Policies for a Stronger Greek Economy

Actions for the Next Decade

Panagiotis E. Petrakis, Pantelis C. Kostis

• Publisher: Palgrave Macmillan
• Year: 2020
• ISBN:
  9783030470791
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

This book presents a comprehensive economic plan for Greece to encourage growth and avoid future crises. This book emphasizes structural reforms and the rational financial management and analysis of private and investment infrastructures. This book also looks at the country's production and places an emphasis on revitalizing its technological structure. The analysis in this book includes policy implementation (in the short-, medium- and long-term) across important topics such as sustainability, inclusivity, pro-growth social behavior, and dynamic economic growth. This book takes an evolutionary economics perspective, looking at important structures throughout society like governance, political functioning, cultural attitudes, and growth. With its comprehensive approach, this book is crucial reading for scholars and policymakers interested in the Greek economy.

© The Author(s) 2020

P. E. Petrakis, P. C. KostisPolicies for a Stronger Greek EconomyThe Political Economy of Greek Growth up to 2030https://doi.org/10.1007/978-3-030-47079-1_1

Begin Abstract

1. Policies for Immediate Action and Medium-Term Policies

Panagiotis E. Petrakis¹ and Pantelis C. Kostis¹

(1)

Department of Economics, National and Kapodistrian University of Athens, Athens, Greece

Panagiotis E. Petrakis

Email: [email protected]

End Abstract

1.1 Introduction

The Greek economy during the years of 2008 crisis experienced a significant decline in its production and deterioration in almost all of its macroeconomic variables. From 2008 to 2016, GDP decreased by 66.29 billion euros, as throughout this period (with the exception of the year 2014) the growth rate was negative. The major effort to restore the economy from 2017 to 2019 (growth rate from 1.5 to 1.9% per year), was violently halted by the emergence of the Covid-19 pandemic and its significant impact on the economy due to the measures taken to limit its spread in Greek society (lockdown of the economy).

The planning of the next day should, anywise, have been careful for the Greek economy, while the existing effects of the pandemic make this planning even more compelling. The Greek economy enters a decade that is expected to be particularly critical to its recovery.

When the political mandate is given to implement a new economic policy, there are two levels of action: the first one has urgent direct character. This usually involves policies being put directly into practice, having results before long. The second includes policies that are being directly implemented, with the results occurring in the medium-term.

The first category includes handlings related to the closure of the output gap and effective demand. The second includes handlings related to fiscal policy, the reorganization of the banking sector and the effective management of the productive potential of the wider public sector.

This chapter focuses on the presentation of a series of actions and policies for immediate action or for action in the medium-term for the Greek economy. More specifically, Sect. 1.2 presents issues related to the output gap of the Greek economy and the importance of its management for the implementation of economic policy in the Greek economy. The following Sect. (1.3) presents economic policy guidelines for the revitalization of the financial sector. Next (Sect. 1.4), the medium-term fiscal strategy for the Greek economy is being presented and finally, Sect. 1.5 presents the critical—for various sectors of the economy—issue of the efficiency of the public property’s management and privatization.

1.2 The Output Gap

The factors of production of an economy (physical capital, labor, human capital) are given at any point of time and they determine its maximum production capacity. When these factors are used effectively, then the level of potential product of this economy is also determined.

One of the main questions that concerns economies is whether or not the utilization of the productivity factors is fully effective. In other words, whether the produced product (GDP) is above or below the potential product (potential GDP). Potential GDP is essentially an indicator summarizing the economy’s capacity for long-term, sustainable, and non-inflationary economic growth. Thus, the output gap of an economy is calculated, as the difference between its actual product and its potential product. This is an indication of the degree of over-using or under-utilization of productive resources in relation to potential GDP.

The potential product and the output gap are two important tools of the economic science in order to evaluate the production capacity of an economy and determine its position in the economic cycle. These concepts are now an essential component of the budgetary surveillance process, as derived from the Stability and Growth Pact, as well as in assessing the effectiveness of the structural reform program, pursued in the context of the priorities for long-term economic growth.

The output gap can be either positive or negative. Negative output gap means that the actual produced product is below the full production potential of the economy. A significant disadvantage of the prevailing views on the output gap (Borio, Piti, & Mikael, 2013), is about how it is measured, since ignoring the possible economic conditions that determine fluctuations in economic activity can lead to less accurate estimates about the potential product.

For example, an output gap of −10% means that the economy in question can produce 10% higher GDP than the actual, by incorporating in the production process the inactive production factors up to the levels taken as a hypothesis for calculating the gap. In other words, the output gap is an indicator of potential productivity that exists but is not being realized. When the output gap has positive values it turns into a surplus of production, meaning that the economy is over-using resources, it’s reaching its limits, that is, full employment levels, which is a non-sustainable situation in the medium to long term. A typical example of an economy with positive value is Germany. German economy has an extremely low unemployment rate of 4%, well below the historical averages used by the OECD to calculate the output gap. In other words, German economy has been producing higher GDP in recent years than if the employment indicators of the productivity factors were at their medium- to long-term equilibrium levels. The reason is that the German economy serves the demand of other economies than the domestic demand, in a way that is quite profitable judging by the monstrous surpluses in its current account over the last years.

The important issue arising from the debate on the output gap of an economy, is that the phase in which an economy is determines the type of economic analysis that is applicable and the economic policy that should be followed in order to get the economy out of the output gap regardless of whether it operates below or above its productive potential. In theory, as long as an economy is at the point where it has not exhausted the available margins of economic production potential, the theoretical and political analysis of growth will belong to the field of macroeconomic analysis and when it is above its potential it will belong to the field of development analysis and policy. So basically we accept a more general logic that argues that short-term problems cannot be addressed unless they are placed in a broader long-term context.

