All posts by Periklis Gogas

Dr. Periklis Gogasis a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece

Agriculture and Productivity of Labor in Europe

Dr. Periklis Gogas
, Associate Professor, Department of International Economics, Democritus University of Thrace, Greece.


Ms. Anna Agrapetidou, PhD candidate, Economics, Democritus University of Thrace, Greece

The third column of the Table below, reports the percentage of the labor force employed in agriculture; in the fourth column we present the GDP share of agriculture for each country. Finally, in the last column we produce a Balassa-like revealed productivity index by dividing the share of agriculture in the GDP by the share of agriculture in total employment (column four divided by column three). Thus, the last column provides a comparable measure of the revealed productivity of the agricultural sector in Europe. It measures for each country, the share of GDP produced by a 1% employment in the agricultural sector.

Continue reading Agriculture and Productivity of Labor in Europe

Greek Governement Debt Decomposition

PeriklisDr. Periklis Gogas, Associate Professor, Department of International Economics, Democritus University of Thrace, Greece.

The issue of the Figure 1 presents the government debt as a % of the GDP of 11 EU countries. Greece tops the list with 175%. This fact is very worrisome by itself. What is also a problem is the percentage of the debt that is held by non-residents. One issue for Greek citizens is of course that the creditors being non-Greeks can afford to be more inelastic and strict in any negotiations. They are only exposed to the default risk and the cost of the capital they borrowed that may be lost. But they have a limited exposure to the country, political and macroeconomic (from the perspective of the Greeks) risk. Another more important, but often overlooked, issue is outflow of that the interest payments. For a principal of €315 billion and a weighted average interest rate of 3%, an amount approximately €10 billion is fleeing the county every year. This represents approximately 6% of the Greek GDP. As a result this is spent outside Greece and provide no increased domestic demand, no taxes for the Greek government and are not deposited in the crisis-stricken Greek banking sector. The picture as we can see in Figure 1 is different in other countries.

Click on the figure below to enlarge it.


Do you know what Neoliberalism is?


Dr. Periklis Gogas, Associate Professor, Department of International Economics, Democritus University of Thrace, Greece.

Ms. Anna Agrapetidou, PhD
candidate, Economics, Democritus University of Thrace, Greece

Neoliberalism is a term that can be traced back to the 1930’s. It was introduced then by the people who were looking for the middle way between the classical liberalism of the laissez-faire doctrine and the emerging –at that period- socialism. The usage of the term declined in the 1960’s and it was reintroduced in the 1980’s. This time, it was mainly used to describe the classical liberalism by its critics, thus adding negative connotations as its meaning was shifted to the laissez-faire principles.

Continue reading Do you know what Neoliberalism is?

Greece: Reality where Myth was Born

Perry Gogas 15xx (2)Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece. Now that the Greek Crisis is as it seems coming to an end, it is interesting to highlight some common myths that surrounds Greece and Greeks. The fiscal crisis put Greece in the spot light. It is important to step back and put some things into perspective. In what follows I will try to dismantle some of the myths that made headlines or were (and many are) discussed widely both within Greece by its own people and by outsiders.

 The Greek Crisis

As a result of the crisis Greece saw a significant decrease in its utilization of its production capacity. It dropped from almost 80% to less than 65% between 2009 when the crisis started and 2012. The positive growth rates of real GDP fell from an average of 1.5% the years 2000 to 2008 to -5% recently. As a result per capita income decreased by 17% from almost $15,000 to $12,500. But the most striking and important change was the huge surge in unemployment: from 7% in 2008 to 27% these days. It was no surprise that retail sales registered a negative reaction by declining an average of 10% per year. Greece was not able to borrow from the capital markets anymore as the government bond yields increased gradually from a low of 5% to more than 40%.

The Greek Debt

But when did really the debt problem start? Was it something new? A result of the costly 2004 Olympic Games? Or something else? Greek macroeconomic indices were looking very optimistic in the years before the crisis. The country enjoyed a stable growth with low unemployment and was operating to almost full capacity. Despite this beautiful picture, the debt as a percentage of GDP was already very high that was constantly fed by deficits with increasing trends. In 2012 Greece was second only to Japan in terms of public debt with 165.30% of its GDP. Nonetheless, even 12 years before this percentage was already high at 103.40% ranking Greece 7th internationally. Thus, the problem was already there. Now, after the haircut and the resulting restructuring only a small fraction (approximately 10%) of its debt is held by private investors. International entities such as the EFSF, the Troika and the IMF hold Greek debt. The weighted average interest rate is only 2.29% well-below market rates and the true risk associated with this lending.

Myth: the lazy Greeks drinking frappe on the beach

Even Greeks themselves feel that they do not work as hard as the European North and they even make jokes about their northern partners about how hard they work and they do not enjoy life. But, when we look at official OECD labor data we can see that Greeks are the hardest working nationality within the OECD! They work a little more than 2100 hours per year while Germans work only 1450.

Myth: cutting wages will help Greek competitiveness

Not true. Labor costs account to only 5%-10% of a final product. Thus, even a huge reduction in wages will not be able to help Greek exports and competitiveness very much. There are other costs in Greece that are more significant and they considerably increase costs. These according to a recent survey to business people in Greece are: the excessive taxes, the bureaucracy, extensive corruption in public agencies and the scarcity of R & D funding. Thus, labor costs is not the key factor. Greek businesspeople never demanded a wage reduction as a means to improve their productivity and sales. But if lower wages are the key to competitiveness, growth and prosperity then how come countries such as Germany, Sweden and Canada are dominating in international markets and low wage nations like Bulgaria, Albania and Romania are trailing far behind? Isn’t that strange?

