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Vignettes on Greece
by
Daniel Gros
Panel discussion ‘Euro-crisis & Greece’
March 20, 2013 l Hellenic Observatory l London
Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
Outline:
1. Fiscal adjustment important, but external
adjustment key.
2. Depth of recession due to ‘extraordinarily’ bad
export performance.
3. Continuing risk premia related to foreign debt.
4. Is fall in consumption unacceptable? Short
versus longer run view.
5. Key long term issue is deterioration of domestic
governance (Greece today much worse than 10
years ago). Why? Can it be reversed?
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Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
External adjustment
1. Classical case of sudden stop.
2. ECB plus ESM allowed Greece to stretch out
adjustment.
3. But is now close to be achieved.
4. ‘Legacy’ : foreign debt.
5. PSI had limited impact on foreign debt =>
spreads remain high.
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Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
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Cyprus
6
Current Account Balance as % of GDP
4
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-2
-4
Cumulated
Current Account
-6
-8
-10
-12
-14
Centre for European Policy Studies • www.ceps.eu
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0
Greece
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-2
Current Account Balance as % of GDP
-4
-6
Cumulated Current
Account Balance:
-342bn EUR (2012)
-8
-10
-12
-14
-16
-18
-20
Centre for European Policy Studies • www.ceps.eu
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Sovereign Spread vs. Cumulated Current Account
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Greece
y=
9
0.0145x2
- 0.2293x + 1.0882
R² = 0.9458
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Sovereign Spread Feb. 2013
7
6
Cyprus
5
Portugal
4
Spain
Slovenia
3
Italy
Ireland
2
Slovakia
Malta
1
0
-200
-150
-100
-50
Belgium
France
Austria
0
Germany
50
Netherlands
Finland
100
150
Luxembourg
200
Cumulated current account as % GDP (1995-2012)
Centre for European Policy Studies • www.ceps.eu
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Why was fiscal adjustment so costly
1. Sacrifice ratio for Greece very unfavorable.
2. Fiscal adjustment was brutal if measured from a
one year peak.
3. Measured from pre election outlier adjustment
was gradual.
4. But no offset from exports.
5. Why did exports fall?
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Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
GDP sacrifice for CA adjustment
Cumulated real GDP Growth in percent
5.0
Italy
Bulgaria
Ireland
0.0
-5
0 Spain
5
Portugal
10
15
20
25
Change in CA
in % of GDP
30
-5.0
Lithuania
-10.0
Greece
-15.0
Estonia
y = -0.7447x + 1.5826
R² = 0.9884
Latvia
-20.0
Centre for European Policy Studies • www.ceps.eu
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Sacrifice ratio
Cumulated real GDP Growth in percent
5.0
Italy
Bulgaria
Spain
0.0
-5
0
Ireland
5
Portugal
-5.0
10
15
20
25
Change in CA
in % of GDP
Greece would have been at around -4%,
if its export performance would have been
similar to the one of Spain or Portugal,
i.e. increase in export of 3%,,
instead of a fall more than 2p.p (% of GDP)
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Lithuania
-10.0
Greece
Estonia
-15.0
Latvia
-20.0
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Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
Adjustment costs not acceptable?
1. Relative to German consumption path Greece is
still ahead.
2. Problem is always change with respect to recent
past, not level.
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Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
Real consumption per capita, 2000=100
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Germany
Greece
Cyprus
Centre for European Policy Studies • www.ceps.eu
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Why were reforms not implemented?
1. Governance indicators have deteriorated.
2. Without improvement in corruption, efficiency
of government reforms cannot be implemented
and economy might react only sluggishly to price
signals.
3. Cyprus better on this front.
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Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
Control of Corruption index
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-0.2
-0.4
GREECE
EU27 (excl. GR)
ESTONIA
CYPRUS
Source: WGI index, World Bank
Centre for European Policy Studies • www.ceps.eu
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Control of Corruption index
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-0.2
-0.4
GREECE
EU27 (excl. GR)
ESTONIA
BULGARIA
CYPRUS
Source: WGI index, World Bank
Centre for European Policy Studies • www.ceps.eu
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Conclusion
– Sudden stops always lead to deep recession.
– Depth of recession and speed of recovery
depends on export growth.
– Fall in Greek exports difficult to explain.
– Fall in consumption brings Greece to German
level (if 2000 = 100).
– Implementation of reforms, capacity to
manage the crisis low due to low quality of
governance (much worse than 12 years ago).
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Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu
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