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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