Myth: the “return” to the drachma

There is no return we must point-out. No matter if the name points to the currency Greece abandoned in 2002, leaving the Eurozone will find Greece with a new and unknown –meaning extremely risky- new currency. Moreover, if we go back to the Greek debt chart we can see that it is not the euro to blame for the huge Greek debt. We can observe a huge rise in public debt from 1980 to 1998: from 25% to 115% of GDP. The euro era is stable for the most part before the crises.

Myth: the 1950’s and 1960’s “Greek miracle” was due to the drachma

Greece saw very significant growth rates during these decades and it was second in the world only after Japan with growth rates of GDP close to 6%. But the drachma was not the reason for this spectacular growth rate. Greece participated to the Bretton Woods system. Drachma was not a free floating currency. It was tied to the USD with an exchange rate of GRD 30 per 1 USD for the whole period from the late 1940’s to the early 1970’s. Greece, as a result, did not have an independent monetary policy much like it does not within the Eurozone when it adopted the euro. The very high growth rates of the period were due to: a) monetary stability that reduced risk for foreign direct investment, b) minimum inflation resulting from the Bretton Woods monetary system, c) a prudent fiscal policy that resulted into minimal deficits and d) significant capital inflows as a result of the monetary and fiscal stability.

Myth: Greece should default following Iceland that recovered soon after

The situation is not similar. Iceland faced a banking crisis and not a public debt crisis. Moreover, it seeks to adopt a stable currency like the euro or the Canadian dollar in order to reduce the country risk and stabilize its economy.

Myth: Argentina is better off after severing its ties to the IMF

No and it did not. Argentina still closely cooperated with the IMF. The problem in Argentina amounted to EUR 70 billion while the Greek debt is as high as EUR 360! Also, 30% of Argentinians live below the poverty line, the middle class has disappeared, the national currency, the peso, was devalued to 1/5 of its value and the inflation is very high at 22%.

My favorite Myth: Greece must become self-sufficient

In every economics dictionary the term self-sufficiency right after the obvious interpretation signifies poverty, underdevelopment and low living standards and human development indices. Many people in Greece believe out of ignorance that Greece must produce all it needs so that it is not dependent from any other country. Well, this may sound appealing, interesting and maybe revolutionary but it is outright wrong! Adam Smith and David Ricardo long time ago proved how specialization and international trade can increase consumption and wealth for all countries as international trade is not a zero-sum game: it is not necessary for someone to lose in order for someone else to gain. That is the beauty of specialization and trade. Another important clue: no other country in the world adopts the goal of self-sustainability.

Myth: the Greek comparative advantage is agriculture

Reality check: it is not! If it were it would mean that Greek farmers can produce at low prices to cover domestic demand and export to other countries. This is not the case as Greek agriculture is heavily subsidized and it is still not competitive and it can never be competitive enough to neighbouring countries with very low labor costs. Moreover Greek terrain is mountainous and thus difficult for most agricultural products.

Myth: Greece is a poor country

NO! Greece is ranked by the OECD and other international economic organizations as a developed industrialized country. It is one of the 25 richest countries of the world even after the significant decrease in per capita income as a result of the prolonged recession due to the debt crisis. Before the crisis it was at the top 20 wealthier countries in the world. More importantly, with respect to Human Development Indices it still ranks among the top 20 nations.

Reality: the comparative advantage is research and technology

Greek universities in terms of scientific publications rank 9th in the world. Greece exports more space technology than it exports tomatoes. Agriculture represents a mere 2% of Greek GDP. High technology exports amount to 12.3% of its exports and the chemical industry to a 31.6%. Greece ranks 38th in the world in R&D funding but it ranks 19th in total scientific publications. More importantly it ranks 13th in publications in top journals making it better than: Italy, Canada, Spain, France, etc according to the Nature magazine. Greece spends only 0.6% of GDP for research while France, Canada, Spain and Italy spend 1.9%, 1.8%, 1.3% and 1.1% respectively Canada spends $24.3 billion for 51,107 publications per year and France $42.2 billion for 57,320. Greece spends $1.7 billion and produces 9,281 scientific publications. These numbers and the total in the corresponding Nature table shows that Greek productivity is 2.6 times more than Canadian and 4.02 times the French. The European Commission’s “Report for Innovation in Europe 2011” states that Greece has 4.2 researchers per 100 workers 33% less than the European average that is 6.3. Nonetheless, the total production of scientific publications that is 438 compares to the European average that is 491.

Those that would like to see the data and other details please click on: Gogas Greece Slides

Asymmetries in Fiscal Policy

Perry Gogas 15xx (2)

Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece

Ioannis PragidisDr. Ioannis Pragidis is a co-author for the Business Thinker magazine. He is a Lecturer of Economic Analysis at the  Department of Business Administration, Democritus University of Thrace, Greec




Fiscal and monetary policies are the cornerstone of policy-making.  However, until 2000 the main bulk of empirical research was dedicated solely to the effects of monetary policy to real economic activity. In the aftermath of the global financial crisis of 2008 there is a renewed interest and a growing debate of whether governments should run fiscal stimulus packages (based on Keynesian macroeconomic theory) in order to restore previous growth rates or run an austerity program to reduce deficits and in the long-run the debt-to-GDP ratio. Recently for example, highly indebted Eurozone countries (Greece, Ireland, Portugal and Spain) are required to implement strict fiscal austerity measures in order to balance their balance sheets. In this context it is interesting to see whether and how Keynesian principles may apply.

