market share and.
b) by letting the currency find its true equivalence, we make exports
more competitive and so increase production. thus compensating for the
undervaluation and counterbalancing inflation expectations coming from
it by enforcing production and improving trade balance.
ivloreover. exchange rate parity should follo\v more closely the currency
fluctuations of those countries which especially produce goods
competitive to Greece, like Spain, Portugal and Ireland so we can
efficiently support national competitiveness. Therefore, although
exchange rate policy is a vcry delicate matter and a very sensitive one and
thus careful movements need to be made. a selective, differentiated and
gradual sliding of the national currency is what this paper proposes for
the time being.
As for the budget deficit in pHl1icular, it becomes quite clear from
our analysis that if the state keeps up paying real interest rates which
exceed real GDP growth, any slight deficit decrease will be overbalanced
by a deterioration in the total debt ratio. Our analysis proves that a large
part of the dt'ficit is traceable directly to the slow economy. Any effort
indeed to reduce primary expenditures today would even worsen the
current economic stagnation. Hmvever, an eff0l1 to restructure public
expenditures on investment-led acti\'ities would be much preferable.
The policy followed since 1990, failed not only to stimulate
investments by lowering interest rates but also retarded them by
dampening the gro\vth of demand. Thus. it proved to be
counterproductive because it focused on the wrong place. It paid attention
to (dis)absorption and completely neglected competitiveness, which
according to our analysis proves to be the real issue at stake. Units of
production and technologically-based restructuring in particular, went
backwards while at the same time the Greek economy rather than
approaching the, even nominal, targets of the treaty of Maastricht, in fact
diverged.
To COLlnter the demoralising economic and social clima, a correct
""
diagnosis needs to put problems into proper perspective. First of all, a
stable economic em'ironment from a permanent and sustainable increase
of GDP is certainly needed. Reinforcing the competitiveness of the
economy should be considered as the top priority of the newly-elected
government. Enhancing competitiveness would be immediately reflected
in the balance or payments in a positive way by stabilizing the currency
rate. Emphasis should be paid to increase investments in plant and
equipments and this will certainly lead to higher rates of future
productivity growth, Enterprises today desist from investment activities
only partially because of high interest rates. In many countries, including
the U.S., interest rates are quite low to encourage productive investments,
but they fai I to succeed the target. On the contrary, of cardinal
importance seem to be expectations for fulure profits coming from a
steady, permanent and proportionate to GDP, demand increase. Thus,
restoring economic activity should be the first task of the government,
while economy is ina permanent do\vnturn. To break away from the
persisting crisis, it is government's interest first, to raise the level of
business aeti vity and reduce the risks facing indi vidual firms as they
increase expenditure to stimulate recovery. \Vithin this context, a general
tax-based expansion is less sustainable because in an open economy,
money seems to leak more to imports and consumer spending which
creates only short-term and vulnerable jobs \vhile it aggravates stagnation
in the long-term. It wou Id appear at Ieast paradoxical, especially to
minds, right-wing policy-makers and "deficit hawks" that in
order to reduce the deficit and the debt we may first increase them by a
stimulus package directed on public investments, and spending on
incentives to spur private investments in the intagibles, high-yield areas of
training, education and research promotion to a,ssist the economy in
reaching the needed growth trajectory (Magaziner and Reich 1982, Reich
1992a, \Vall Street Journal 1992). Such measures would stimulate
demand, reduce unemployment, raise the GDP, and very likely raise
private investment too. Recent studies which pay attention to these supply
side mesures indicate that infrustructure spending both increases
productivity directly and stimulates private investment (Baker and
Schafer 1993. Aschauer 1990). Professor J. Tobin (1992, 1993) also
argues that we should not be afraid to increase the deficit for investment
purposes, and so to bring aggregate demand to a level ,vhich will permit
us to enjoy full employment. Spending measures in infrastructure and
investment tax credits are the two-track growth path for sustainable
development (Blinder 1992). Thus, emphasis should be paid on
microeconomic issues focusing on industrial policy in particular, both
"horizontal", and "veltical". As far as it concerns the former. we repeat
that general infrastructure investments would generate productivity
increase of the private sector. For example, recent evidence shows that
the Japanese have the highest public sector investment rate. and at the
same time, their private-sector investment rate also exceeds that of the
other nations (Ferleger and :Mandle 1993). Similarly, A. Ashauer (1990).
along with other numerous studies, has shown that the higher the public
investments in infrastructure, the higher the productivity a nation enjoys,
while any decline of public investment seems to go along \vith a
slowdown and periods of recession. There is also evidence that there
does exist a positive relation between total factor productivity and
increase in tax revenues, especially those ,vhich come from personal and
corporate income (Ferleger and 1993). The case of Japan is again
an outstanding example. On the other hand, industrial targeting criteria
should be applied to enforce country's comparative advantage and
restructure private expenditures towards investment-led purposes
(Krugman 198..+. 19()], 1992). By enforcing industrial competitiveness it
is very possi ble that we will succeed constant and permanent
improvement in the trade balance and so, as a result, lead to international
confidence over the national currency thal will SUppOlt an effective and
real currency stability.
Policy directions prorosed by this paper, share the v iew that in
order to break away from the "vicious circle" and shift from speculati ve
capital and generally unproductive activites to productive investments in
the real economy, priority should be given to economic growth. Deficit
reduction is only tangentially related. Over the long-term, a large deficit
may retard growth. but it is not the biggest drug on growth (Reich 1992a,
1992b). Similarly, it is not wise to try to depress inllation at any cost in a
sl ump era. Again, Greek economy neither was nor is - as believed - on
the verge of overheating at present. If and when this changes it will be a
good ti me to pump gently on the brakes. That time is celtainly not today.
If the newly-elected government will keep up conservative perscriptions.
the results to come up in the future \vi11 be similar to those of the 1990-93
period.
Harvard University
REFERENCES CITED
Alogoskoufis, George
1990 "Competitiveness, Wage Adjustment and Macroeconomic Policy in
Greece". KEPE Disclission Paper. A.thens: KEPE (Ktv'IPO
o l K(rU UU KCil EpEUVWV).
1991 flWP"YOS MoYOOt-(:OU<Plls, "H 'IllS
DOAITllC'lls". H Ka(Jl7J1E'pniJ, 31 March.
t 993 "Greece and the Europe.m Unification" In Greece, the New
Ellrope. alld the Changlllg inlemational Order, edited by Hany J.
Psomiades and Stavros B. Thomadakis, 163-178. New York: Pella.
Arsellis, Gerassimos
1990 ApO[Vlls. J-11.n-npOVllo.),OYIOW)S 1991. mimeo.
Aschauer. Alan
. 1990 Public investmenl and Privale Sector Growth. Washington D.C.:
Economic Policy InstitlltC .
. \ssociation of Greek lnclusnialists
1992 EAA llVllCWV ,jeZ ri.o XEB,
..
Baker, Dean ancl Schafer. Tocld
1993 "The Clinton Budget Package: Putting Deficit Reduction First?".Challenge
36 (3): 4-10.
Barkleys Bank
t 993 COllntrv Repor/: Greece. London: Barkleys Bank.
Blinder. Alan
1992 "Keynensian Restoration". Challellge.
r-.linistr) of Finance
1992 rrroupydo npOVJlOAO,'IO/ICE 1993, Athens:
Ministry of Finance.
Central Bank of Greece
1992 OIl\:OI-0IIIK(') rio (1). Athens: eBG (KEVrptKll Tpcx:m:l;o
E).)..aDOs)
Cohen, Stephen and Zysman, John
1987 AIatters. London: Basic Books.
cord
1989 Economic Convergence ill the European Community (333 Final).
Bmssels: European Economic Community.
