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From Grexit to Growth: How feasible is Greece exiting the crisis? Nicos Christodoulakis LSE, March 2013 The dual problem of Debt and Unemployment in Greece Fighting unemployment by creating debt failed: Debt up from 21% to 100% of GDP! Unemployment up from 1.7% to 8% Fighting debt by creating unemployment is failing: Debt from 110% to 190% of GDP! Unemployment from 8% to 26% But why? All deficits seem to improve: crisis Government Balance from -16% Primary surplus from -11% Current Account from -15% to to to - 4.5% of GDP + 1.8% of GDP - 7% of GDP Debt burden increases in recession After 2008, Greece adds on debt 5-15% of GDP every year, due solely to the lack of Growth Greek economy is unstoppably contracting Why predictions have so pathetically failed? The Greek Banks’ capitalization Greek Banks HAIRCUT PSI+ Recapitalization Injection Bonds Bonds Debt Debt Bonds Debt Installment Greek Government Debt cut Debt restored Stripping the Social Funds Social Funds Haircut PSI+ Deficit finance Payment Bonds Bonds Bonds Debt Debt Debt Transfer Government TOTAL DEBT = 0 Debt cut = 0 Same obligations Wage cut -23% Unit Labour Cost Competitiveness, back to the 1995 level … but Exports are not taking Off ! 2009-2012: Tax rates rise, Revenues fall ! Austerity is highly inequitable Personal to Corporate taxation up, from 3 to 6 times! Institutions are crumbling … Country ranking, World Economic Forum, 2001-2012 Between 2003-2013, Greece lost 60 positions overall and 70 positions in the efficiency of public institutions 3+1 PREREQUISITES for EXITING RECESSION 1.Recapitalize Banks via EFSF, not Greek Debt (Financial Times, editorial, 22/2/2013) 2.Create a Growth Front: Use CSF, EIB, Privatizations 3.To regain credibility, endorse fiscal rules in the Constitutional Amendment 4. Change the Policy Mix: More reforms, less austerity Relax Fiscal Adjustment: More Public Investment Fewer taxes to raise demand & liquidity Selective actions, no universal cuts Speed-up reforms Evaluation with bonus/malus Strip privileges of political class (wages, pensions) Unify terms of employment/rewards/social security in private and public sectors Debt Forecast 2020 180 Percent of GDP 170 160 150 140 130 120 (a) EC_2012 (b) quick adj (c ) gradual adj 110 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 More investment, fewer taxes can spur growth, cut unemployment & achieve debt sustainability