According to economic theory, the impact of an expansionary fiscal policy on GDP can range between negative and positive values and be large or small depending on the broader macroeconomic setting. Thus, we can identify five potential sources of nonlinearities/asymmetries from the implementation of fiscal policy:

a) the phase of the business cycle: whether the economy is expanding or contracting,

b) the GDP to debt ratio: the effect of fiscal policy may differ when this ratio is small or large

c) the sign of the fiscal policy shock: positive versus negative shocks of the same instrument). For example an equal in absolute magnitude expansionary versus a contractionary tax policy.

d) the nature of the fiscal policy shock: whether an expansionary or contractionary fiscal policy is implemented through spending or revenues (taxes).

e) the magnitude of the shock: “small” and “marge” fiscal policy shocks may have asymmetric effects with respect to real GDP.

Despite the many possible sources of non-linearities and divergence of economists’ opinions, the empirical research is still too narrow and only recently has started to take into consideration the possible asymmetries reported above. Trying to reconcile economic theory with the empirical results many practitioners analyse the effects of fiscal policy on economic activity over the business cycle -case a) above- for many countries. Most of these studies report a spending multiplier around unity in boom times and 0.36 in recessions. However, the rest of the possible non-linearities have not be tested adequately yet. In order to fill this gap in empirical macroeconomics we employ several econometric methodologies in order to test for the existence of asymmetries that may be associated with the conduct of fiscal policy.  In doing so, we try to detect two types of fiscal policy asymmetries. First, whether equal in magnitude contractionary or expansionary fiscal shocks –case c) above- have the same multiplier impact on real output and second whether theoretically equal –in terms of their impact on the government budget- fiscal policy tools, such as a tax cut or an increase in government spending – case d) above-  have the same impact on output. Using quarterly data that span the period 1967Q1 to 2011Q4 for the U.S we uncover some very interesting results.

Empirical Methodology

We reveal that an increase in government spending is by far more effective in stimulating the real economy than a decrease in government revenue, i.e. a tax cut. Moreover, an interesting result is that we uncover an asymmetry in the size of the government revenue shocks. It appears that a large increase in government revenue (increase in taxes) during periods of increasing government expenditures may have a positive and lasting effect on the growth rate of real output. This may be the case since such a shock may be perceived as a strong signal of the government’s commitment to fiscal consolidation. This improves the credibility of the implemented policy and alters the public’s expectations on future economic conditions. On the other hand, during periods of decreasing government spending the decrease of taxes cannot boost the economy into a growth path. Finally, we find evidence on asymmetries in terms of the persistence of fiscal policy shocks. Increments in spending and revenue shocks, i.e. increased government spending or an increase in taxes, are more persistent as they take seven to eight quarters to fade, whereas their negative counterparts, a decrease in government spending and a tax cut, take only three to four quarters.

Empirical Results

We reveal that an increase in government spending is by far more effective in stimulating the real economy than a decrease in government revenue, i.e. a tax cut. Moreover, an interesting result is that we uncover an asymmetry in the size of the government revenue shocks. It appears that a large increase in government revenue (increase in taxes) during periods of increasing government expenditures may have a positive and lasting effect on the growth rate of real output. This may be the case since such a shock may be perceived as a strong signal of the government’s commitment to fiscal consolidation. This improves the credibility of the implemented policy and alters the public’s expectations on future economic conditions. On the other hand, during periods of decreasing government spending the decrease of taxes cannot boost the economy into a growth path. Finally, we find evidence on asymmetries in terms of the persistence of fiscal policy shocks. Increments in spending and revenue shocks, i.e. increased government spending or an increase in taxes, are more persistent as they take seven to eight quarters to fade, whereas their negative counterparts, a decrease in government spending and a tax cut, take only three to four quarters.

Policy Implications

The policy implications of the empirical evidence we found with the two alternative empirical methodologies are very important. To summarize them here:

a)  It appears that the most effective fiscal policy instrument in terms of its impact on real private GNP is government spending. The empirical evidence provided in our analysis shows that government spending has the sign and impact predicted by standard Keynesian macroeconomics.

b) On the other hand, government revenue shocks, i.e. through taxation, are found to have a much smaller (approximately four times) multiplier than equal in size spending shocks.

c) Finally, our results highlight the importance of the credibility of the fiscal policy. It appears that an increase in government revenue sends a strong signal to the public that the government is committed to fiscal consolidation and is moving towards prudency. This alters the public’s expectations about future economic activity increasing confidence that may a positive impact on real private GNP.

According to these results a policy maker would be far more successful in implementing fiscal policy through government spending than revenue. Moreover, to stimulate the economy, an expansionary fiscal policy through an increase in government spending appears that it would be the most efficient instrument of choice for the policy maker. An equal in size stimulus package through lower taxes would be marginally successful as the corresponding multipliers reveal.


  • James P. Cover, (1992). Asymmetric Effects of Positive and Negative Money Supply Shocks.  Quarterly Journal of Economics, 107(4), 1261- 1282.
  • Robert Lucas, (1972). “Expectations and the Neutrality of Money”. Journal of Economic Theory 4 (2): 103–124. doi:10.1016/0022-0531(72)90142-1.
  • John F. Muth. (1961). “Rational Expectations and the Theory of Price Movements”, Econometrica 29, pp. 315–335.