Economoll. Cicorge
1991 ftc.0PYOS l'let 11Iet' EIOO(')l]IICtTlKr, nOAITlKr,
Xra8E'poJToz,]0lJ5 Kat EVbVlrip (iJOTJ5 TTJS flapaywyir> Kal
Tl]S Athens: rOBE (Iv'on 101lT0
KCit Epc'U\/wV).
Eisner, Robel1
1993 "Clinton. Deficits and the u.s. Economy".Challellge 36 (3): 47-50.
Epilogi
1993 Em.,'{oYli, Jan-FebI'.
European Economy
1990 Allnual Eeol/omie Report 1990/91 46. Brussels: EEC.
European Economy
1992 51. Bmssels: EEe.
Eurostat
1992 Statist/ques Rapides: Populatloll et COlldiliollS Soeiales 4. Brussels:
EEe.
Ferleger, Louis and MandIe Jay
1993 "No pain, No Gain: Taxes, Productivity and Economic Growth". Challenge
36(3): 11-19.
Galbraith, Jan1es
1993 "A Two-Track Growth Program". Challenge, Jan.-Febr.
Harrison. Benett and Bluestone, Barry
1988 The Oreal U- Tum. New York: Basic Books.
1990 "Wage Polarization and the Flexibility Debate". Cambridge Journal of
Economics 14: 351-373.
Heilbroner. Robel1 and Bemstein, P.
1989The Debt and the Deficit .. New York: Norton.
Krugman, Paul
1984 "Targeted Indusnial Policies: Theory and Evidence" In Industrial Policy
and /lIlern({/ional Compelltlveness. edited by S. W. Amell. Washington
D.C.: George Washington University.
1991 "Myths and Realities of U.S. Competitiveness", Science 254 (8 Nov.).
1992 "On Balance Clinton's Econonucs".IlIfeTliattol/al Herald Tribune,S
Wednesday August.
Kuttner,_ Robe11
1992 "Don't Worry so Much about the Budget Deficit". Business Week, 6 July.
MagazineI', Ira and Reich. Robel1
1982 Alilldillg America's Blisiness. New York: Vintage Books.
OrnE
] 990 Evolution dans la (Jestton Publique. Paris: OCDE.
OCDE
1991 Perspectives Economiques de I'OCDE 50 Dec. Paris: aCDE.
OECD
1989 Economic Ol(tlook 46, Pruis: OECD (Organization for Economic Co
operation and Development).
OECD
1991 Historical Statistics 1961-89. Pads: OECD.
DECD
1993a Ecollomic Surveys: Greece 1993. Pmis: OECD.
OECD
1993b Economic Outlook 53 June. Paris: OECD.
Papaclemos, Loukas
1989 "Greece and the EMS: Issues, Prospects and a Framework for Analysis",
COllference on the European Afonelary System in the 1990
1
s. Athens:
GCES (EV:llVlI('b KE'VTPO EupwnmKWV tvJrf..rTCDv).
1993 European Monetary Union and Greek Economic Policy in Greece, the
New Europe, ...
Pavlopou]os, Panayiotis
198b rIc.('vcryltDTlls IlctU}.CHWU), os, EI(JOS17flctTlK'a .ME'pi&a Athens:
lOBE.
1987 H JIapaOlf\:ovojda aT!]\-' EitJ..ct<..Sc:i. Athens: lOBE.
1989 !).llI-Lbcnos Kcn MlCt
AvcO,ucnl" In JIpOrl.}Xilb[!]TfS lJmWaLOVOf,llf\:Tr>
JIoJ..ln;.;:tjs, edited by George Provopoulos. Athens: lOBE.
PavloponJos. Panayiotis and Kouzelis, A.
1990 nrtHl':i1 GH1ls fICfU/,C)JlOU}d)S KW A ns, To
JIpo{3J..nJta: no). I Tud.s .Athens: lOBE.
Pelagidis, Theodore
1989 "Southern Europe in the Era of Post-Fordism: The Case of Greece."
IvLPhiL Thesis. Blighton: University of Sussex.
1993 "L'Economie Politique de I'Adaptation lndusnielle: La Rexibilitedans
I'Industrie Grecque." Tbe de Doctoral. PaIis: Universittde Paris VIII
Reich, T<obl'rt
1992a The vVork of 2nd Edition. New York: Vintage Books.
1992b "Accounting the Futtrre" The American Prospect 11: 61-64
Spraos. John
1991 "Macroeconomic Policy in an Open Economy" Symposium 011: Greece in
the Europeall Community: The Challenge of Adjustment, 26-28/9/91.
Athens: GCES.
Sweezy, Paul and r..1agdoff, Han)'
1987The Financial Explosion. New York: Monthly Review Press.
Tobin, James
1992 "The EconorrUc Pendulum: 1962 ... 1982 ... 1992" Challenge March-April.
1993 'Thinking Straight About Fiscal Stimulus and Deficit Reduction"Chalienge
March-April.: 15-18.
Vavouras, John
1993 TuXlVVTlS To ElJ.ll"'tKb c'.\mU'ICHO xptos. Athens:
Papazisis.
Vergopoulos, Kostas
1991 "Greece: A Review of the '80s" In The Greek SOCIalist Experiment:
Papondreoll's Greece 1981-1989. Edited by John Kariotis. New York:
Pella.
1992 "Regionalism and Stabilisation" Paper Presented in the CoIloqioum: Greece
0/1 the Road 10 the 21s1 Cenll/TV, Washington D.C.: Windrow Wilson
Center.
1993 "Greece in the New European Order" in Greece, the New Europe, ...
Wall Street Journal
J992 ''Top Economists tTrge Officials to Boost Federal Spending to Stimulate
Growth", 31Tuesday March.
The Minda de Gunzburg Center for European Studies
The Minda de Gunzburg Center for European Studies is an interdisciplinary
program organized within the Harvard Faculty of Arts and Sciences and
designed to promote the study of Europe. The Center's governing committees
represent the major social science departments at Harvard and the
Massachusetts Institute of Technology.
Since its establishment in 1969, the Center has tried to orient students towards
questions that have been neglected both about past developments in
eighteenth- and nineteenth-century European societies and about the present.
The Center's approach is comparative and interdisciplinary, with a strong
emphasis on the historical and cultural sources which shape a country's political
and economic policies and social structures. Major interests of Center members
include elements common to industrial societies: the role of the state in the
political economy of each country, political behavior, social movements, parties
and elections, trade unions, intellectuals, labor markets and the crisis of
industrialization, science policy, and the interconnections between a country's
culture and politics.
For a complete list of Center publications (Working Paper Series, Program for
the Study of Germany and Europe Working Paper Series, Program on Central
and Eastern Europe Working Paper Series, and French Politics and Society, a
quarterly journal) please contact the Publications Department, 27 Kirkland St,
Cambridge MA 02138. Additional copies can be purchased for $4. A monthly
calendar of events at the Center is also available at no cost.
Economic Policies in Greece During 1990-1993:
An Assessment
by Theodore Pelagidis
Ph.D. Fellow at the Center for European Studies,
Harvard University
and
SPES Researcher of the European Communities in the
University of Paris vm
(November 1993)
Working Paper Series #46
Abstract
This paper deals with the assessment of the econoinic policy followed during the period 199()..1993 in Greece. It
analyzes in particular the evidence and the results of the applied conservative prescription at that time. While
the results of this policy proved to be negative according to the arguments as well as the findings of this paper,
a new policy agenda is sketched out Proposed policy directions share the view that in order to break away from
the economic crisis in Greece, priority should be given to economic growth, paying attention to public invest
ments in infrastructure in order to generate productivity increase of the private sector, raise the level of business
activity, and reduce the risks facing individual finns. A differentiated, selective and, according to market sig
nals, gradual sliding of the national currency is this paper's proposal for the crucial field of exchange rate pol
icy. .
