Loukas Tsoukalis, Professor of European Integration at the University of Athens and President, Hellenic Foundation for European and Foreign Policy

1. Loukas Tsoukalis
Istituto Affari Internazionali
Roma, 6 February 2013

2.  Greece as catalyst for transformation of
international financial crisis to a crisis of
the eurozone in 2009
1. Budget deficit (15.4% of GDP in 2009)
2. Current account deficit (15% in 2008)
3. Credibility deficit (Greek statistics)

3.  Essentials of Greek problem:
1. Public finances gone out of control, esp. in 2007-9
2. Competitiveness gradually eroded
3. Lack of structural reforms
4. Clientele political system
 In Greece, it is mostly public debt, not private as in Spain
and Ireland. Cheap borrowed money provided mostly by
foreign lenders on the assumption that sovereign risk was
zero and high growth rates could be sustained forever.
Meanwhile, clientelism grew and reforms were postponed.

4.  Greek problem also part of a systemic European
problem reinforced by the bursting of the international
financial bubble.
 Banking crisis
 Sovereign debt crisis
 Competitiveness problem in a currency union
 A currency without a state (Tommaso Padoa-Schioppa)

5.  When reality hit in the end of 2009, Greek government
dithered and so did its European partners.
 Since May 2010 (first adjustment programme), Greece
has become a test-case for new policies at national
and European level.
 Stress test for political system, economy and society.
 ‘Unthinkables’ become reality in Greece and the EU.

6. GENERAL GOVERNMENT DEFICIT/SURPLUS
AS A PERCENTAGE TO GDP (2001-2012)
0.0
-2.0
-4.0
-6.0
-5.7
-8.0 -6.6
-10.0
-9.8 -9.4
-12.0 -10.7
-14.0
General government
-16.0 deficit/surplus as % GDP
-15.6
-18.0
2001-2007: Average annual general government deficit/surplus as % of GDP
2012: Forecast, European Commission, "The Economic Adjustment Programme for Greece", December 2012
Eurostat
 Unprecedented budgetary consolidation (9% of a rapidly declining GDP
between 2009 and 2012)

7. INTERNAL DEVALUATION: NOMINAL COMPENSATION PER EMPLOYEE
(1998-2012)
8.0
6.6
6.0
4.0
4.0 3.6 3.5
2.0
0.0
-2.0 Nominal compensation per
-2.6 employee (annual percentage
-4.0 -3.4 change)
-6.0
-6.8
-8.0
1998-2002, 2003-2005: 5-year averages
2012: Forecast
European Commission, "European Economic Forecasts- Autumn 2012"
 Cumulative decline of nominal unit labour costs by 14% in 2010-12

8. CURRENT-ACCOUNT BALANCE AS A PERCENTAGE OF GDP
(2001-2012)
0.0
-2.0
-4.0
-6.0
-5.8 -5.8
-6.5 -6.5
-8.0 -7.2 Current account balance as
-7.6 % GDP
-10.0
-10.1 -9.8
-12.0 -11.4 -11.1
-14.0
-14.6 -14.9
-16.0
2012: Forecast
IMF
 Improvement of current account balance by 9% of GDP in 2008-12,
but largely due to the shrinking of domestic demand

9.  Slow pace of structural reforms, accelerating since mid-
2012
 Pension reform
 Labour market
 Closed professions
 Restructuring of the state
 Privatisations

10. GENERAL GOVERNMENT GROSS DEBT AS A PERCENTAGE OF GDP
(2001-2012)
180.0 170.6
160.1
160.0 148.3
140.0 129.7
120.0 112.9
102.1
100.0
80.0
60.0 General government
40.0 gross debt as % GDP
20.0
0.0
2001-2007 2008 2009 2010 2011 2012
2001-2007: Average annual general government gross debt as % of GDP
2012: Forecast, European Commission, "The Economic Adjustment Programme for Greece", December 2012
Eurostat
 Public debt restructuring: ‘haircut’ of private holders of Greek public debt
(total €200 billion) at 53.5% of the outstanding face amount% in present
value in Feb-March 2012, followed by debt buyback of €32 billion in Dec.
2012

11.  Deadly spiral of austerity and recession
sustained by fiscal consolidation, monetary
squeeze and speculation on Grexit.

12. ANNUAL AVERAGE GROWTH RATE (2001-2012)
6.0
4.2
4.0
2.0
0.0
Real GDP growth rate
-2.0 -0.2
-4.0 -3.1
-4.9
-6.0
-6.0
-8.0 -7.1
2001-2007: Annual average growth rate
2012: Forecast
Eurostat
 Cumulative decline of GDP by 20% between 2008 and 2012. Further negative
growth expected in 2013.

13. UNEMPLOYMENT RATE (2001-2012)
25.0 23.6
20.0
17.7
15.0
12.6
9.8 9.5
10.0
7.7
Unemployment rate
(% labour force)
5.0
0.0
2001-2007: Annual average rate
2012: Forecast, European Commission, "European Economic Forecasts- Autumn 2012"
Eurostat

14.  Partial implosion of political system, rise of
extremism, society close to nervous
breakdown
Coalition Government accelerating implementation
of adjustment programme since mid-2012
.........but risk of accidents

15.  Given where we started, adjustment was bound to be
painful and long. Yet, the pain has been much stronger
than anticipated and the suffering has lasted
longer, because of the ineptitude of much of the Greek
political class, the incoherence of the European political
system and a faulty economic strategy.
 Frontloading of adjustment?
 Fiscal multipliers?
 Sustainability of public debt?

16.  Greece needs a peaceful revolution
 Greeks need to take ownership of a wide ranging
programme of reforms; they cannot simply be
imposed from outside.
 Together with other countries of the beleaguered
South, Greece needs time, money and an external
environment more propitious to growth.
 And these can be provided by Europe as part of a
new grand bargain.

17. NEW EUROPEAN GRAND BARGAIN
 Banking Union
 Recapitalisation of banks
 Fiscal and Economic Union
 Symmetry of adjustment
 Growth policies
 Debt sustainability
 Democratically regulated markets or market driven democracies?
Restore confidence in the irreversibility of the currency union
Restore trust between countries