Evidence on the Debate on Fiscal Multipliers

Perry Gogas 15xx (2)
Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece
Ioannis Pragidis
Dr. Ioannis Pragidis is a co-author for the Business Thinker magazine. He is a Lecturer of Economic Analysis at the  Department of Business Administration, Democritus University of Thrace, Greece

Fiscal Multipliers

The “rescue plan” for Greece and other economies in trouble in the recent European fiscal crisis was designed by the IMF based on one very important factor: the fiscal multiplier. The latter is a measure of the total decline of GDP after a reduction in government spending or a tax increase. The IMF assumed that the fiscal multiplier for Greece was 0.5. Thus, a €1 reduction in government spending would ultimately decrease GDP by €0.5. But both economic theory and empirical evidence suggest that depending on the case and the phase of the cycle the fiscal multiplier may be well above unity. Even the IMF admitted that they were wrong and the actual multiplier may be between 0.9 and 1.7 in an economy in a recession and in the middle of a fiscal crisis. This suggests that the final effect of the austerity measures to the Greek GDP was surprisingly at first 2 or 3 times higher that was assumed. The result of this austerity program based on wrong assumptions is evident: a cumulative 25%-30% real GDP decline in the past 4 years and an unemployment rate that reaches 28%! It is embarrassing that the IMF used a value totally inappropriate for Greece’s case. Finding empirical evidence that the fiscal multiplier is 0.5 in the U.S. or Japan does not necessarily mean that this value is appropriate for Greece too and especially in the midst of a crisis! The fiscal multiplier increases as the economy enters a recession. Thus, a contractionary fiscal policy during recession time could have much larger contractionary results than in a boom time.

The Theory
In a Keynesian model and under a closed economy (an economy with no international trade) economic theory predicts that the fiscal multiplier is large and above unity and there is a crowding out effect of private investment. This means that when government spending is increased, private investment falls as a result of a rise in the interest rate. In an open economy (an economy with international trade): the fiscal multiplier is larger when we have a fixed exchange rate regime (peg) than under floating exchange rates. The crowding out effect is larger under a floating exchange rate regime than under a peg. In a classical model on the other hand, the fiscal multiplier is near zero and the crowding out effect of government spending on private investment is large.

Empirical Evidence so Far
In the empirical evidence found so far in economics literature, the exchange rate regime and its effect on the fiscal multiplier is not exploited in depth. So far, the empirical papers have found that:
• The fiscal multiplier is larger under a peg than under a float.
• The crowding out effect is larger under a float than under a peg.
• However, the differences in the crowding out effect between the two regimes is not found to be very large as well as the differences in net exports
• There is no consensus about net exports: some find that they increase and some others that they decrease.
• The same ambiguity in empirical evidence exists for the interest rate as well.

Evidence from the Long Run Derivative
In our current study (Gogas-Pragidis, June 2013) we use data spanning both the fixed exchange rates regime of Bretton-Woods and the recent floating exchange rate period. We use data on several macroeconomic variables from the U.S. economy and we employ for the first time in the empirical literature and in this context the Long Run Derivative methodology of Fisher and Seater (1993). This methodology allows us to explore the evolution from the short to the long run of the effect of government spending on several macroeconomic variables of interest that are in the heart of the relevant policy debate. Our empirical findings are summarized in the following:
• The fiscal multiplier is positive in the short run and neutral in the long run under a peg but negative under a float.
• The crowding out holds for both regimes, although under a peg there is no crowding out in the long run. Nevertheless, the difference in the results between the two regimes is quite large.
• Net exports deteriorate in both regimes after a fiscal expansion. Under a float though this turns to positive in the long run.
• Private consumption increases under a peg in the short run and returns to its initial value in the long run. Under a float, private consumption decreases in the long run confirming Ricardian equivalence.
• We also confirm the decrease of gross savings in both regimes
Thus, we confirm the very large differences in the fiscal multipliers and the crowding out effects with respect to the exchange rate regime. We also confirm the transmission mechanism predicted by economic theory: under a float, an increase in government spending will increase the interest rate, so the exchange rate will appreciate, crowding out both net exports and private investments. Due to Ricardian equivalence, the private consumption will decrease as well as the total output. Thus, under a float the expansionary fiscal policy can have contractionary results. The inverse holds in the case of a peg. An expansionary fiscal policy will have expansionary results. In this case the transmission mechanism works differently. The interest rate is accommodative and the crowding out effect in both net exports and in private investments are smaller. Private consumption increases resulting to an increase in total output.

From our analysis it is evident that the exchange rate regime plays an important role with respect to the effects of government spending on key macroeconomic variables. Following this, we may bring into the multiplier’s debate the fact that Greece is an economy operating in a de facto peg: it cannot use the monetary policy as a tool to stimulate its economy in this crisis. This has significant implications to the fiscal multiplier as under a peg, as the evidence suggests, the multiplier should be large and positive. Thus, government spending cuts and tax increases have a large and negative effect on real GDP irrespective of the phase of the economic cycle. Going back to the miscalculation by the IMF, It is not only the crisis and the recession that is the main driver of the large fiscal multiplier; the fixed exchange rate regime that Greece faces in terms of the euro is another issue that was not considered and properly included in the models. So the IMF used wrong fiscal multipliers not only because it failed to take into account the recession phase of the Greek economy but also it failed to incorporate the exchange rate regime, the fact that Greece is a member of the Eurozone, into its calculations. 



Asynchronous Cycles and European Convergence.