"The author would like to thank the E.U. for its financial support throulith SPES funds. An oral version of this pIlp!! was
presented at the Center for EuropeaI! Studies at Harvard University on November 30 and at the Betcher School at Tufts
University, Boston. on December' 1, 1993. Comments from the audience are gratefullyacknowledged as the source of
improvements in this paper. Of course. the responsibility for the arguments presented remains mine.
INTRODUCTION
It is widely supported in Greece that excess demand and extremely
high public debt and budget deficits constitute the main problems of the
economy, responsible for the poor macroeconomic performance since the
'80s and beyond. The conservative party which took power early in the
'90s, facing intense macroeconomic imbalances, adopted at once a
package of hard austerity measures in order to cut down the budget
deficit and restrict domestic demand. The persisting economic crisis and
the failure of sustainable growth were considered the outcome of past
policies which had increased wages above inflation and productivity and
promoted state intervention especially through the increase of
unproductive public consumption expenditures. Three and a half year
later, a political crisis provoked by the unpopular austerity measures,
brings back to power the Socialist Party (Pa.So.K.), which as believed,
will put an end to the "extreme monetarism" applied before. Despite this
clearly declared intention, it seems that even within the socialist party. it
is widely accepted that the government's new economic policy should,
more or less. run on t h ~ same lines. Pro-socialist policy makers advise
that general stabilisation measures, backed by a social concensus, are
needed to bring the economy back to a stable macroeconomic
environment. Carefully devised political movements and delicate words
seem to be up to now the way of implementing aQd applying a "mild
.. - ~
monetarist policy". Notwithstanding, it is unfortunate that few of the
policy-makers who support conservative ideas even within the socialist
party, present detailed and convincing arguments to justify the rationale
behind the ,measures taken while, at the same time, this "ala mode" blind
devotion to a mania for austerity prevents them from keeping a cool head
to evaluate the existing 3.5 year results of such a policy. In response to
such an attitude, this paper makes an attempt to present and explain the
goals and the rationale of the economic poljcy followed in the last three
and a half year in Greece and more importantly, seeks to analyse the
evidence and the results of this applied extreme monetaIy perscription.
1. Poor Macroeconomic Performance and Prevailing Diagnosis
It will not be news to anyone that the macroeconomic performance
of the Greek economy during the '80s was not impressive. Real GDP
grew at an average annual rate of 1.1 % which is a low percentage both
per se and compared to the GDP increase of the European Union (B.U.),
around 2% (Spraos 1991: 1). Taking into account that Greece as a full
member of the E. U. has both the obligation and the ambition to approach
European standards, the increase in Greek GDP was rather disappointing.
Despite periods of intense income restraints (1983, 1986, 19f!7, 1990),
inflation proceeded at an annual average rate of 18% in the pa'st decade.
The current account deficit averaged -5.2% of GDP in the years 1980
1989, while the foreign currency debt increased from 10.6% in 1980 to
31 % in 1989. At the same time, unemployment rose from 4% (1981) to
7% (1989), an almost double increase although still below the European
peak r ~ t e of 11 %. Industrial production remained almost stagnant - 0.8%
average change during 1984-1991 - while the share of manufacturing
production as a percentage of GDP retreated from 17.2% in 1975-1979
to 15.8% in 1985-89, facts which are both attributed to poor industrial
productivity performance especially in the first five year period (-1.0%
in 1980-84 and 2.4% in 1985-89),
The deterioration or at least the relevant stagnation of the main
macroeconomic indicators is considered as a result of a huge public
sector deficit which run at an average rate of 17.7% of GDP during
1984-91. and reached a record level equivalent to almost 19% in 1990,
by far the highest level in the OECD area (Barldeys 1993: 12).
Since 1990, a year in which the conservative party took power,
tough austerity measures have been taken with the goal of stabilizing the
economy and bringing Greece closer to its European partners. Economic
policy focused on. the - believed - sources of macroeconomic
disequilibrium: the huge budget deficits and the "excess demand coming
mainly from increases of wages above productivity during the last
decade. Budget deficit, a concept familiar to economists, is constituted by
the amount by which expenditures exceed tax revenues and regularly this
amount must be borrowed or added to the total debt. Hence, debt is the
sum of all past net borrowings. In the case of Greece, the applied neo
conservative analysis (Alogoskoufis 1990, 1991, Papademos 1989,
Pavlopoulos 1986, 1989, Pavlopoulos and Kouzelis 1990, Economou
1991) attributes massive deficits to excess spending expenditures, refering
in particular to excess public consumption and increase in private and
public sector wages. Most of these expenditures are considered as a waste
of resources which indeed provoke crowding-out effects in the private
economy. As a result, nominal interest rates are going up so that the state
may be able to pull capital resources in order to cover its deficits. One
must remember that during the '80s the short-term nominal interest rates
were at an average rate of 20%, a fact that, as it is argued, pulled
resources away from private investment. On the other hand, excess
domestic demand is considered to be the primary cause of high inflation
as well as of the significant reduction of private sector profit rates which
had a negative side effect on investment decisions and, as a result, on
productivity performance. Authors who support these arguments
characteristically mention that public expenditures reached the
unprecedented 49% of GDP at the end of '80s, fact which, together with
excess public consumption rates, had negative effects on inflation as well.
In the reports of the influential conservative Institute of Economic
and Industrial Research (lOBE), the enormous increase of the wage
income share during the '80s, is particularly emphasized. Vice-director
of the Institute Professor Economou (1991), points out that the income
share of wages increased from 58.2% in 1981 to 66.8% in 1985, an
increase which continued for the rest of the decade (1986-1989). The real
wage in manufacturing increased cumulatively 4.40/0, while productivity
decreased -2.2%, having as a result a total. net increase of the real wages
for the whole decade of 16% (Economou 1991: 58 and : 72). G.
Pavlopoulos (1986, 1989), Professor and Director of the same Institute
and an advisor to the conservative government, estimates in detail the
negative impact on profits due to an increase of real wages, a fact that is
considered of cardinal importance for private investment decisions and
hence for productivity increase and competitiveness. The same authors
argue that real wage increase had a negative side effect to the marginal
propensity to save, which from 22% of GDP in the '70s went down to 6%
in 1987.
2. The Conservative Policy Perscription
Having supported the above diagnosis, the conservative government
proceeded since 1990 to implement tough stabilisation measures focusing,
in the first place, on efforts to reduce the deficit from 19% of GDP
(1990) to 3%. and the total debt from 76.3 % (1989). to 60% (Epilogi
1993). so as to meet two of the most central convergence criteria of the
Maastricht Treaty. Hence, to bring the economy closer to European
standards. and to break away from the economic inertia provoked. as was
believed. by the extremely high public sector borrowing requirements
(PSBR). the conservative government announced a number of drastic
fiscal measures. Besides a drastic overhaul of social security expenditures,
higher indirect taxes and public utility prices were soon applied to
increase state revenues and to compensate for the tax short-fall especially
in the 1992-93 years. together with an urgent plan to de-nationalise state
owned enterprises like the cement company "AGET-Hercules". the Greek
telecommunications corporation "OTE". shipyards. public transportation,
etc. With the speeding-up of the privatisation process it was hoped that
the state would get rid of public enterprises' deficits and get money from
their sale so that the primary budget balance could show a surplus of 5%
of GDP in 1993. rising to 7.7% until 1997. However. in the measures
applied we should emphasize the corporate tax reduction to 35% and the
personal income tax highest rate reduction to 40% (Barkleys: 6). in order
to increase profits and as hoped. investments.
