A Macro-Economic Analysis of the economy of

GREECE

SUBMITTED BY:

Aarshia Arora(166)Kaushik Dutta(195)Sakshi Jaikray(222)

Sakshi Khurana(223)Siddhant Jain(230)

Vivek Dharmarajan(243)

Greece – Pre Euro zone

Greece; an economy that has survived highs (second highest growth rate) and lows (hyperinflation and its current debt crises).

The Greece economy has not had a budget surplus since 1973 and the deficit has been higher than 3% of its GDP since 1981.

Greece suffered from a hyperinflation post the Second World War. This is the fifth worst case of hyperinflation in the history of the world. Post this period the country also suffered a civil war that further weakened the economy though Greece was quick to recover from the slump in its economy.

The period from 1950 to 1973, Greece economy grew at a rate of 7.7%, second only to Japan. This rapid recovery of the Greek economy following the Greek Civil war was due to a number of measures, including the devaluation of its currency, the Drachma. This devaluation attracted a huge amount of foreign investments and Investments promote growth. Massive construction activity connected with huge infrastructure projects and rebuilding in the cities promoted Government expenditure and this further added to the increase in GDP and growth. This strategy was similar to what the US economy had adopted to come out of the great recession I faced in the early 20 th

century.

During the 80’s, Greece suffered from poor macroeconomic performance due to expansionary fiscal policies that was funded by debt. This long period of budget deficit reflected in the fact that Greece has had a debt to GDP ratio of above 94% since 1993.

Even if Greece had remained outside the Euro zone, its dependence on Euro borrowing would have increased because it failed to control its debt and hence its borrowings. The vicious cycle of deficit and debt is what would eventually lead to the fall of the Greece economy. Adoption of the Euro in 2000 only delayed the inevitable. The problem always has been excessive foreign borrowing.

Greece falsified its deficit to enter the Eurozone. This is one of the controversies surrounding Greece and surfaced in the Greek financial Audit in 2004.

The entry into the Eurozone depends on applicant nation meeting certain economic criteria like budget deficits, public debt, inflation and exchange rate of the national currency. The deficit for Greece was calculated at below 3% during 1999 and 1999 was used as the reference error for Greece’s entry into the Eurozone. When the deficit was recalculated in 2004, the revision figures showed that the deficit was at 3.07% which meant that Greece had not fulfilled the minimum requirements of Eurozone entry.

These claims though were later justified because the deficit was calculated using the ESA79 methodology that was in force during the time of Greece’s Eurozone entry and the calculation by that methodology led to a figure of below 3% deficit.

Greece and the Eurozone

For a euro membership, it was necessary for the Greek Government to adopt tough austerity measures, reducing public spending massively. Even then, with all the budget cuts, the euro membership decision is very popular in Greece. Polls suggest a favouring of the move in the ratio of 2:1.

But if you ask the question, did the euro membership help Greece? What happened to the Greek economy after that, the question is difficult to answer. Greece could borrow on unrealistically good terms for most of the last decade due to the high credit ratings it enjoyed owing to the euro membership and the currency’s stability brought in by the economic heavyweights; a little surprisingly though, national interest rates converged after the adoption of the euro. As a result, the Greek economy accumulated debt and reassertion of the market forces and divergence of the peripheral yields from core yields, the unsustainability of Greece's debt burden was proven beyond doubt.

Greece like all the other EU states, gave up monetary independence to become a part of the common currency. The ECB developed a monetary policy around the EU anchor, Germany which ultimately proved to be extremely loose for Greece's economy. Although between 1980 and 1998, Greek inflation was never less than 4%, from 1999 to 2010, the inflation ratings crossed the 4% mark only once. Inflation was in fact in double digits for four of those years.

This graph compares the real per capita output for Greece, Britain and Denmark—the two countries (Britain and Denmark) which are in the European Union but not in the euro zone. These levels are common-sized. In absolute numbers, although Denmark and Britain have traditionally enjoyed a richer economy, but Greece caught-up with the growth during its membership in the euro. While some of that initial burst of growth has been sacrificed during the later recessionary periods, it is closer to the Danish and British per capita income levels as a euro member than when it had joined

the Drachma, single currency. This shows that the decision to join wasn't a big mistake.