Perry Gogas 15xx (2)Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece


Ioannis Pragidis
Dr. Ioannis Pragidis is a co-author for the Business Thinker magazine.
He is a Lecturer of Economic Analysis at the  Department of Business Administration, Democritus University of Thrace, Greece


Towards Consolidation
After the crisis of 2008, governments and investors have been looking forward to the next day. After four years of fighting hard to restore liquidity in the global system, we face the difficulties arising from the slow growth of the real economy in almost all developed countries. The financial analysis of the Eurozone crisis gives way to the need to develop and implement a long-term economic policy. After 11 years of the euro crisis and with strong data in hand, we can factor in a satisfactory degree of certainty with some useful conclusions on the functioning of the euro area economy. In addition, the zone’s future now perhaps for the first time since the outbreak of the crisis is expected to be less dark and uncertain.

Asynchronous Cycles
The million dollar question is how will the countries of the South and North manage to cope together with the challenges in a common currency area. The common view is that the lack of national exchange rate policy will lead to a further recession for the countries of the South, since the main objective is the depreciation of the euro in order for these countries to regain their competitiveness. On the other hand, the hard core countries advocate a tougher euro so as not to disturb the market’s confidence for the common currency and to avoid the problem of imported inflation with negative consequences for the competitiveness in international markets. The production is mainly based on the usage of intermediate goods, the cost of which will increase as a consequence of a devaluation; this will drag up the cost of the production of other goods and services and thus lead the economies toward inflation and a loss of competitiveness. In International Monetary Theory, this is known as the problem of “asynchronous business cycles“. In this case, in the context of a monetary union such as the euro zone, a serious problem is being created regarding the effectiveness of monetary policy when some member states are being developed while others are in a recession. This is the reality being faced in recent years by the European Central Bank. In the northern countries, where competitiveness is high on the international level, the real economy is growing steadily. The main concern of monetary policy should be curbing inflationary pressures from the booming economy resulting in increased income and effective demand. In order for this to be achieved, a contractionary monetary policy should be implemented to limit the growth of the money supply. This is achieved by raising interest rates, reducing credit and the sale of debt through “open market operations“. However, for countries facing severe financial problems that are in a recession or crisis as a result of low productivity and hence low competitiveness, the appropriate monetary policy is to increase the money supply, reduce interest rates in order to stimulate new investment, and buy government bonds in open market operations in order to increase liquidity in the banking system; all of this will lead to credit expansion through the financing of new investment projects and through consumption, which is needed for the economy to be stimulated. It is obvious that in such a case there is not a monetary policy that is effective for all countries involved in this monetary union. In the case of Europe, it is logical that the European Central Bank designs and implements a monetary policy that is beneficial for countries whose GDP accounts for more than 70% of total output in the Eurozone. Thus, we experience the implementation of a strict monetary policy where inflation is the word missing from the vocabulary of the experts. Of course plays an important role here the mandate that aims to implement the ECB in contrast for example to the U.S. Federal Reserve. The ECB under the Statute has as its main objective the so called ‘monetary stability’, in other words avoiding inflation. The Fed on the other hand has two objectives: monetary stability and full employment. Naturally, these two objectives can often be conflicting. However, this difference gives significant leeway to the Fed as opposed to ECB. This discrepancy in economic priorities leads many economists and politicians to expect the breakup of the Eurozone. Careful observation of the data of the last decade may show a different reality which is much more optimistic.

Empirical Evidence Convergence
Economic data shows that there is a convergence of business cycles between the economies of the Eurozone. More specifically, a recent study to be published shortly in the journal of the OECD (Gogas 2013, Journal of Business Cycle Measurement and Analysis) shows that after the introduction of the common currency in 1999 (by pegging the national rates with the euro) Eurozone countries generally showed more synchronized cycles than the previous season. Certainly this synchronization as indicated in the study “should not be interpreted as an indication of general economic convergence. Although economic cycles appear more synchronized after the euro, the fundamentals of member countries such as productivity and competitiveness may not have converged. This can result in problems such as the recent debt crisis that threatens even the existence of the eurozone.” After the adoption of the euro, most of the peripheral economies faced cumulative competitiveness problems. Being in a monetary union and helpless to offset the high cost of labor and production, which is mainly a result of differences in labor productivity, with a devaluation they relied solely on deficits and increases in debt trying to finance their growth and their imbalances in current account transactions. The period before the crisis, i.e. before 2008, shows that apart from the convergence of business cycles in the Euro area countries, there was a convergence of nominal wages, as well as the price level in the unit labor costs. Inflation in the southern countries (Greece, Spain, Portugal, Italy) were consistently above the Eurozone average, which indicates convergence of the price levels of countries that had lower prices in the launch of the Euro. Moreover, it appears that the increase in prices was caused by higher prices of non-tradable goods and services, i.e. those not participating in the trade balance of countries. On the other hand, labor productivity tends not to be at the same levels between countries, especially those countries that had low labor productivity before their integration in the Euro area and that continued to move toward lower levels.