Shifting to the income policy. tough real wage cuts were adopted to
diminish labour costs so as to decrease domestic demand and slow
inflation. Pressuring demand and so keeping down inflation was
considered as a precondition to cut interest rates and. as a result. state
back payments and deficits. In fact. with inflation pressures persisting at
the high levels of 15.8% and 14.5% the last two years 1992 and 1993
respectively. the public sector pay award of 5% in 1992 and 4% in 1993.
brought down relative wage levels and did positively influence private
sector profits. After tough real wage cuts in 1991-1993, payroll cuts are
expected to reduce the state wages bill from 12.4% to 11 % of GDP by
1996 (Barldeys 1993: 6).
As regards exchange rate policy, the scope was to keep the national
currency within a very narrow range of fluctuation, around the ECU
parity. with the prospect of entering the drachma into the European
Exchange Rate Mechanism (ERM), as a first step of Greece's
participation in the process of the European Monetary Union (EMU).
Recent estimates put the overvaluation of the drachma at 20-30%, fact
which has partly been the result of an anti-inflationary "crawling peg"
policy in the last two years (Alogoskoufis 1993).
Finally, as for the liquidity of the economy, interest rates were
supposed to enter in a process of gradual cut down by early 1994. along
with a decrease of public debt. Money supply and credits to the economy
also contracted. From 16.9% annual percentage change in 1990. credit
expansion slowed to 10.8% and 9.8% in 1991 and 1992 respectively from
its peak rate of 23.6% in 1989 (GEeD 1993a: 60). M3 grew by 15.3%,
12.3% and 15% for 1990, 1991 and 1992 respectively, from 24.2% in
1989, following the same lines (op.cit.: 62). According to conservative
policy-makers this would contribute to a drastic decrease of the liquidity
of the economy. a fact which usually contributes to a deceleration of
inflation and in a way counterbalances considerably liquidity issuing from
the huge budget deficits and the massive debt.
Concluding the above policy perscription, we would say that during
the years 1990-93. the conservative government adopted a total of tough
austerity measures to slow inflation and to reduce the budget deficit. This
type of irreconcilable monetarism was considered as the only way to
succeed in the above goals, bring the country away from economic crisis,
and also to meet Maastricht criteria. But other things are not equal. The
Maastricht treaty defines concrete nominal economic targets to be reached
and sets deadlines for these to be achieved. It does not spell out the right
policy to meet the goals. It is supposed to leave free ground to each
member-State to apply the suitable policy perscriptions in order to
succeed the targets, although the latter are subject more to political
criteria and they are not designed according to purely economic logic.
Notwithstanding, leaving aside the Maastricht treaty per se, we will make
an attempt to assess the policy applied since the early '90s examining in
the first place whether the government achieved the objectives set.
3. Results and Critical Assessment
Our first task is to consider the diagnosis for macroeconomIC
disequilibrium. Is it true that excess demand is found at the heart of the
problem? It is reminded again that excess demand is believed to be
created by extraordinary wage and public consumption expenditure
increases during the decade of the '80s.
Contrary to what is commonly believed, during the '80s (1980
1990), the average annual change of total domestic demand in Greece was
1.3% (OCDE 1991), while the GDP per head grew at an annual rate of
1.7% during 1981-1991 (European Economy 1990: 239). Private
consumption cumulative change in constant prices grew in Greece at 21 %
(1979-1989), while in the E. U. it grew at 24% in the same period (OECD
1991: 56). Private consumption in Greece was 51 % of the community
average in 1981, but dropped to 41 % in 1991, a fact that we should
attribute to the fall of the relative wage levels from 55-56% of the OECD
and E. U. averages (in common currency), to 42-45% in 1991 (OECD
1993a:29). Therefore, as Vergopoulos (1991, 1992, 1993) rightly observes
the above evidence is highly incompatible with the overconsumption
theorem and interpretation of crisis as perceived by conservative policy
makers. On the other band, Greece presents; the highest saving propensity
of households (around 20%) among the E.U. countries (14% average)
(AGI 1992: 12-13), so we can certainly support that there is neither
insufficiency of saving nor overconsumption tendencies at the expense of
savings and investments. As for public consumption, although it is true
that consumption grew constantly during 1980-89, it certainly remained
at European levels, around 19% of GDP against 18.5% in the E.U.
(OECD 1991: 66). The cumulative growth of real public consumption
expenditures during the years 1982-1992 was 19.8% for Greece against
21.0% for the E.U. (OECD 1993b: 204). We should also mention that
public expenditures as percent of GDP reached the European levels only
in late '80s (around 50%), although what the state receives from the
" ",
economy (around 35% of GDP) is far behind the European standards
(45%), a fact which. according to our interpretation for the economic
inertia today in Greece below. proves to be of cardinal importance.
The above evidence, which primarily refers to the excess domestic
demand issue. is perfectly matched with the evidence concerning labor
wages and costs. The real average wage per head grew in Greece at an
annual average rate of 0.9% during 1983-90, while in the E. U it exceeded
1.5% (COM 1989: 60). The relative labour cost - per unit of product - in
TABLE 3.1
RELATIVE LABOUR COST PER UNIT OF PRODUCTION IN A COMMON
CURRENCY (1961-73=100) IN RELATION TO E.U.
YEAR 1984 1985 1986 1987 1988 1989 1990 1991 1992
GREECE 83.7 82.2 67.4 63.7 68.5 71.1 72.6 68.1 65.2
Source: European Economy (1992: 258).
common currency, as can be easily seen by table 3.1 above, was 83.7 in
1984 of the European one, while in 1982 it fell off to 65.2%. Finally,
Eurostat statistics show that, real wages in Greece are going down by
1.6% per year since 1985, while in all other E.U. countries real wages
increased. from 2.8% in Germany - the higher % - to 0.7% in France
the lowest % (Eurostat 1992: 1).
After presenting and analysing so much data which deals with
various aspects of the so-called "domestic demand" in the economy. we
can definitely maintain that any problems of macroeconomic
disequilibrium can not be attributed to excess demand, overconsumption
and generally unproductive waste of resources coming from excess public
or private consumption. We saw that, contrary to what is commonly
believed, domestic demand was kept at low levels, in fact lower than the
slight increase of GDP; public consumption and expenditures are at
European standards showing convergence with the B.U. and not
imbalance; at the same time, divergence is observed on state revenues and
on wages, although the government in power during the '80s was a
socialist one.
Let me now embark on the more complex issue of public debt and
deficit, which, as mentioned above became the main concern of the
policy-makers during 1990-93. As has been noted before, conservative
authors still consider the annual public sector borrowing requirements
(PSBR) as responsible for high inflation rates as .well as for keeping
interest rates up, a fact that it is commonly believed, pulls resources away
from private economy and provokes dis-investment and crowding-out
effects. I am not going to enter territory concerning theoretical issues
about the relationship between interest rates and budget deficits. but I am
almost urged to point out that government deficits do not necessarily
affect interest rates and investments. As Prof. Barro at Harvard
University states clearly, government budget deficits do not necessarily
affect interest rates, investment or anything else because the increase in
private saving exactly offsets the fall in public saving. Along the same
lines, we would say that the deficit affects interest rates only when the
economy is near its potential level of output, which means that only from
the point of full employment does it pull resources away from private
investment. Deficit reduction stimulates investment through the freeing
up of resources only in the case in which the latter is not available. In any
other case, problems are getting worse by excessive deficit reduction and
we support that this is the case of Greece in the last three years or so.