Since 2000, Greece saw GDP growth levels that were higher than the Eurozone average, the peak being at 5.9% in 2003 and then a 5.5% in 2006. However, unemployment and inflation rates although lower than before, were still higher than in most euro-area countries. In 2002, the Greek government debt stood at 99% of GDP.

The EU aid adds about 3.3% to the Greek GDP. Greece is a major beneficiary of the Common Agricultural Policy of the European Union. After the entry into the Eurozone, quite a big percentage of its agricultural infrastructure has been upgraded and as a result the agricultural output has increased commensurately. Organic farming has increased by 885%, the highest increase in the Eurozone, and all this between 2000 and 2007. In 2007, Greece was accountable for 19% of the European Union’s fishing output in the Mediterranean Sea, ranked third with 85,493 tons, and ranked first in the number of fishing vessels in the Mediterranean between European Union members. The country ranked 11th in the EU in total quantity of fish caught, with 87,461 tons. Privatization of state-owned enterprises has moved at a relatively slow pace, especially in the telecommunications, banking, aerospace, and energy sectors. Preparations for the 2004 Olympics drove investment heavily in the year 2003 and can be seen clearly in the numbers.

Entrance into the euro zone was dependent on certain reforms and a certain level of economic discipline on part of the Greek government. Although Greece fell short of the standards of good behaviour other euro-zone members had in mind, it had positive effects on the economy. The membership of the euro zone didn't turn Greece into Germany overnight, but it has left Greece in better shape.

2008-09: The Eurozone crisis

Scenario-Greece economy had been in an unstable position since 2001 however the global financial crises of 2008-09 worsened its position and it went into a phase of recession. It became the epicenter of Europe’s debt crises and revised its deficit from predictions of 3.7% in early 2009 to 6% in September 2009 to nearly 12.7% of GDP towards the year end. It admitted to have reached a debt level of 300 billion euros amounting to 113% of the GDP, the highest in modern history and twice the Eurozone limit of 60%. This was followed by a downgrade in rating of the Greece bonds by the major credit rating agencies further aggravating its woes.

Reasons-Due to the Wall Street crises the country stopped receiving funds from European countries due to which it was not able to finance its fiscal and current account deficit driving it into debt crises.Apart from that the GDP growth rate was lower than the anticipated values of Greek National Statistical Agency and the government deficit was rising enormously. The nominal increase in output by 41% was not sufficient to match up the expenditure increase of 87%. This forced the government to rethink the debt structure in its economy. Looking at the situation the investors became skeptical about the stability of returns from the government bonds and started demanding a higher interest rate for holding these bonds. This further raised the borrowing cost and increased the debt levels in the economy.

As can be reflected by the data in Appendix - 1, the country had been experiencing negative budget balance for a very long time however the GDP growth rate became negative from 2008-09. The country’s debt-GDP ratio has been constantly rising putting a pressure on the Balance of payment position of the country. A shut out from financial market borrowings drove the country towards bankruptcy leading to a new age financial crises in the world economy.

2010-2011: Dealing with the crisis

Economic growth

Greece saw growth rates of -4.9% in 2010 and -7.1% in 2011. Since May 2010, the Greek authorities have been implementing Economic Adjustment Programme (EAP). The programme foresaw that the economy would reach a trough by 2010 with a growth rate of -4.0% in 2010, and would start recovering thereafter with a growth rate -2.6% in 2011 and 1.1% in 2012. Despite the fiscal consolidation measures, the recession was deeper and more protracted in 2010 and 2011 and looked worse for 2012.

