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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? 2 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. 3 Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu 8 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 4 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 5 Sovereign Spread vs. Cumulated Current Account 10 Greece y= 9 0.0145x2 - 0.2293x + 1.0882 R² = 0.9458 8 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 6 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? 7 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 8 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) 30 Lithuania -10.0 Greece Estonia -15.0 Latvia -20.0 9 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. 10 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 11 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. 12 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 13 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 14 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). 15 Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu ABOUT CEPS Founded in Brussels in 1983, the Centre for European Policy Studies (CEPS) is widely recognised as the most experienced and authoritative think tank operating in the European Union today. CEPS acts as a leading forum for debate on EU affairs, distinguished by its strong in-house research capacity, complemented by an extensive network of partner institutes throughout the world. Goals – Carry out state-of-the-art policy research leading to innovative solutions to the challenges facing Europe today, – Maintain the highest standards of academic excellence and unqualified independence, – Act as a forum for discussion among all stakeholders in the European policy process, and – Provide a regular flow of authoritative publications offering policy analysis and recommendations. www.ceps.eu 16