Gross household savings as a percentage of disposable income was 20.1 %
in 1991 in Greece and 14% in the EU. (AGI 1992: 12-13). Therefore,
the economy, despite high public borrowing. does have idle resources
available indeed at such a level so that the view that private economy
suffers from crowding-out effects can not be supported .
. As I have cited before. contrary to the demoralizing syndrome
about the wasteful. consumption-natured and unproductive Greek State,
public consumption and expenditures do remain around the European
standards. But if this is true, then what provokes the continuing increase
of the total debt from the early '80s onwards. a fact that according to
some academic analysts confiInls "State hypertrophy" in Greece?
It is at first glance paradoxical that the highly restrictive policy
adopted since the early 90s, while slightly reducing the PSBR at the same
time massivelly increased the total debt, as you can realise for yourselves
in table 3.2. But let us take things from the start. Looking at the
composition of public expenditures and revenues one can easily realize
why the debt explosion of 1990-93 can no longer be a mystery. As we can
see from table 3.3, public expenditures as a % of GDP have risen from
28.9% (1981) to 32.1% (1985), 37.5% (1988) and 47.8% (1992). Other
TABLE 3.2
PSBR AND TOTAL DEBT AS % OF GDP
YEAR 1988 1989 1990 1991 1992 1993+ 1993
PSBR* 13.5 19.6 21.0 15.6 10.9 9.0
PSBR** 18.6 16.1 13.2 10.6
DEBT*** 71.5 76.3 88.8 95.9 lOlA 105.0
PSBRI 15-18
+Predictions, estimations.
Sources: *OECD (19933,: 51).
**Barkleys Economic Dpt: Greece (1993: 12).
***Epilogi (1993: 24).
#While 1993 is ending, evidence annolDlcedjust before submitting this
paper, shows that the budget deficit for 1993 finally reaches 14-15%. Prof. L. Katseli,
member of the cOlDlci1 of economic advisors, person in charge of the 1994 budget report
and personal advisor of the prime minister A. Papandreou, in a talk given in the Kennedy
School at Harvard in November 1993, puts this number at 18%.
TABLE 3.3
PUBLIC EXPENDITURES AS % OF GDP
YEAR 1981 1988 1990 1992
Total 28.95 37.53 43.65 47.81
Interests & 8.56 11.91 9.92
Amortization 2.03 3.36 12.35
Primary expend. 25.21 26.95 28.38 25.54
Source: Ministry of Finance (1992).
reports like the European Economy (1990), raise the above number to
46.2% of GDP as average annual rate during the period 1981-1990.
Whichever report is closer to the reality, one can easily realise that
46.2% is even lower than the relative E.U. rate of 48.0% - the average
annual rate in the same period. Looking at the composition of public
expenditures we observe that primary expenditures as a % of GDP
remained relatively stable: from 25.2% in 1981, rising only to 28.38% in
1988 and dropping again to 25.5% in 1992. Thus, even this legitimate,
according to European standards, increase of public expenditures since
the early 180s is definitely not due to new/added primary expenditures. It
is evident from table' 3.3 that the increase arises from the explosion of
interest and amortization payments which grew from 10.59% of GDP in
1988 to 22.25% in 1992. Total payments for interests and amortization as
a % of p u b l ~ c expenditures alone, also rose from 17.5% in 1988 to 42.2%
in 1992 (Epilogi 1993: 24). To counterbalance the huge interest payment
increases the share of wages and pensions in G DP - again contrary to
what is commonly believed - decreased from 14.07% of to 12.45% in
1992. To cover the widening deficit, policy proceeded during
- - ~ ..-.-.-.----...-- ...----------------------.----- ..--_.-._---_. __ ._.
TABLE 3.4
PUBLIC REVENUES AS % OF GDP
YEAR 1981 1988 1990 1992
Indirect taxes 13.1 16.8 17.6 19.3
Direct taxes 6.1 6.9 7.7 7.9
Total tax revenues 19.3 23.8 25.3 27.2
Non-tax revenues 1.3 2.0 1.7 3.1
Total revenues
20.6 25.8 27.0 30.4
Source: :Ministry of Fmance (1992).
1990-93, to a large increase in taxes (revenue side). Total tax revenues
increased from 22.3% of GDP in 1989 to 27.2% in 1992 (table 3.4). It is
worth mentioning that this increase came mainly from indirect taxes
(OECD 1993a: 50), while revenues from direct taxes shows only a 1 %
increase during this period, coming mainly from taxes on deposit
interests (Ministry of Finance 1992). On the contrary, it is reminded that
corporate tax was reduced to 35% (Barkleys 1993 :6). Despite indirect
tax increase, Greece is still considered to be around the European levels
(E.U. 19.0%), that is 19.1% of GDP for 1991 (AGI 1992: 12-13),
although an important increase in indirect taxation with the measures
taken in August 1992 should have slightly z:isen the figure.
Concluding from all of the above, two are beyond any
doubt. The existing big deficit should be attributed to a large extent to: a)
the low level of state revenues, which were mainly a result of low direct
taxes especially on incomes and profits. State revenues in Greece which
come from taxation on incomes and constitute only 6.5% as a
percent of GDP, while in OECD the correspondent figure is 14.5%
(OCDE 1990: 141) and, b) to a serious increase of expenditures for debt
service payments. Notwithstanding. in case we add to the official GDP the
one that is produced in the so-called "atypic economy", and which is
estimated around 30% (Pavlopoulos 1987). or even 50% of the official
GDP according to Professor Angelopoulos and Barkleys (1993: 6)
estimates, then state expenditures and revenues, as a % of GDP. are much
lower than the official numbers indicate. Finally, at this point, it is worth
mentioning that there are studies which indicate that this percentage
should even be less when we estimate the inflation-adjusted PSBR (Spraos
1991) or when we modify calculations and leave aside state guarantees for
private sector's borrowing or include state-owned corporation deposits in
banks (Arsenis 1990,Vavouras 1992; see also: Heilbronen and Bernstein
t'989, Kuttner 1992).
Going back to the issue at hand, that is the assessment of the
conservative monetarist policy applied in the last 3.5 year, we can now
definitely support that the diagnosis was wrong. There is no way to
support, as proved, that macroeconomic imbalances stem from either
excess demand or a state that is, in size and intervention, consumptionist
and wastefully hypertrophic. The deficit should not be considered
structural since it is fed mainly by interest and amortization payments
(expenditure side) and from the state's weakness, inability and
unwillingness to impose and collect direct taxes (revenue side). The
conservative government predicts a decrease of the deficit to 10% of
GDP in 1993 (table 3.1), but even if this fall off comes true, total debt
keeps increasing and will, even by optimistic predictions, exceed 105% of
the GDP in 1993. On the expenditure side, we remarked that an ever
increasing' percentage goes for interest payments while primary
expenditures remain stable. As long as the real rate of interest paid by the
state remains higher than the real GDP increase, the debt will keep
. increasing for the forseeable future. It is estimated that under these
conditions it would need, from now on, high surpluses on the primary
budget of central government in order to cover every "new" deficit
coming from the deduction: real interest rates payments-increase of real
GDP. But raising indirect taxes as well as efforts to cut spending in order
to achieve a surplus in the budget excluding interest payments, it subtracts
income from business and consumers, reducing even more purchasing
power, profitability, consumer spending and investment (Galbraith 1993).