This output contraction was majorly due to negative developments in private consumption (the biggest GDP sub-component) which declined by 6.2% in 2010 and 7.7% in 2011. Also the gross fixed capital formation (GFCF) declined by 15.0% in 2010 and 19.6% in 2011. In 2011, on the supply side, output of the secondary sector fell sharply (almost twice as much as in 2010: -12%, compared with -6.1%), mainly attributable to construction and energy industry. The decline in output of the tertiary sector intensified as well (-5.9%). By contrast, agricultural output increased by 2.5% but, given the sector’s small size, this positive development had little effect on GDP as a whole. Primary deficit was reduced by about 2.5% of GDP. Primary expenditure fell, due to increased subsidies to social security funds. The current account deficit for 2011 was 9.8% of GDP.

Austerity measures taken by Government of Greece in 2011:

1) Revised Wages(wage bill): For public sector government reduced allowances by 8-20% and for private employees, government gave no inflationary raise and reduced the severance pay. In several cases the wages were frozen.

2) Pension: Changes in Pension system were introduced. Greece had disproportionate aging population with 2.6 million pensioners, a work force of only 4.4 million which is further shrinking by 700 workers/day in the private sector. This was causing state to take loans to keep pace with the monthly payments for the pensions. The retirement age was raised and the insurance funds serving lawyers, engineers, journalists were reduced.

3) Tax rate: All VAT rates were increased by 10%. Tobacco, alcohol and fuel were also subjected to additional 10% increased tax (third time in the year). Withholding tax was applied on both private and public sector salaries

Unemployment:

The unemployment rate reached 14.5% in 2010. The unemployment rate increased to an all-time high of 21.8% in 2011. The decline in production in 2011 was the main cause of the net loss of 298,000 jobs and for the surge in unemployment by approximately 248,000 people.

Inflation:

Average CPI inflation of Greece in 2010 was 4.71% and was 3.34% in 2011.

Effects of the fiscal measures:

Reduction in disposable income : Reduction in the wage bill lowered private consumption and output growth. The decline in the private consumption was also attributed to decline in disposable income, unemployment and high price levels. One such example is that In 2011 the 18.8% rise in fuel prices were accompanied by a 16.5% drop in the demand for fuel, while the 0.5% fall in clothing and footwear prices was not enough to boost the sale of such items, whose volume decreased considerably (by 18.8%) on account of reduced income. National accounts showed 10.2% decline in the total outlays for wages and salaries. The real disposable income was also affected by the notable increase in taxes and prices.

Fall in consumption and residential investment: The fall in consumption and investment led to the contraction of goods and services imports by 8.1% in 2011, compared to 2010. This is mainly due to a 7.1% decline in imports of goods (1.7 percentage points contribution), whereas imports of services declined by 11.6%. Due to considerable decline in residential investment, the gross fixed capital formation dropped in 2011.

The increase in the tax on profits, the reduced availability and the high cost of capital were the main reasons for the decline in the investment expenditure. The lack of capital was also because of the considerable slowdown in the annual rate of credit expansion to enterprises.

Monetary Measures: In 2010 the monetary aggregate M3 recorded a decrease rate of -12.5% and -16.5% in 2011. The overnight deposit rate recorded minor increase, while the time deposit rate increased significantly, resulting in a considerable increase in the opportunity cost of holding overnight deposits.

Bank Deposit rates: In 2011, the interest rates on time deposits continued an upward trend, up to 126 basis points depending on the beneficiary. The increase in the interest rates on new bank deposits reflects strong pressure on liquidity of Greek banks. While addressing these pressures, banks sought to curb the withdrawal of deposits on the part of non-financial corporations and households by offering high nominal returns on time deposits

Bank Lending rates: There were significant interest rate cuts in 2011. The average rate on these loans was 76 basis points lower than in December 2010. These interest rate cuts were caused by the cuts in Euro system Key interest rate.

Greek Government Bonds: In 2010 and 2011, ten year Greek government bonds yields on the Electronic Secondary Securities Market (HDAT) doubled to 25.68% from 12.55%.

Credit institutions had options of drawing liquidity from the Eurosystem by making use of government guarantees preventing credit growth rates from turning negative. The extraordinary monetary policy measures averted a credit crunch.

