Greece: Reality where Myth was Born

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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

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