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? Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu 2
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. Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu 3
8 Cyprus 6 4 Current Account Balance as % of GDP 2 0-2 -4-6 -8 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Cumulated Current Account -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 -8-10 -12-14 Cumulated Current Account Balance: -342bn EUR (2012) -16-18 -20 Centre for European Policy Studies www.ceps.eu 5
Greece y = 0.0145x 2-0.2293x + 1.0882 R² = 0.9458 Sovereign Spread vs. Cumulated Current Account 10 9 8 7 Portugal Slovakia Malta Cyprus Spain 6 5 4 Sovereign Spread Feb. 2013 Slovenia 3 Italy Ireland 2 1 Belgium France Austria Netherlands 0 Luxembourg Germany Finland -200-150 -100-50 0 50 100 150 200 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? Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu 7
GDP sacrifice for CA adjustment Cumulated real GDP Growth in percent 5.0 Italy Bulgaria Ireland Change in CA 0.0 in % of GDP -5 0 Spain 5 10 15 20 25 30 Portugal -5.0 Lithuania -10.0-15.0 Greece 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 0.0 Spain Ireland -5 0 5 10 15 20 25 30 Portugal Change in CA Greece would have been at around -4%, in % of GDP if its export performance would have been -5.0 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) -10.0 Lithuania Greece Estonia -15.0 Latvia -20.0 Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu 9
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. Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu 10
1.6 Real consumption per capita, 2000=100 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. Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu 12
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
1.4 Control of Corruption index 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). Thinking ahead for Europe Centre for European Policy Studies (CEPS) www.ceps.eu 15
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