2012-2013 – Austerities and Bailouts

Austerity measures

Sixth austerity package

In February 2012, facing sovereign default, Greece was in need of more funds from the IMF and EU by 20 March 2012, and was negotiating over the next lending package, worth €130 billion. On 10 February 2012, the Greek cabinet approved the draft bill of a new austerity plan, which has been calculated to improve the 2012 budget deficit with €3.3 billion (and a further €10 billion improvement scheduled for 2013 and 2014). The austerity plan included:

22% cut in minimum wage from the current €750 per month.

Holiday wage bonuses (one extra months of full wage being paid each year) are permanently cancelled.

150,000 jobs cut from state sector by 2015, of which 15,000 shall be cut by the end of 2012.

Pension cuts worth €300 million in 2012.

Changes to laws to make it easier to lay off workers.

Health and defence spending cuts.

Industry sectors are given the right to negotiate lower wages depending on economic development.

Opening up closed professions to allow for more competition, particularly in the health, tourism, and real estate sectors.

Privatisations worth €15 billion by 2015, including Greek gas companies DEPA and DESFA. In the medium term, the goal remains at €50 billion.

Seventh austerity package

On 7th November 2012, The Seventh austerity package is adopted by the Greek parliament. The austerity measures are required for Greece to receive the next installment, the second economic bailout, worth €31.5 billion. Key features of the austerity package were:

Public pension cuts on average between 5% and 15% through the removal of two seasonal bonuses.

An increase of the retirement age from 65 to 67. Additional wage cuts for civil servants up to 20% Public salary wage cuts up to 30%.

Reform Bills, 2013

In 2013, a series of reform bills were passed with the aim of increasing austerity measures. Some notable features of these bills were:

Abolishing 15,000 state jobs by the end of 2014, including 4,000 in 2013. Making it easier to fire civil servants. Increasing the working hours of teachers.

A contentious plan for thousands of layoffs and wage cuts for civil service workers.

Second Bailout Package

In February 2012, Finance ministers approve a second EU-IMF bailout for Greece, worth 130 billion euros ($172 billion). The deal includes a 53.5 percent debt write down—or “haircut"—for private Greek bondholders. In exchange, Greece must reduce its debt-to-GDP ratio from 160 percent to 120.5 percent by 2020. Greece and its private creditors complete the debt restructuring on March 9, the largest such restructuring in history.

The Troika behind the second bailout package defined three requirements for Greece to comply with in order to receive the money:

1) Finalize an agreement whereby all private holders of governmental bonds would accept a 50% haircut with yields reduced to 3.5%, thus facilitating a €100bn debt reduction for Greece.

2) Greece needed to implement another demanding austerity package in order to bring its budget deficit into sustainable territory.

3) A majority of the Greek politicians should sign an agreement guaranteeing their continued support for the new austerity package, even after the elections in April 2012

17 June 2012 – Early elections are held. The New Democracy party leads, winning 29.7% of the popular vote, but doesn't win a majority of seats in parliament. Four days later, a coalition government is formed between New Democracy, PASOK and DIMAR. Antonis Samaras, the president of New Democracy, becomes the new Prime Minister

State of Greek economy in 2012-13

Budget deficit was 8.7% of GDP in 2012 which increased to 12.3% of GDP in 2013. Total debt was 156.9% of GDP in 212 which increased to 175% of GDP in 2013. GDP growth rate was -6.6% in 2012 which improved to -3.9% in 2013. On 30 November 2013, Greece's credit rating is upgraded by Moody's to Caa3 from C. On 25 may 2012, The Athens Stock Exchange general index falls below 500 points for the

first time.

Unemployment

Unemployment was at an all-time high in 2013 with third quarter of 2013 recording highest unemployment rate in past 5 years.