Besides, high interest rates are not only kept artificially high in order to
attract c.apital and c.ompensate for low state revenues, but also because of
the need to prepare the national currency to formally enter the European
Exchange Rate Mechanism (ERM) and keep up with Maastricht
obligations regarding the creation of a common European currency
(ECU) and so, as is believed, fight inflation. First of all, a high degree of
exchange rate fixity requires correspondingly high levels of real interest
rates, which further speeds-up the debt accumulation process both
directly by increasing the interest payments on debt, and indirectly by
reducing the demand for high-powered money and the growth rate of
output (Papademos 1993: 153-154). Thus, this policy keeps the deficit at
high levels and balloons debt, while at the same time, high interest rates
hit the real economy and bring on economic inertia as the increase of
GDP can not counterbalance high interest rate payments. Moreover, this
has the result of an increase in the average rate of state services in order
to cover the deficit. and it leads to an increase in prices and inflation.
Inflation today remains around 15% and a recent tendency to fall by 2-3
points rapidly overturned by a need to increase taxes (from 22.3% of
GDP in 1989 went to 27.2% in 1992) in order to cover an unexpected
high deficit in the end of 1992. The fight against inflation does not take
place neither by keeping the drachma parity high because a "hard
currency" policy weakens trade balance. From -11.9 as % of GDP deficit
in 1988, trade balance grew at -15.8 % in 1992 (OECD 1993a: 71) and
thus, deterioration continues. While the trade deficit is growing, the
artificial nominal drachma parity is seriously undermined. while
sentiment about the drachma is dominated by the performance and
prospects of the current account. Then, real parity falls off due to
growing trade deficits, reinforcing market speculation over the national
currency and keeping inflation at high levels. despite the fact that
economy is in an unprecedented deep recession. This policy, combined
.'
with excess disabsorption by highly restricting domestic demand, had as
an outcome' even more catastrophic results on the real/industrial
economy. The fall off in domestic demand reduced the size of the
domestic market and diminished economies of scale for enterprises,
increasing the per unit cost - and furthermore boosting inflation once
more. Enterprises, even those with much potential, find it always more
difficult to compete in the international market arena when imports are
subsidized via the undervaluation of the f?reign currency while, at the
same time, exports are taxed by an "expensive drachma". As a result, they
find only one way to restore competitiveness through the Blustonian
Harrisian (1988, 1990) "low road restoration of profits" which is based
on low wage labour force, and restores competitiveness in the short-term,
but definitely undermines it in the long-term by lowering investments and
preventing technological change (Cohen and Zysman 1987, Pelagidis
1989, 1993). It is estimated that only as a result of further wage cuts
alone, there has taken place a sharp increase in Greek profitability of up
to some 80% since 1990 (Barkleys 1993: 3), without actually increasing
investment rates correspondingly (see table 3.5), contrary to what
conservative policy-makers expected.
TABLE 3.S
GROSS PRIVATE INVESTMENTS*
YEAR MIL. DR.
1985 56000
1989 64027
1990 73412
1991 65943
1992
64803 .
Source:OECD (1993a: 104).. *In constant drachmas
I:'
The sharp Illcrease III unemployment to 11 % should also be .
considered equally damaging to the economy not only because this
threatens social justice and destroys society's cohesion and social
conditions for productivity increase, but also because it "represents" lost
potential output. According to Professor R. Eisner (1993), high
unemployment does not only means waste of resources, as I have stated
above, but also adds to the deficit in the short-term and the amount
grows over time as additional deficit adds more to the debt and future
. interest payments. A loss of potential output means, furthermore, a loss in
potential future investments which w o ~ l d increase productivity,
competitiveness. having the side-effect of decreasing the debt and deficit
by enlarging and deepening the taxable "base" of the economy and by
increasing GDP. Thus. the potential deficit of the so-called "full
employment budget". would be less. As a result, we can say that today's
fiscal policy in particular is even more restrictive than it appears to be
with the conventional calculation;
On the other hand, the healthy part of the. Greek industry enjoys
extremely high profit shares which exceed 60% although the relevant
percent in the OECD and in the G7 countries is around 44% (OECD
1989: 124). Since 1990. there has also been a sharp recovery in Greek
profitability. up some 80% as mentioned above (Barkleys 1993: 3).
Direct state aid to manufacturing as a percent of value added was around
20% in Greece, while in the E. U. it was lower than 4% during 1986-90
(OECD 1993a: 16). Combining together at the same time. low taxation on
business, low state revenues - coming from low taxation on incomes and
revenues - high private profits, low investment rates and high public
deficits, all these constitute a substantial state contribution to the private
economy. This, "hiden" state back up to individuals as well as to
industrial competitiveness in particular, together with its low size and
intervention to the economy, signifies in our view a particular "state
atrophy" in Greece. It should be repeated and emphasized at this point
that high interest payments by the state, in order to attract funds to
counterbalance diminished budget revenues, constitutes in fact the way to
feed private profits and makes the "crucial link" between the state and the
private sector. This unique manner of state contribution substitutes today
for the "old road" of state backing private revenues in Greece, namely the
high state subsidies and general protectionism which took place in the era
before Greek accession to the E. U. Significantly, this closed "vicious
circle" of financial flows between state borrowing from the private
economy through bonds, and the state b a c ~ payment,s to it at high interest
rates. in fact feeds speculative in nature capital which is not invested
TABLE 3.6
SOURCES OF PSBR FINANCING
(Share in %)
YEAR 1989 1990 1991 1992*
Internal borrowing 86.9 87.9 87.5 95.9
State Bonds purchased by:
Banks 42.2 16.1. 1.8 -27.9
Individuals & enterprises 18.9 43.1 68.0 93.7
Borrowing by commercial
banks 15.8 13.7 12.7 -2.8
Bank of Greece 10.0 15.0 5.0 32.8
External borrowing 13.1 12.1 12.5 4.1
Total
100.0 100.0 100.0 100.0
*Jan-Sept, predictions
Source: Central Bank. of Greece (1993: 61);
productively but instead contributes to the well-being of a "neo
. compradoric" class which seems to live from interest revenues alone and
at the expense not only of the agrarian and labour class but also of
industry. In table 3.6 we have the opportunity to consider the economy's
most serious problem which seems to lie in the increasing share of
indi viduals and enterprises state bond purchase which reach at a peak
level in 1992. This table shows that funds, instead of being directed to
real investments on machinery and equipment - which increase
productivity and competitiveness -. go' to the puchase of state bonds
simply because the latter are more profitable. Thus, industries learn to
rely more on low wages, avoiding investments on new technologies and
investing more, on state bonds (on speculation capital see: Sweezy and
Magdoff 1987. Cohen and Zysman 1987, Bluestone and Harrison 1988,
Pelagidis 1993).
Policy Guidelines and Conclusions
Intervening directly at the source of the problem is the main
principle of economic policy. It is really unfortunate that in Greece,
during the crucial years 1990-93 when a new policy was applied, the rule
of optimal intervention was so much distorted by hitting domestic demand
and creating excess disabsorption when the source of the problem was
found in the supply side. Deficit reduction was the wrong criterion and
target to use in the first place - not that it was unimportant. only that it
was not the main issue. After 4 years of "wild monetarism". a slight
decrease in the budget and current account deficit, together with some
marginal decrease in the inflation rate since 1990 - in 1988 it was around
13% - constitute unimportant and only temporary improvements which
indeed took place at the expense of the industrial base of the country. As
for the current account, it is estimated that for 1992 -2.7% of GDP from
-4.7 in 1989 and .,.5.4% in 1990, although it was only --:1.8% in 1988
(OEeD 1993a: 71). As we saw before, within current account in Don-oil
trade balance in particular, which mainly reflects competitiveness (terms
of trade non-included), things are getting worse; From -11.9 as % of
GDP in 1988 negative non-oil trade balance grew at ... 15.0% in 1991 and
-15.8% in 1992 (op.cit.: 71) and this deterioration continues mainly due
to the hard currency policy . .Indeed, deterioration would be even worse if
imports were not hit by domestic demand restrictive policy. However.
you can overvalue one, you can overvalue a bit more a second time but
you can not keep extending overvaluation indefinitely without avoiding
damages in the production sphere (Spraos 1991). Under a "hard
currency" regime, it is indeed very possible that after a long period of
recession, production could be so weak that it could not even respond to
any increase of demand at that time. In that case, the most possible effect
is that demand would be directed mainly on imports and then, trade
balance will worsen even more. Authors who support "hard currency"
policy believe that in any other case inflation will boost again, especially
the "imported oneil and then it would not be possible to bring down
interest rates. We must mention at this point that:
a) it is very possible that in the case that we let the currency slide
according to market signals, foreign competitors w ~ l l keep prices down so
as not to lose their domestic market share and,
b) by letting the currency find its true equivalence, we make exports
more competitive and so increase production, thus compensating for the
undervaluation and counterbalancing inflation expectations coming from
it by enforcing production and improving trade balance.
