European concerns: Greece is still Struggling, But Who is to Blame?

Historical Snapshot

As we are heading towards the 9^th year of economic crisis in Greece, someone has to wonder “what went so wrong that 9 different governments in collaboration with the tripartite committee (European commission, IMF and WB) were unable to reach a solution?”  and how come the Greek crises has not been resolved yet?.

I am sure you are all familiar with the 2008 financial crisis and the harm it has done to all countries, especially Greece, so I won’t waste your time to explain the story. Of course, it is convenient to say “It was just a real estate bubble, it happens all the time” or “Derivatives like CDO’s should have not been created at the  first place, otherwise everything in the housing market would be fine”, but the answer to Europe’s economic problems could be found if we take a look at the economic performance, growth and convergence of European Union members since the 70’s.

Research and Data

An examination of the data reveals long periods of continuous convergence (e.g. 1960-1979) followed by long periods of continuous divergence (e.g. 1979-1995). We focus on the supply side of the economy and use standard economic theory (a technique which is known as growth accounting) to quantify the sources of growth.

Using a framework that is based on neoclassical growth theory, we decompose the growth rate of real per capita GDP into three factors. These are: the total factor productivity (TFP) factor (a measure of aggregate efficiency), the capital factor (capital deepening) and the labor factor (labor hours per capita).

In addition, the TFP factor is divided in two components. These are the trend factor and the productivity factor. Τhe former is not country specific and according to Kehoe and Prescott (2002) represents the world stock of useable production knowledge which grows smoothly overtime. The latter is country specific, and although there is no broadly accepted theory for it, Kehoe (2003) points out the crucial role played by a country’s institutions and it is the one we will focus on.

According to Stylianos G. Gogos, economic analyst for Eurobank Greece, the significant role played by productivity factor can explain quite well the path of the capital factor, of the labor factor and that of real per capita GDP in a dynamic general equilibrium theoretical framework.

As a result, we conclude that explaining the convergence and the divergence path between Greece and the majority of our sample economies requires an in depth investigation for the factors that lie behind the path of TFP. Although there is no broadly accepted theory of TFP (see Prescott (1998) and Kehoe (2003)) the neoclassical “Great Depressions” literature provides a guidance in focusing our attention towards the following factors (with an emphasis on a country’s institutions): Obstacles to the incorporation of new technology, labor market organization, strength of labor unions, government regulation of industry and other factors that we could easily find in the Greek economy.

As a conclusion, the Greek legislators must restrain the economy in order to improve its total factor productivity. Greece’s creditors will not accept any more bailouts programs without a dramatic change by the Greek government.

Political Interference and Solutions

Until now, none Greek government made the necessary changes and the people’s vote is driven by anger, fear and ignorance. As long as people continue to pick candidates by hating the former ones ‘with all their heart’, they will continue to get heart attacks. Let’s hope this will change before 2019 elections, with the major candidate being Kyriakos Mitsotakis, who claims to reform the public sector and reverse the economy dramatically.

Guy Verhofstadt, the Leader of the Alliance of Liberals and Democrats for Europe Group and Member of the European Parliament, continually warned that the Greek political class did not make enough efforts to create concrete proposals of reforms and that the deals between Greece and its creditors won’t work unless we change the focus from pure accountancy measures to real modernisation measures.

Mr. Verhofstadt said “The only way to save Greece is by radically modernising the country. The Greek government should make a more serious effort to combat clientelism, reform the public administration, modernise the justice system, make sure that taxes are collected and put in place targeted tax cuts for SMEs.”

The Greek Affect on Markets

Since the beginning of Greece crisis in 2009, the euro seems to follow the trends of its member’s news and opportunities for profit are created. When there are bad news for each member’s economy, euro’s value is heading south and it won’t stop plummeting until European Union bind to policies that will reach to a solution for its social, economic and geopolitical issues.

There are many other factors along the Greek crisis that weigh the European currency. Obviously, low interest rate and stimulus programs by the ECB weakens the currency. Yet, the European Union is keen to solve the Greek crisis, stabilise its economy and move forward. Otherwise, all the efforts and concerns will not prevent Frexit.