The Euro
The effects of the introduction of the new currency was not uniform in all member countries. In Greece, for example, the adoption of the Euro has led to significant price increases that reduced competitiveness. In Greece, this sharp increase in prices was believed by consumers to be what economists call a “temporary shock“ (transitory) or a “transient effect on income.” So this was incorrectly treated as a temporary reduction in real income. According to the “permanent income hypothesis” of Milton Friedman, households and businesses react to such a temporary shock by trying to compensate its effect through lending. According to this theory, consumers do not like sudden short-term changes (and downwards and upwards) in consumption and try to compensate by dispersing the result of temporary changes throughout many periods in the future so that there is little change in consumer behavior. This is exactly what happened in Greece. Households began to accumulate debt hoping to repay it when economic conditions improved. The optimism of the participation of Greece in the Eurozone, the steady growth, and other purely emotional and psychological factors such as the assumption of the Athens Olympic Games in 2004, created a great feeling of confidence that things would get better. This situation was fueled mostly by the unprecedented credit expansion in early 2000. This credit growth was supported by the ease with which the Greek financial institutions had access to capital from a broader and more integrated European capital market. The banks thus exacerbated their balance sheets through financial leverage. This proved disastrous as we have recently seen. Greece, just like other peripheral economies of the Eurozone faced a productivity gap relative to the central economies. For a monetary union to be successful, the economic convergence was essential both to the state budget (deficit, debt) and to the economic performance of the private sector (productivity, innovation). The unjustified euphoria that followed the introduction of the euro with “easy money” (easy but borrowed) created an illusion of wealth that misled both the private sector and governments from focusing on growth and on the reduction of the productivity gap from our European partners. Even worse, the differences in productivity and asymmetric business cycles encountered no substantial and structural measures, only new borrowing. As mentioned above, the ECB’s monetary policy is necessarily designed to serve the “big” EU countries, as they produce the overwhelmingly majority of the European GDP. To the extent that some of the smaller economies face adverse movements in GDP, since they are not synchronized with the so-called “big” countries, the only tool you can use is fiscal policy. Greece, along with other small regional economies in the EU have tried to address these asymmetries by creating deficits and increasing public debt, thus causing the debt crisis facing the Eurozone.

The Trade Balance and Exchange Rate
The difference in real wages between countries , as shown by recent studies on the case of the Eurozone (IMF, 2012), are due largely to a productivity gap, rather than sizes belonging to the narrower term core of competitiveness such as price and unit labor costs. The general elements of the course of the Euro show a lack of convergence of the countries of the Euro area work efficiency as expressed through technological improvements, education, infrastructure, etc. It is also important to note that the Euro as a single currency is not largely responsible for the level of unemployment in the countries of the Euro area, since from the first year of its adoption and through 2007, there was a convergence of rates between Eurozone countries.
If we pay attention to the entire Eurozone, we see with few exceptions that trade surpluses were achieved in all years (of course with the bulk coming from exports of Germany). The Eurozone manages to compete in international markets. During the same period, the euro-US dollar was high for the Euro levels. That is, the stable Eurozone trade surplus was not due to a devalued Euro. Paradoxically, the same picture applies across countries in the Eurozone. The relative level of prices of tradable goods and services is not the main determinant of imbalances in trade balances. Moreover, the current account of the U.S. was firmly in deficit throughout the decades of the ’90s and ’00, while the dollar depreciated between 2004 and today against the major currencies. In other words, the reduction in the price of U.S. goods abroad has not helped to eliminate the deficit. The reason in the case of the U.S. is mainly due to the preference shown by most countries to invest in financial products from the U.S.; this is because the development of the financial sector in many developing countries are not strong enough (that also explains the low interest rates in the U.S.). Of course, some of this deficit is financed by investments of U.S. firms abroad, which has particularly increased in recent years.

The conclusion, however, is that the monetary aggregates (such as commodity prices, exchange rates, etc.) do not affect long-term developments in the real sector of the economy such as output and employment but are only affected in the short term. This principle is known as the “neutrality of money“. Based on this, the assumption seems to be gaining ground that trade deficits were created primarily because of low interest rates after the adoption of the Euro and by the expectation of convergence and not because of a lack of competitiveness of the countries of the region toward the the North.
Therefore, the challenge for the Eurozone is the next day: the development of the real economy and the reduction of unemployment through a reduction of trade deficits of weak states.
On this basis we conclude that a central economic policy which favors inflation with simultaneous investments in increasing labor productivity can be the driver to exit the crisis. Inflation seems to create far fewer problems than it solves, for example, the gradual reduction of the nominal debt, while not exacerbating the trade deficit to the extent that until today most economists believed. Of course, these measures cannot replace the need for federalism in Europe or the lack of sectoral policy among countries nor can it replace the rationalization of government spending and the creation of primary surpluses.

A Brief History of International Borrowing

Perry Gogas 15xx (2)

Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece

Efthimia Chrysanthidou

Ms Efthimia Chrysanthidou is a PhD candidate in economics at the Democritus University of Thrace, Greece.



Traditional Banking

In the international financial system banking institutions played a core role in raising capital. Their central position was safe and unchallenged for many decades. This happened because banks can take advantage of both the economies of scale they create and their in-house expertise in risk assessment. These can reduce significantly both the financing cost and the adverse effects of asymmetric information as compared to direct financing. Moreover, the direct and one-to-one relation between the bank and the borrower provides the flexibility to adapt the financing and repayment schedule to the specific needs of the borrower. Therefore there is a state of complete transparency between the two parties.


Over the last three decades and as a result of the process of the deregulation in the financial system and the technological progress, the disintermediation was made possible: borrowers could more easily in terms of risk, cost and transparency raise the necessary capital directly from the lenders (individuals or corporations) in the capital market. The rating agencies played the role of the assessing the credit risk and thus the intermediation of a bank was not necessary. The advantage of the disintermediation is the reduction of the borrowing cost as the banking intermediary is absent. For large corporations with high creditworthiness the risk for the lender is minimized. As a result we observed a qualitative change in the borrower lender relationship: from the one-to-one direct transaction and negotiation to a relationship where the lender is now an anonymous crowd dispersed, heterogeneous and practically unknown to the borrower. There is now no flexibility on the financing terms and the lenders assume all the credit risk.