However, the analysis should be multi-dimensional regarding the choice of theoretical and applicable policy. The period after the Great Recession of 2008 or the crisis of Covid-19 are good examples where demands for macroeconomic analysis and growth analysis coexist for both situations after economies have been operating at a level below their potential for a long time.

Hence, macroeconomic analysis and policy should be used when the economy is operating at a level below its potential. In other words, if the economy is at the point where it has not exhausted the available margins of economic productive capacity we are in areas where theories of macro-economics are being applied. Typically, during a recession or during an external shock, a negative output gap is generated since the economy produces less than it could. In such a case, a government could use monetary policy in order to strengthen economic growth (e.g., through lowering interest rates) or fiscal policy (e.g., expansionary fiscal policy in order to increase government spending).

On the contrary, if an economy has exhausted the available margins of economic capacity and the question of growth for the production capacity arises, then it is in areas where growth theories apply and development analysis and policy are implemented. A typical example in such a case is the implementation of structural reforms.

Regarding Greek economy, from 1980 to the present day, the output gap has negative values for most years. As shown in Fig. 1.1 presenting the percentage ratio of actual product and potential product, only in the years 1980, 1989 to 1992, and 2002 to 2009 the output gap recorder positive values. Of course, the recent global financial crisis highlighted the structural weaknesses of the Greek economy, resulting in the output gap falling to significantly negative prices and has remained in them until today. Indeed, the crisis of the Covid-19 pandemic seems to bring the real output of the economy to an even lower level than its potential output since the 2010 crisis.

Fig. 1.1

Output gap in the Greek economy (%)

(Source Oxford Economics [Global Economic Model] and authors’ own creation)

However, the next decade should be a period of recovery for the output gap of the Greek economy. Based on the above discussion, three types of macroeconomic policies can be implemented to fill the output gap:

• The first relates to monetary policy by adopting the theoretical-positive relationship between the functioning of the financial sector and the productive sector of the economy. As for Greece, this policy is limited to the issues of reorganization of the banking system (see Sect. 1.3) due to accession to the Eurozone, since the issues about quantitative easing and interest rates belong to the European Central Bank (ECB).
• The second relates to fiscal policy and the management of the budgetary area (see Sect. 1.4). The higher the fiscal space, the less the need for Central Banks intervention through unconventional policies. The use of fiscal space is one that will be able to increase limited demand and lead to sustainable growth in the Greek economy.
• Finally there is a third version related to the creation of growth expectations. This is an interesting prospect and refers to the creation of a “growth environment“ based on the reduction of tax burden and to enhance creative motivations.

1.3 Revitalizing the Financial Sector

The way the financial system is organized and the relative importance of the intermediary process in relation to arm’s length transactions has a number of advantages, but at the same time, under certain circumstances, it also raises important questions about the smooth functioning of economic activity (Petrakis, 2011).

As Petrakis (2011) points out, In economies where the intermediary process of the banking system is the main source of financing for the business sector, cooperation between intermediaries and enterprises provides the productive units of the economy with financing at the time when they most need it, during economic turbulence and financial crises. In these periods, financing through the market mechanism (for example issuing and distributing new securities) is only possible for robust companies (which are likely to be able to finance their investments in other ways, e.g., by retained earnings, etc.) because of the negative psychology of investors and their refusal to take higher levels of risk. After all, even those companies that retain the ability to have access to financing from the market mechanism in times of instability and uncertainty, do so by paying significantly higher costs. Because of all of the above, economies that rely to a lesser extent on the decentralized market mechanism, experience less force of turbulences.

On the other hand, economies that rely to a greater extent on the “invisible hand” of the money market, are in a better position to respond to serious technological changes and adopt the innovations that appear. In these cases, investors can, much more easily, be freed from sectors of the economy with an uncertain future (with whatever political, social, and other consequences this attitude may involve), while offering funding to the sectors with the highest growth rates. Typically, these economies are more dynamic and record higher growth rates, precisely because of their ability to invest in the most promising technologies and to adopt innovations, changing more often the structure of their productive activity.

The organization of the financial system, in addition to the business world, can greatly affect the consumption of households. In general, in economies in which most of the financing is carried out through the mediation of the banking system, consumers are most affected by income shocks. On the contrary, the ability to carry out arm’s length transactions allows households to normalize their consumption level (for it allows them to borrow using their property as collateral, taking advantage of periods of euphoria of the real estate market). However, at the same time, in these economies there is a greater dependence of the wealth of individuals on assets in their possession that are freely traded in markets. In this way, the wealth of households is directly related to the conditions in the respective markets and—thus—their well-being is exposed to sharp changes in asset prices.

From the above it can be concluded that no form of financing of economic activity is a necessary and sufficient condition for the growth of the economy (Levine, 2001; Rajan & Zingales, 1998).

However, in the Greek economy, the problem of the under-functionality of the financial system outside of systematic banks widened with the crisis of 2010, while it is obvious that policy measures should be adopted for four areas of economic policy. The first relates to the banking system consisting of the four systemic banks. The second is associated to cooperative banks, the third to the shadow finance system and the fourth to the development banking sector and development finance.

Until the appearance of Covid-19 the data was quite promising for the 4 system...

Table of contents

• Cover
• Front Matter
• 1. Policies for Immediate Action and Medium-Term Policies
• 2. Sustainability Policies
• 3. Policies for Sustainable Governance
• 4. Policies for Enhanced Inclusivity
• 5. Policies for Pro-growth Social Behavior
• 6. Policies for Dynamic Economic Growth: Medium- and Long-Term Policies
• 7. Simulation of the Policies Implementation up to 2030
• 8. The Risk Scenario Analysis
• Back Matter