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An Economic Report On Greece

By Liban-Kiggathi-Ali Nov 20, 2014 1524 Words
An Economic report on Greece

Since the crisis began Greece has lost nearly 25% of its GDP.

The percentage change in Greek GDP was volatile but overall declined from 1991-2006. During this 15 years the highest percentage change experienced was 23.5 %( 1991), while the lowest was 6.6 %( 1999). This did start to pick up after the country joined the Eurozone and reached a 6 year high percentage increase in GDP of 10%. This may have been due to the cheap finance available to Eurozone. This compares to Germany where the percentage change in GDP got no higher than an 8.4% change and no lower than 0.7% over the same period. Indicating the changes in German GDP were much more stable. A decline at a faster rate in the percentage change in GDP then occurred from 2008. The percentage change was a 4.6% change to a -0.5% decrease. A decrease was recorded in 2011 and the same was expected for the next year.

The percentage change in GDP and the rate of unemployment generally follow the expected trend in the graph above, the rate at which GDP was increasing decreased from 1991-93, while unemployment increased during this period, in 1999 unemployment is at an all time high for the years leading up to the period and the rate at which GDP is growing is also at its lowest up until this time.

Greek government debt peaks at 168% in 2013 according to estimates. You can see more effects of the 2008 crisis on the Greek economy as government debt increases at an alarming rate from 2008 onwards, and while even German debt is increasing as well, it is at a stable rate.

Since Greece’s acceptance into the Eurozone it has run a budget deficit every single year. The austerity measure Greece has had to implement has meant that whilst they are trying to cut G, T just carries on falling. Making their job nearly impossible to try and balance the books or even stop the deficit without some sort of fiscal stimulus (boosting AD through G). The deficit from 2008-2009 was the largest deficit increase in the period (nearly doubling).

Government spending in Greece peaked at 48% in 2009, this may have been expected as unemployment increased during this period and benefits would have increased. This also explains why the budget deficit in Greece would have increased significantly at this time as they would have received less T due to the increased unemployment, combining with an increased amount spent on G. Government expenditure was stable for the 15 year period to 2006, no lower than 36% and no higher than 41%.

So what’s wrong with Greece?
A combination of various types of problems have lead Greece to the situation it finds itself in today, high unemployment (especially youth unemployment), national debt, tax evasion and a large underground economy. There is no magic cure for these issues as they may be embedded into the culture of society, however I will look at suggestions on as how different policies can help solve these specific issues. Youth unemployment reached nearly 62% for 15-24 year olds in Greece. Figures released on the 14th February show youth unemployment are a long term issue that can have a severe effect on the long run potential of an economy if the productivity of the labour force is not sufficient. Studies have shown that the long term unemployed usually are not as productive as their employed counterparts. One method adopted by Germany to lower youth unemployment(currently stands at 8%) is to give employers tax incentives to higher younger workers, this sounds very simple however has proved very successful and the long term gains from having as much young people employed as possible cannot be understated. However the problem with this is that the Greek government would have to find the finances to do this due to their austerity package they are trying to reduce government spending and increase taxation, this possible solution would decrease taxation in the short run. Nevertheless there is no short term solution to youth unemployment and the rewards will be far greater long term than the price that is currently being paid with 6 out of 10 young people being unemployed.

Greece have a culture of tax evasion in the country, this is not a new problem and governments of new and old have very much struggled to try and solve this problem. There are two main reasons as to why a large amount of the labour force in Greece don’t pay tax

Firstly, politicians are not trusted; if we thought we didn’t trust politicians in the UK it is a lot worse in Greece. The Greek people believe that their tax money is just being offloaded into politician’s bank accounts in Switzerland and is not being used to benefit the Greek people. Secondly, it is widely acknowledged that ‘backhanders’ or secret payments are required for some services e.g. ‘’If you go to the hospital because your child has a bloody knee and the physician says you need to pay me a €200 bribe or I won't even look at your child, then people will think why should I have to pay taxes when I have to pay these extras anyway?" This combined with increased Government spending due to very high unemployment results in an unsuccessful austerity plan essentially as taxation is falling, the opposite of what is required to lower national debt. One way Greece may want to address the issue of tax evasion may be by naming and shaming those who are believed to be evading tax. ‘’ Using studies conducted on persuasion and peer pressure, the British tax agency, Her Majesty's Revenue and Customs (HMRC) has been testing different strategies to make people pay their taxes’’. Greece may want to listen as this would relatively cost efficient in comparison to hiring more public sector tax officers to investigate evaders. This would also not hamper their austerity plan imposed upon them as T is likely to increase much more than the increase in G. The underground economy is another major issue which Greece must find a solution for. As a percentage of GDP, Greece has the largest reported underground economy in the Eurozone as shown below.

‘’The state should create bridges between the shadow and official economies. One model is a voucher system for household help, which is a discreet state subsidy to bring shadow workers into the social security system’’. This is one method suggested by Friedrich Schneider, however this is a risky strategy if it was to be employed by Greece, this is because the government would have to pay for these vouchers, increasing G in the hope that this may bring more force more people into the tax system due to this and shrink their underground economy.

What the future holds
‘’As Greece's economy is in for a demand-led contraction, only supply-side reforms can restore economic growth and investor confidence in Greek debt’’. Greece’s current economic policy was fiscal consolidation and some economic reform. A deep cut to public spending, tax increases and a crack-down on tax evasion have all been factors deemed crucial by the IMF, EU and ECB to solving the Greece debt problem Most spending cuts have been to the civil service workers, on the revenue growth side income tax increases and VAT increases were accompanied by increasing effort to find tax evaders. This once again highlights that the groups mentioned above are willing to take unsustainably high unemployment, massive contractions in the economy leading to major social unrest for the aim of preventing a Greek exit from the Eurozone. These austerity measures have directly conflicted with the aims of the Greek government pre-2008, however a default would also have been very likely if Greece did not agree to these austerity plans. Fiscal policy to boost AD would include lowering of taxes resulting in consumers having more disposable income, however as we know this directly goes against what Europe have demanded Greece pursue and AD suffers as a result, meaning GDP will not grow significantly while austerity is in action. While it is obvious that some of Greece’s issues are of a cyclical nature, it cannot be forgotten the structural issues that Greece suffer from, the supply side of the economy needs reform in cohesion with the demand side policies. Reducing the power of trade unions and the reduction of labour market regulation can increase the competitiveness of a nation’s workforce; this is especially crucial for Greece as they are in a spiral of a shrinking economy, high unemployment and lower tax revenues. Greece is bankrupt; nevertheless the austerity measures are believed to be the cure for this. All else being equal, I believe Greece will continue to suffer very high unemployment, GDP will be a slightly smaller than it is currently (Signs are that the economy may start next year to flat line) national debt will continue to be well about 100% of GDP in 2016 and Greece will still be running a deficit over the 3% target. Nevertheless the outlook for Greece isn’t as bleak as it was a year ago and the situation with the austerity measures is that it is predicted to have the Greek national debt significantly by 2016.

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