The banking industry reacted by demanding and achieving gradually the repeal of the Glass-Steagall Act that strictly separated the lending (commercial banking) and investment (investment banking) activities of a financial institution. Universal banking, the consolidation under the same financial institution of both the commercial and investment activities has become the norm. Under this new regime, banks reacted with the practice of securitization taking advantage of the disintermediation trend in financing. The impersonal nature of the disintermediation is even worse in the case of the securitization as now not only the lender but also the borrower has become unknown and impersonal: a wide and heterogeneous lender base finances the needs of a large group of individual borrowers that are for any practical reason unknown.

The International Lenders – History

International lending experienced huge growth over the last three decades. Modern technological developments completely transformed the global financial system by making the mobility of funds from one country to another easier and much simpler. But this is not a new phenomenon. The history of international borrowing has its roots far in the past, from the first civilizations developed in the Mediterranean. We might even identify the colonization of the ancient Greeks as a form of internationalization of the capital in the known world. This colonization had exactly the same characteristics as in the 19th and 20th century: the Greek cities sent abroad their productive factors, capital and labor to gain from higher returns. Later in history, the rapid growth of productivity during the Industrial Revolution in Great Britain, and its subsequent spread to Europe and to the colonies all over the world, resulted in an unprecedented accumulation of capital surpluses. Thus, at the end of the 19th century this capital could not remain inactive and people tried to find ways to make the gains of productivity even higher. As a result, Europe and specifically the Great Britain became the main world international lender of capital. A significant development in this process was the creation of a new middle class, that of craftsmen, manufacturers and traders. They started to accumulate large amounts of wealth and power and to conquer high and influential positions in the societies of that time, which they did not intend to lose. They were particularly oriented towards investment in search of new wealth opportunities and higher productivity of their capital. Later, in the early 20th century the U.S. experienced the same rapid growth when the industrialization was transferred over the Atlantic Ocean. The U.S. continued to borrow from abroad as they were achieving significant growth rates, but simultaneously they increased capital export to international markets. As a result, the U.S. soon become a net international lender and took the lead from Britain just before the Second World War.

The 1870-1913 Period

This period was signaled by a strong growth in international trade and the liberalization of the mobility of the factors of production capital and labor. It is also the period of the largest migration that the humankind ever experienced, mainly from Europe and Asian countries to the U.S., Canada, South American countries, Australia, New Zealand, etc. The international lenders in this period were mainly capitalists, traders and industrialists. Total international financing increased from $100 million in 1820, to $4 billion in 1870 and to $44 billion in 1913. This international lending was achieved almost exclusively through the capital market, i.e. with the issuance and disposal of bonds and shares to the public.  The most important international lenders and borrowers for the year 1913 are presented in the table below:


$ billion


$ billion

Great Britain










Latin America










Other countries








The 1914-1950 period

This period was very important for the international capital flows as the financing of firms and the war reparations played a dominant role. When the war began there was an objective need for funding for all European countries. This need was first satisfied mainly by individuals from the U.S. as their country seemed that would not be touched by the war. But this changed in 1916 when the U.S. entered the war. At the same time, although the U.K. remained a lender, it significantly decreased its contribution to the global financial system. The same phenomenon was observed in other European countries as well. Another significant change was that excluding U.S. the other developing countries reached a pivot point in their growth due to the war. Additionally, profit margins declined significantly and in conjunction with severe recessions, there were created severe liquidity problems leading to default. This practically eliminated international lending. Especially the funding for the colonies and for the less developed countries stopped completely. By 1939, a new form of international financing was in place. The parent companies of the developed countries invested directly on subsidiaries in developing countries which were under their control. This practice became extremely widespread in Canada and Australia. About half the capital invested in the industry belonged to foreign companies. It is estimated that in 1939 the total amount of international financing was $55 billion. The U.S. played a crucial role in international lending. Not only they finance the European economies during the war, but they also provided economic support to the restoration of Europe from the damages after that. This effort is commonly known as the Marshall Plan. The total U.S. aid to Europe amounts to $40 billion.

The Impact of International Lending to borrowers and lenders

Impact on Borrowers

During the last quarter of the 19th century and the first half of the 20th century, the international capital flows played an important role in the development process of borrowing countries. The foreign funds were available for the borrowing countries in order to initiate a process of development. These funds were used to specialized uses and activities on which each country had its comparative advantage.

The results of the borrowing were not symmetrical in all countries. During the 19th and 20th century countries like the U.S., Canada and Australia used the borrowed funds in a very productive way. They succeeded to internalize the international lending both by implementing crucial infrastructure projects and by successfully diffusing the technology and the know-how they already had to enhance the inflow of foreign capital. But there were also countries that maladministered the funding that was given to them, like the countries of Eastern Europe and Latin America. The reason for this asymmetry between the countries recipients of international lending relies on institutional issues, intense corruption, political instability and war conflicts which substantially reduced the investment returns. This situation created a global competition where the efficient and productive countries managed to dominate and gain significant improvement in their balance of payments, finally becoming in that way leaders in the global market. Instead, the maladministration of funds in most of the countries of Eastern Europe and Latin America contributed to a decline of productivity and deficits in the balance of payments.  These characteristics proved significantly persistent for both groups of countries until today.

Impact on Lenders

For lender countries, the export of domestic capital to other countries abroad had a direct negative effect: the reduction of funds available for investment and production in their own economies. This situation created an intense competition between domestic and foreign markets. The economies of scale in the new and virgin markets, the availability of resources and the abundance of labor, increased the productivity of capital providing high returns for lenders. However, the resulting increase in unemployment and poverty rates in Europe and America rendered them competitors to the developing countries. The workers in the industrialized countries of Europe and America improved their standards of living due to cheaper food from the developing world and also enjoyed the positive effects of the increased growth rates in their entire economy. Overall, the distribution of income had worsened in countries acting as international lenders. Great Britain invested about 80% of its total capital abroad during the period 1893-1913.