Moreover, exchange rate parity should follow more closely the currency
fluctuations of th(.)se countries which especially produce goods
competitive to Greece, like Spain. Portugal and Ireland so we can
efficiently support national competitiveness. Therefore. although
exchange rate policy is a very delicate matter and a very sensitive one and
thus careful movements need to be made, a selective, differentiated and
gradual sliding of the national currency is what this paper proposes for
the time being.
As for the budget deficit in particular, it becomes quite clear from
our analysis that if the state keeps up paying real interest rates which
exceed. real GDP growth, any slight deficit decrease will be overbalanced
by a deterioration in the total debt ratio. Our analysis proves that a large
part of the deficit is traceable directly to the slow economy. Any effort
indeed to reduce primary expenditures today would even worsen the
current economic stagnation. However, an effort to restructure public
expenditures on investment-led activities would be much preferable.
The policy followed since 1990, failed not only to stimulate
investments by lowering interest rates but also retarded them by
dampening the growth of demand. Thus, it proved to be
counterproductive because it focused on the wrong place. It paid attention
to (dis)absorption and completely neglected competitiveness. which
according to our analysis proves to be the real issue at stake. Units of
production and technologically-based restructuring in particular, went
backwards while at the same time the Greek economy rather than
approaching the, even nominal, targets of the treaty of Maastricht, in fact
diverged.
To counter the demoralising economic and social clima, a correct
diagnosis needs to put problems into proper perspective. First of all, a
stable economic environment from a permanent and sustainable increase
of GDP is certainly needed. Reinforcing the competitiveness of the
economy should be considered as the top priority of the newly-elected
government. Enhancing competitiveness would be immediately reflected
in the balance of payments in a positive way by stabilizing the currency
rate. Emphasis should be paid to increase investments in plant and
equipments and this will certainly lead to higher rates of future
produCtivity growth. Enterprises today desist from investment activities
only partially because of high interest rates. In many countries, including
the U.S., interest rates are quite low to encourage productive investments.
but they fail to succeed the target. On the contrary, of cardinal
importance seem to be expectations for future profits coming from a
steady, permanent and proportionate to GDP, d e ~ a n d increase. Thus,
restoring economic activity should be the first task of the government,
while economy is in a permanent downturn. To break away from the
persisting crisis, it is government's interest first, to raise the level of
business activity and reduce the risks facing individual firms as they
increase expenditure to stimulate recovery. Within this context, a general
tax-based expansion is less sustainable because in an open economy,
money seems to leak more to imports and consumer spending which
creates only short-term and vulnerable jobs while it aggravates stagnation
in the long-term. It would appear at least paradoxical, especially to
conservative minds, right-wing policy-makers and "deficit hawks" that in
order to reduce the deficit and the debt we may first increase them by a
stimulus package directed on public investments, and spending on
incentives to spur private investments in the intagibles, high-yield areas of
training, education and research promotion to assist the economy in
reaching the needed growth trajectory (Magaziner and Reich 1982, Reich
1992a, Wall Street Journal 1992). Such measures would stimulate
demand, reduce unemployment, raise the GDP, and very likely raise
private investment too. Recent studies which pay attention to these supply
side mesures indicate that infrustructure spending both increases
productivity directly and stimulates private investment (Baker and
Schafer 1993, Aschauer 1990). Professor J. Tobin (1992. 1993) also
argues that we should not be afraid to increase the deficit for investment
purposes, and so to bring aggregate demand to a level which will permit
us to enjoy full employment. Spending measures in infrastructure and
investment tax credits are the two-track growth path for sustainable
development (Blinder 1992). Thus. emphasis should be paid on
microeconomic issues focusing on industrial policy in particular, both
"horizontal", and "vertical". As far as it concerns the former. we repeat
that general infrastructure investments would generate productivity
increase of the private sector. For example. recent evidence shows that
the Japanese have the highest public sector investment rate, and at the
same time. their private-sector investment rate also exceeds that of the
other nations (Ferleger and MandIe 1993). Similarly, A. Ashauer (1990).
along with other numerous studies, has shown that the hi gher the public
investments in infrastructure, the higher the productivity a nation enjoys.
while any decline of public investment seems to go along with a
slowdown and periods of recession. There is also evidence that there
does exist a positive relation between total factor productivity and
increase in tax revenues, especially those which come from personal and
corporate income (Ferleger and MandIe 1993). The case of Japan is again
an outstanding example. On the other hand, industrial targeting criteria
should be applied to enforce country's comparative advantage and
restructure private expenditures towards investment-led purposes
(Krugman 1984, 1991, 1992). By enforcing industrial competitiveness it
is very possible that we will succeed constant and permanent
improvement in the trade balance and so, as a result, lead to international
confidence over the national currency that will support an effective and
real currency stability.
Policy directions prorosed by this paper, share the view that in
order to break away from the "vicious circle" and shift from speculative
capital and generally unproductive activites to productive investments in
the real economy, priority should be given to economic growth. Deficit
reduction is only tangentially related. Over the long-term, a large deficit
may retard growth, but it is not the biggest drug on growth (Reich 1992a,
1992b). Similarly, it is not wise to try to depress inflation at any cost in a
sl ump era. Again, Greek economy neither was nor is - as believed - on
the verge of overheating at present. If and when this changes it will be a
good time to pump gently on the brakes. That time is certainly not today.
If the newly-elected government will keep up conservative perscriptions,
the results to come up in the future will be similar to those of the 1990-93
period.
Harvard Uni versity
REFERENCES CITED
Alogoskoufis, George
1990 "Competitiveness, Wage Adjustment and Macroeconomic Policy in
Greece". KEPE Discussion Paper. Athens: KEPE (KEvrpo
TIPOypo:llllo:noll0-U KO:l. Epuv@v).
1991 rl.Wpyos MOYOOK:o-u11s, "H 1:TJs OtKOVOllt1d]s
TIOAtTIK1lS". H KatirTllE.'plVIj, 31 March.
1993 "Greece and the European Monetary Unification" In Greece, the New
Europe. and the Changing International Order, edited by Harry J.
Psomiades and Stavros B. Thomadakis, 163-178. New York: Pella.
Arsenis, Gerassimos
1990 n:pClOtllOs ApoCVlls. AVn-1lpOVJlOAOyz.01lOs 1991. mimeo.
Aschauer, Alan
. 1990 Public Investment and Private Sector Growth. Washington D.C.:
Economic Policy Institute.
Association of Greek Industrialists
1992 I-uvoOIlOS EU11VLK6w BWIl11xClVLWV, t.lclrio IEB,
Ai>YOt> a'tos-Icrt'tIlPPl.os..