2012(Q1)

2012(Q2)

2012(Q3)

2012(Q1)

2013(Q1)

2012(Q2)

2012(Q3)

2012(Q4)

0

5

10

15

20

25

30

21.923.9

25.5 26.3 27 27.6 27.8 27.6

Unemployment rate

Protests and riots in Greece

The sixth and seventh austerity package in 212 led to widespread civic unrest. Many buildings in the centre of Athens are burned during the riots. On 4th November 2012, a retired pharmacist committed suicide at a short distance from Greece's parliament as an act of protest against austerity. He became a symbol for groups opposing the austerity measures, and violent clashes between police and demonstrators erupted in Athens.

2014-15: The road to recovery

Economic Growth: Recovering from a 6 year long crisis

The Gross Domestic Product (GDP) in Greece was worth 237.59 billion US dollars in 2014. The GDP value of Greece represents 0.38 percent of the world economy.

Greece's economy shrank by 1.1 per cent in the first three months of 2014, and by 0.3 per cent during the second quarter. But the crisis-stricken economy returned to growth in the 3 rd quarter, after 6 years of recession, marking an end to the longest and steepest contractions in the post-war history of Europe. GDP in the 3rd quarter of 2014 rose by 0.7% from the previous year, besting all other Eurozone countries, including Germany, which barely dodged recession.

Owing to the positive reports for the last 2 quarters, at the end of 2014, Greece's central bank slightly raised its forecast for economic growth this year to 0.7% and forecast growth of 2.5% in 2015, but warned about the possible negative effects of the political turmoil gripping the country.

Greek GDP expanded 0.9 percent quarter-on-quarter in the three months to June, from an upwardly revised 0.1 percent growth in Q1. Final consumption expenditure was the main driver of growth as it increased 1.1 percent (+0.1 percent in Q1) boosted by consumer spending of 1 percent (0.1 percent in Q1) and by government spending of 3.8 percent (+2.3 percent in Q1). By contrast, investments contracted further by 10.6 percent, after shrinking 8.4 percent in Q1. Meanwhile exports of goods and services grew 0.1 percent while imports fell 4.9 percent. GDP Growth Rate in Greece averaged 0.24 percent from 1995 until 2015, reaching an all time high of 3.30 percent in the first quarter of 2006 and a record low of -4.70 percent in the first quarter of 2009. GDP Growth Rate in Greece is reported by the National Statistical Service of Greece.

On 15th August, 2015, Greece clinched a three-year bailout worth €86bn (£60bn) after parliamentarians in Athens backed the deal, and Germany backed down on its opposition to the third rescue of the bankrupt country in five years.

Inflation:

The inflation rate in Greece was recorded at -2.20 percent in July of 2015. It was the 29th consecutive fall. Inflation Rate in Greece averaged 8.88 percent from 1960 until 2015, reaching an all time high of 33.70 percent in January of 1974 and a record low of -2.90 percent in November of 2013. Inflation Rate in Greece is reported by the National Statistical Service of Greece.

In Greece, the most important categories in the consumer price index are: food and non-alcoholic beverages (17 percent of total weight); transport (13 percent); housing (12 percent) and hotels, coffee shops and restaurants (11 percent). The index also includes: clothing and footwear (9 percent); health (7 percent); furnishing and household equipment (7 percent); recreation and culture (5 percent); communication (5 percent). Education, alcoholic beverages, tobacco and other goods and services account for the remaining 14 percent of total weight. This page provides the latest reported value for - Greece Inflation Rate - plus previous releases, historical high and low, short-term forecast and long-term prediction, economic calendar, survey consensus and news. Content for - Greece Inflation Rate - was last refreshed on Sunday, August 30, 2015.

Unemployment:

Unemployment Rate in Greece decreased to 24.99 percent in May from 25.58 percent in April of 2015. Youth Unemployment Rate in Greece decreased to 51.80 percent in May from 53.20 percent in April of 2015.

Other key economic indicators in 2014-15:

1. Budget Deficit: The country’s budget deficit was 3.5% of gross domestic product in 2014, which is expected to reduce to 0.2% of GDP by the end of 2015.