What Happens Nowadays?

In recent years, there have been very significant changes in international borrowing and as a result the world map of lenders and borrowers has changed both quantitatively and qualitatively. The following table shows the ten largest international lenders and borrowers in 2010, using data from the International Monetary Fund.


$ million


$ million



























Great Britain
















Germany and the Economics of “Merkelianism”

Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece

My students have a hard time understanding and mastering the Keynesian, Monetarist and Neoclassical theories of macroeconomics. In this academic year I am going to add a new chapter in the course’s syllabus: the Merkelianism. It is a new theory of macroeconomic policy that combines all the advantages of classic economics but without any of the policy disadvantages: growth and development with negative borrowing cost, a depreciation that increases international competitiveness without an increase in the money supply, inflation or systemic risk and finally securing the dominant position in international markets through foreign “rescue” packages.

Adopting the euro as the common currency in the Eurozone was hailed by politicians, economists and businessmen as an important step towards the ideal of the European economic integration by creating an Optimum Currency Area as it was envisioned by Robert A. Mundell. The new currency was even more successful than many economists thought and it has since become the second, after the dollar, most important reserve currency for central banks and approximately thirty countries are pegging their currencies to the euro. The new currency eliminated exchange risk and minimized transaction costs within Europe, enhancing inter-European trade and the efficient distribution of capital.

Recently, however, this whole structure is shaken. The European debt crisis was dealt by a set of stunned and politically divided European leaders who reacted too little and too late to prevent a crisis or even dampen its effects before it was transformed in a systemic crisis – with one exception: Angela Merkel. The chancellor of Germany imposed her opinions on the rest of Europe by enforcing a strict set of austerity measures for Greece producing the opposite results for Greece’s stability and growth. Any of my students in macroeconomics can assure you that economics provides two sets of policies to avoid or dampen a crisis:

a. an expansionary monetary policy, i.e. an increase in the money supply that will also lead to inflation

b. an expansionary fiscal policy, i.e. an increase in government spending (investment, salaries, consumption, etc.)

The “aid” package for Greece dictates exactly the opposite:

a. there is no increase in money supply as Germany is strongly resisting it,

b. there has been imposed a very dramatic reduction in government spending of any kind: investment, health, education, social benefits, etc.

Thus, the question my students ask confused is why? Why does Germany seems to destabilize the euro? Beyond any conspiracy theory the answer –not surprisingly- comes again from macroeconomics:

  1. The uncertainty created by the Greek crisis and the danger of contagion depreciates the euro making German exports more competitive in international markets.
  2. At the same time, this is achieved without any increase in the money supply that would have resulted in the same depreciation but accompanied with inflation hitting Germany as well.
  3. The so called memorandum of competitiveness that was signed in the height of the Greek crisis last year, prohibits the Eurozone member states to try and attract foreign direct investment by competing with each other by means of lower corporate taxes and/or by financing investment plans for growth through debt. What is the direct impact of this? It preserves the existing status-quo that finds Germany at the top of the EU competitiveness without any possibility for the other member countries to compete in attracting international investment capital.
  4. The “aid” packages accompanied with a strict memorandum of austerity create for the European peripheral economies a permanent state of dependence from Germany: directly, since without any provision for growth, in a deep recession for Greece, the provided loans are the only means of government revenue.
  5. Last, but most importantly, the best effect for Germany is that the uncertainty and instability in the Eurozone is translated in a mass selling of government bonds from other European countries and a corresponding increased demand for the now perceived as safer German bunds. This demand for the safe heaven drives their prices up shrinking yields towards zero or even to negative returns!

Thus, by perpetuating this situation, investors agree to pay Germany for the “privilege” to lend their money to the German government! Why wouldn’t chancellor Merkel try to change anything from this setting getting the best from all worlds? Any economics student can assure you of the superiority of Merkelianism as compared to traditional macroeconomic policies.


A Vicious Cycle of Debt and Recession

Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece

“The Dire Straits of Scylla and Charybdis and the Magic Wand of the Drachma”

The problems in Greece are real but it becomes evident that the solutions provided through the “Memorandum of Understanding II” are unrealistic. Every economist knows that in order to cope with a recession one must use expansionary monetary and/or expansionary fiscal policy in an effort to stimulate economic activity. In Greece the situation is very bizarre and unique: monetary policy is implemented by the European Central Bank for the Eurozone as a whole and no one (especially Germany) is ready to tolerate a mild inflation that will help the troubled and heavy indebted peripheral economies of Greece, Spain, Portugal, Ireland and even Italy and Belgium. Expansionary fiscal policy is, on the other hand, impossible as Greece cannot borrow from the capital markets as long-term bond yields soar to almost 25%. On the contrary, the Memorandum implements an extremely harsh and never seen before in Europe austerity program that resulted in severe recession and a 4% decline in real GDP on average in the last three years. Never before in peaceful periods had Greece displayed such frustrating macroeconomic performance.

This difficult situation is dividing Greeks between those that are pro-memorandum (and pro-euro) and those that want to abolish it and return to the drachma along with a cross default. Like Homer’s Odysseus though the safe passage from the strait and the solution is between the Scylla (memorandum) and Charybdis (drachma) the two sea monsters.

Continue reading A Vicious Cycle of Debt and Recession