Baker, Dean and Schafer, Todd
1993 ''The Clinton Budget Package: Putting Deficit Reduction First?".Challenge
36 (3): 4-10.
Barldeys Bank
1993 Country Report: Greece. London: Barkleys Bank.
Blinder, Alan
1992 "Keynensian Restoration". Challenge.
Ministry of Fil1c'UlCe
1992 rnot>pydo ol.1\:OVO!!1.1\:Wv. 199J, .Atbew;;
1tfinistry of Fmance.
Central Bank of Greece
1992 OIKOVO/-i.U:O .1cA!I.o (1). Athens: CBG
EMaOos)
Cohen, Stephen and Zysman, John
1987 Manufacturing Matters. London: Basic Books.
roM
1989 Economic Convergence in the European Community (333 Final).
Brussels: European Economic Community.
Economou, George
1991 otlCOVOIlOU, FLa J.ua EI.aOTfj.l.arocr,
Ira8EpOJToi.Tjons teen EvvvaJ.l.(i)(JTJS napaywyrjs Kat
!TJS A:lTaaxoJ.Tjo1]S. Athens: lOBE (IvCin'w1.)"[o
ICCiL B1.01111xCiVLICWV Epruvwv).
Eisner, Robert
1993 "Clinton, Deficits and the U.S. Economy".Challenge 36 (3): 47-50.
Epilogi
1993 Em).oyrj, Jan-Febr.
European Economy
1990 Annual Economic Report 1990191 46. Brussels: EEC.
European Economy
1992 51. Brussels: EEC.
Eurostat
1992 Statistiques Rapides: Population et Conditions Sociales 4. Brussels:
EEC.
Ferleger, Louis and Mandle Jay
1993 ''No pain, No Gain: Taxes, Productivity and Economic Growth", Challenge
36 (3): 11-19.
Galbraith, James
1993 "A Two-Track Growth Program". Challenge, Jan.-Febr.
Harrison, Benett and Bluestone, Barry
1988 The Great U"Turn. New York: Basic Books.
1990 "Wage Polarization and the Flexibility Debate". Cambridge Journal of
Economics 14: 351-373.
Heilbroner, Robert and Bernstein, P.
1989The Debt and the Deficit.. New York: Norton.
Krugman, Paul
1984 "Targeted Industrial Policies: Theory and Evidence" In Industrial Policy
and International Competitiveness, edited by S.W. Arndt. Washington
D.C.: George Washington University.
1991 ''Myths and Realities of u.s. Competitiveness", Science 254 (8 Nov.).
1992 "On Balance Clinton's Economics". International Herald Tribune, 5
Wednesday August.
Kuttner,. Robert
1992 "Don't Worry so Much about the Budget Deficit". Business Week, 6 July.
Magaziner, Ira and Reich, Robert
1982 Minding .4.merica
1
s Business. New York: Vintage Books.
OCDE
1990 Evolution dans la Geslion Publique. Paris: oeDE.
OCDE
1991 Perspectives Economiques de I'OCDE 50 Dec. Paris: OCDE.
OECD
1989 Economic Outlook 46. Paris: OECD (Organization for Economic Co
operation and Development).
OECD
1991 Historical Statistics 1961-89. Paris: OECD.
OECD
1993a Economic Surveys: Greece 1993. Paris: OECD.
OECD
1993b Economic Outlook 53 June. Paris: OECD.
Papademos, Loukas
1989 ItGreece and the EMS: Issues, Prospects and a Framework for Analysis'"
Conference on the European Monetary System in the 1990
1
s. Athens:
GeES (illTJVl.!<;O KrVTpo EUpW1t{nKWV MATWV).
1993 European Monetary Union and Greek Economic Policy in Greece, the
New Europe, ...
Pavlopoulos, Panayiotis
1986 navaYlwTlls nauAonouAos, ElooOTJilGnl'tCr Mcpi&a Athens:
lOBE.
1987H orTJv EU.a.tia. Athens: lOBE.
1989 "<t>opoAoyia, !<;Cll. napaol.lCOVOlltCt. M1.Cl
AVaAUO"ll" In flporcpCilorrru:s LJTJf.WOWVJf.tlxTp
flOAI.!lJC1js, edited by George Provopoulos. Athens: lOBE.
Pavlopoulos, Panayiotis and Kouzelis, A.
1990 ncroA01tOUAOS tecn A. To
flp0f3.J..TJf.ia: flOAt Tuds .Athens: lOBE.
Pelagidis, Theodore
1989 "Southern Europe in the Era of Post-Fordism: The Case of Greece. It
M.Phil. Thesis. Brighton: University of Sussex.
1993 ''L'Economie Politique de l'Adaptation Industrielle: La Flexibilitedans
l'Industrie Grecque." t1se de Doctoral. Paris: Universitcde Paris VIII.
Reich, Robel1
1992a The Work of Nations. 2nd Edition. New York: Vintage Books.
1992b ItAcCOWlting the Future" The American Prospect 11: 61-64
Spraos, John
1991 "Nlacroeconomic Policy in an Open Economy" Symposium on: Greece in
the European Community: The Challenge of Adjustment, 26-28/9/91.
Athens: GCES.
Sweezy, Paul and Magdoff, Harry
1987The Financial E>:plosion. New York: Monthly Review Press.
Tobin, James
1992 ''The Economic Pendulum: 1962 ... 1982 ... 1992" Challenge March-April.
1993 'Thinking Straight About Fiscal Stimulus and Deficit Reduction"Challenge
March-April.: 15-18.
Vavouras, John
1993 ruitvvr)s To ill Xpros. Athens:
Papazisis.
Vergopoulos. Kostas
1991 "Greece: A Review of the '80s" In The Greek Socialist Experiment:
Papandreou's Greece 19811989, Edited by John Kariotis. New York:
Pella.
1992 "Regionalism and Stabilisation" Paper Presented in the Colloqioum: Greece
on the Road to the 21st Century, Washington D.C.: Windrow Wilson
Center.
1993 "Greece in the New European Order" in Greece, the New Europe ....
Wall Street Journal
1992 'Top Economists Urge Officials to Boost Federal Spending to Stimulate
Growth", 31Tuesday March.
The Minda de Gunzburg Center for European Studies
Harvard University
The Minda de Gunzburg Center for European Studies is an inter
disciplinary program organized within the Harvard University Fac
ulty of Arts and Sciences, designed to promote the study of
Europe. The Center's governing committees represent the major
social science departments at Harvard and the Massachusetts Insti
tute of Technology.
Since its establishment in 1969, the Center has tried to orient stu
dents toward questions that have been neglected both about past
developments in eighteenth- and nineteenth-century European so
cieties, and about the present. The Center's approach is compara
tive and interdisciplinary, with a strong emphasis on the historical
and cultural sources that shape a country's political and economic
policies and its social structures. Major interests of Center members
include elements common to industrial societies: the role of the
state in the political economy of each country, political behavior,
social movements, parties and elections, trade unions, intellectuals,
labor markets, and the crisis of industrialization, science policy, and
the interconnections between a country's culture and its politics.
For a complete list of Center publications (CES Working Paper Se
ries, Program for the Study of Germany and Europe [pSGE]
Working Paper Series, Program on Central and Eastern Europe
Working Paper Series), please contact the Working Papers Series
office, CES, 27 Kirkland Street, Cambridge MA 0218 (e-mail:
bouliane@fas.harvard.edu). Papers may be purchased for $5.00
each (plus postage to non-U.S. addresses). A monthly calendar of
events at CES is also available on the Web at http://www.fas.
harvard.edu / -ces.