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The Greek Crisis: Εxit Roadmap

By Alexander Kritikos
Research Director DIW Berlin

Since the financial crisis of 2008, the Greek economy experienced a double-dip recession. The Greek GDP is almost 30 percent below its level before the stock market crash. Given the recent political decisions to be passed these days through parliament – tax increases and higher social security payments again – and the ongoing bottlenecks, the Greek economy tumbles back into crisis modus. Current statistics reveals the disastrous situation of the Greek working population: At the end of 2015, the main source of income for over half of the Greek households was a pension, while only about 37 percent mainly relied on incomes from wages. 

The fact that this crisis is so long lasting reflects the weakness of the Greek political system. Greece has seen during the last eight years six prime ministers and about ten ministers of economics and of development, each. So, there is no political stability and no opportunity to plan, establish, enforce and monitor a consistent reform agenda. And there was only one government, the “technocratic government” under Papademos, between November 2011 and May 2012, pushing forward a reform agenda under Greek ownership. 

Given the imperceptible position of most Greek governments, a Greek ownership of the ongoing reform process or of a serious investment agenda is missing. Instead this process is still driven by the creditors of Greece, whose major interest seems to be the balancing the country’s public budget resulting in a cataclysmal economic downturn. 

With its massive reductions in pension payments, social expenditures, and wage costs, Greece’s cost disadvantages have been largely reduced, at least before the current government started increasing part of these costs again. Tourism has been at highs during the last three years and agricultural products are at low prices again. So, if Greece had a cost problem only, the Greek economy should have been back on track now to high growth rates – but it isn’t.

The simple explanation: there is not much beyond tourism, agriculture, as well as some mining and petroleum products that Greece can export now in considerably higher amount after having reduced unit labor costs. These sectors may allow for modest growth in the future, should agriculture and tourism provide higher value added, but this is not sufficient to fuel higher long-term growth. The tiny high-tech sector for instance in IT or pharmaceuticals is much too small in order to get a boost by cost reductions only.

Thus, the austerity measures and institutional reforms, so far enforced by the various Greek governments over the last seven years, have not revitalized the sclerotic economy. This is also bad news for Greece’s creditors: under such a scenario the accumulated public debt will remain insurmountable. 

Even worse, the austerity measures, the many changes of Greek governments and some of the Troika imposed policies have had devastating effects on the economy. It is crucial after seven years of downturn to leave the daily bustle of the discussion on the next expenditure cuts and tax increases, instead to take stock and critically examine the last years.

On a weekly basis, in cooperation between Naftemporiki and the German Institute of Economic Research (DIW), we will publish a series of articles on the causes and consequences of the Greek crisis from different perspectives. The contributions will be written by economics researchers from Greece, the Greek diaspora, and non-Greek researchers with interest in the Greek cause. These represent the opinion of the respective authors, which sometimes rest upon contrarian concepts and may result from “out-of-the-box”-thinking.

The OpEds will make a fundamental analysis of the last seven years’ economic policy on the Greek economy and will discuss a wide range of specific aspects inherent to the debate on reforms. And the series will take a closer look on the necessary steps for a roadmap to turnaround the Greek economy and to finally end this crisis.