2. External Debt: Even after 2 bailout packages and 3 rd one on the way, external Debt in Greece increased to 419411.30 EUR Million in the first quarter of 2015 from 417620.90 EUR Million in the fourth quarter of 2014.

3. Current Account: Greece recorded a Current Account surplus of 1002 EUR Million in June of 2015, down from a 1253 EUR Million a year earlier, mainly due to a worsening of the income balance. However, it is the second straight surplus and the highest since September last year.

4. Capital Flows: Greece recorded a capital and financial account surplus of 676.71 EUR Million in June of 2015.

5. Money Supply:

M0 - Money Supply M0 in Greece stood at 27055 EUR Million in July 2015.

M1 - Money Supply M1 in Greece stood at 95356 EUR Million in July2015.

M2 - Money Supply M2 in Greece stood at 152440 EUR Million in July 2015.

M3 - Money Supply M3 in Greece stood at 153103 EUR Million in July 2015.

Greece – The Road Ahead

In 2016, growth will gain momentum and unemployment will decline somewhat as exports and investment recover while reform momentum is renewed. Deflation will continue due to the very large degree of slack in the economy.

The debt burden will remain very high, and fiscal sustainability requires continued restraint for some time. Fiscal policy should aim at a small primary surplus. Reforms of the tax system and tax collection are essential to raise revenues, while further pension reforms would help contain spending. Structural reforms to lower barriers to competition and investment would boost exports and create more higher-quality jobs. Social policy reforms should aim at a fair sharing of the costs and benefits of adjustment.

The recovery of investment will depend critically on a return of business confidence and on stepping up the pace of structural reform implementation. Better access to credit is also essential. Stabilising the banking system by addressing the high level of non-performing loans is therefore critical.

REFERENCES:

www.bankofgreece.gr

www.worldbank.org

www.imf.org

www.bis.org

www.ecb.europa.eu

www.tradingeconomics.org/greece

www.socialeurope.eu

www.quandl.com

www.wikipedia.org

APPENDIX-1

Government budget balance, GDP growth and debt-to-GDP ratio

Greek national account

1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015b 2016b

Public revenued (% of GDP)[165]

31.0d 37.0d 43.4d 39.0d 38.7 40.2 40.6 38.7 41.1 43.8 45.7 47.8 45.8 48.1 45.8

Public expenditured (% of GDP)[166]

45.2d 46.2d 47.1d 44.4d 44.9 46.9 50.6 54.0 52.2 54.0 54.4 60.1 49.3 50.2 47.9

Budget balanced (% of GDP)[25]

[167]

-14.2d -9.1d -3.7d -5.5d -6.1 -6.7 -9.9 -15.3 -11.1 -10.2 -8.7 -12.3 -3.5 -2.1 -2.2

Structural balancee (% of GDP)[168]

−14.9f −9.4g −4.2g −5.2h −7.4h −7.8h −9.7h −14.7h −9.8 −6.3 -0.6 2.2 0.4 -1.4 -2.3

Nominal GDP growth (%)[169]

20.7 12.1 5.6 3.2 9.4 6.9 4.0 −1.9 −4.7 −8.2 −6.5 −6.1 −1.8 -0.7 3.6

Real GDP growthj (%)[171][172]

0.0 2.1 4.0 0.9 5.8 3.5 −0.4 −4.4 −5.4 −8.9 −6.6 −3.9 0.8 0.5 2.9

Nominal GDPk (billion €)[169][175]

45.7 93.4 141.7 199.2 217.8 232.8 242.1 237.4 226.2 207.8 194.2 182.4 179.1 177.8 184.3

Debt-to-GDP ratio (%)[30]

[176]

68.3 93.1 99.6 106.9 103.4 103.1 109.3 126.8 146.0 171.4 156.9 175.0 177.1 180.2 173.4

- Overall yearly ratio change (%)

6.5 0.6 11.1 11.8 −3.4 −0.4 6.2 17.5 19.2 25.3 −14.5 18.1 2.1 3.1 −6.8

Source: Eurostat and European Commission