I want to take a quick look at Greek external debt and try to discern its dynamics before and after EMU accession.
I found some data from the Joint External Debt Hub which are not that detailed as far as sectoral breakdown is concerned but hey like they say, make do with what you have. I think the point I want to make gets across anyway. Here's the chart for some external debt aggregates.
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| source: Joint External Debt Hub |
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| source: Joint External Debt Hub |
As you can see Greek external debt growth picked up only after the Euro's introduction. That means that up until then the Greek state financed a proportionaly larger part of its deficit spending in the domestic market (i.e. the Greek banking sector in a large part).
Multiple reasons could be cited for that (the depreciating Drachma, a track record of large fiscal deficits, high inflation etc.).
The fact that, until EMU accession (since external financing was severely limited) fiscal deficits were in a large part financed through the Greek banking sector meant that the public sector crowded out the private sector and created massive distortions. Here's a chart showing the ratio of claims on the general government vs. claims on the other resident sectors (i.e. private sector).
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| source: Unied Nations, own calculation |
Of course this had a catastrophic impact on gross fixed capital formation, which was in total freefall until claims on general government started falling as a % of total and more funds started being channeled to the private sector.
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| source: AMECO, own calculations |
And a further negative side-effect of this was what the following chart shows, the stagnation of real labour productivity for almost two decades and up until EMU accesion - again. Since talk is cheap here's the chart.
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| source: AMECO |
So the fact that the Greek government chose the highly inflationary and all-around detrimental policy of running high fiscal deficits had a series of rather negative consequences on the Greek economy.
Under certain circumstances all these could become a possibility (or even more than that) again...
P.S. To help you visualize what high fiscal deficits actually means I have plotted the Greek state budget balance's evolution over time.
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| source: OECD |
How can one be so ideologically blinded as to blame the regime in the "old days" for the absence of external-debt financing, when it is precisely that external-debt that bankrupted Greece as a member of the Eurozone (how could it be otherwise since the euro is practically a foreign currency that Greece cannot print) is beyond me.
ReplyDeleteAnd no, the sad state of the Greek private sector cannot be blamed on the supposed "crowding out" due to the (irrelevant) high government deficits. These deficits provided plenty of capital for the Greek private-sector to finance itself and it's investments, just not in the form of debt. It was a blessing in disguise.
The poor investment decisions of the Greek private sector were seen in action during the stock-market boom-and-bust of the late 90's, and of course during the exponential increase of private-debt in the 00's. Where did the money go? Not in productive investments. But the author prefers this regime to that of the old days (which he ironically labels "good"), even if in the old days Greece never experienced such high current-account deficits and import surges as it did during the euro years.
First of all, thank you for taking the time to read the post.
DeleteNow, let me go through your arguments.
I quote you, “And no, the sad state of the Greek private sector cannot be blamed on the supposed "crowding out" due to the (irrelevant) high government deficits. These deficits provided plenty of capital for the Greek private-sector to finance itself and it's investments, just not in the form of debt. It was a blessing in disguise.” Now, as far as the deficits providing plentiful capital to the Greek private sector, the fact that in real terms fixed investment stagnated throughout the high deficits period and only overtook its 1980 level in 1998 (i.e. when the deficit reduction drive had already started) is something that obviously eludes you. What’s more I didn’t blame the sad state of the Greek private sector on any one factor (it is a multi-factor affair as most things in real life), so please stop putting words in my mouth.
Moreover, private sector investment evaporated since it went down from 26,7% of GDP in 1980 to a low of 16% in 1995, but hey “those deficits provided plenty of capital for the Greek private sector to finance itself and its investments”.
You also say “But the author prefers this regime to that of the old days (which he ironically labels "good"), even if in the old days Greece never experienced such high current-account deficits and import surges as it did during the euro years.”. Well, the "old regime" brought on a hell of an import surge, since imports spiked by ~274% in the 1980 – 2000 period and the country’s Goods & Services Balance went from a ~3,5% deficit in 1980 to a 10,9% deficit in 2000, while it only widened from a 10,9% deficit in 2000 to a 12,6% deficit in 2008 (the Euro years highest). So it seems that the bulk of the widening was done during the Drachma years. But hey no imports surge took place during the old days, right?!