Greece has managed to achieve a strong economy that is growing fast after the implementation of stabilization policies in recent years. Greece remains a net importer of industrial and capital goods, foodstuffs, and petroleum. Leading exports are manufactured goods, food and beverages, petroleum products, cement, chemicals and pharmaceuticals.
Recent Economic HistoryThe development of the modern Greek economy began in the late 19th and early 20th centuries with the adoption of social and industrial legislation and protective tariffs and the creation of the first industrial enterprises. Industry at the turn of the century consisted primarily of food processing, shipbuilding, and the manufacture of textiles and simple consumer products.
The evolution of the Greek economy in relation to that of Western Europe can best be represented by comparative measures of standard of living. The per capita income (purchasing power terms) of Greece was 65% that of France in 1850, 56% in 1890, 62% in 1938, 75% in 1980 and 86% in 2006 (Paul Bairoch, Europe's GNP 1800-1975, J. of European Economic History, 5, pp. 273-340 (1976); Angus Maddison, Monitoring the World Economy 1820-1992, OECD (1995); Eurostat, including updated data since 1980 and data released in October, 2007).
Greece achieved high rates of growth from the 1950s through the early 1970s due to large foreign investments. After the end of the Greek Civil War in 1949 and for more than two decades Greece achieved the second highest economic growth rate in the world after Japan, resulting in a dramatic improvement of living standards (the "Greek economic miracle"). In the mid-1970s, Greece suffered declines in its GDP growth rate, ratio of investment to GDP, and productivity, and real labor costs and oil prices rose. In 1981, protective barriers were removed when Greece joined the European Community on January 1, 1981 and cohesion funds contributed considerably to the country's fast economic development in the 1980s. By 1989 Greece belonged to a group of 22 "advanced economies".
The government pursued expansionary policies, which fueled inflation and caused balance-of-payment difficulties. Growing public sector deficits were financed by borrowing. In October 1985, supported by a 1.7 billion European Currency Unit (ECU) loan from the European Union (EU), the government implemented a two-year "stabilization" program with limited success. Public sector inefficiency and excessive spending caused government borrowing to increase; by the end of 1992, general government debt exceeded 100% of GDP.
Greece continued to rely on foreign borrowing to finance its deficits. Public sector external debt was $32 billion at the end of 1998, only ¼ of the total. The general government debt was $119 billion at the end of 1998, or 105.5% of GDP. Greece, as a member of the European Union, strived to reduce its budget deficit and inflation rate in order to meet the prerequisites for the Economic and Monetary Union. Although growth remained above the convergence program guidelines, high budget deficits and deficient infrastructure continued to dampen the economy's long-term potential growth rate.
In May 1994, the Bank of Greece successfully managed a currency crisis triggered by the lifting of currency restrictions on short-term capital movements. The bank contained speculative attacks on the drachma by tightening its monetary policy and raising interest rates dramatically: For a few days, interest rates pushed as high as 180%. In less than 2 months, with speculation on the drachma no longer a threat, interest rates returned to normal levels. A similar wave of speculation was beaten back in the fall of 1997, following the Asian financial crisis.
One of the successes of recent Greek economic policy has been the reduction of inflation rates. For more than 20 years, inflation hovered in the double digits, it reached 23% in late 1990. But a combination of fiscal consolidation, wage restraint, and strong drachma policies resulted in lowered inflation. Inflation fell to 2.0% by mid-1999. High interest rates have been historically a significant problem. The government's strong drachma policy and Public Sector Borrowing Requirement (PSBR) made the lowering of interest rates difficult, but progress was made in 1997-99 and rates gradually declined in line with inflation and the rest of the Eurozone.
In 2001 Greece joined the Economic and Monetary Union (eurozone). Interest rate policy is now in the hands of the European Central Bank.
Due to the more stable macroeconomic framework and lower interest rates, growth has picked up significantly. The Greek Economy has been growing continuously since 1994 and above the EU25 average since 1996. In 2004 the Greek economy grew at an estimated rate of 4.7%, the fastest in the EU15. A part of this has been sustained by the investment in infrastructure in the run up to the Summer Olympic Games 2004 that were held in Athens. As a result, real incomes have risen from 85% of EU27 average in 1997 to 97% in 2006 (revised data, source Eurostat, Oct 2007).
In 2004, Eurostat, the statistical arm of the European Commission (after an audit performed by the New Democracy government) revealed that the budgetary statistics, on the basis of which Greece joined the European monetary union, had been massively underreported by the previous Greek government (mostly by not recording a large share of military expenses).[1] However, even according to the revised numbers calculated according to the methodology in force at the time of Greece's application for entry into the Eurozone, the criteria for entry had been met.[2]
Recent economic performance has been satisfying. However, there are two challenges for policymakers: a)to avoid an economic slump after the enthusiasm of the Games has gone and the EU farm subsidies get cut in 2006 and b) to proceed with structural economic reforms, especially in the areas of social insurance, welfare, and the labour market which will encourage further investments, lower the country's high unemployment and promote growth and economic stability. The first step was taken on the 30 June 2005 with substantial reforms of the insurance system for bank employees against fierce opposition from the unions and the main opposition political party PASOK with laws liberalising working hours in retail trade and employment and providing for public/private financing initiatives of public works and services to follow over the summer.
During the third quarter of 2006, Greece experienced a strong 4.4% growth rate, while in the same period of the previous year, the growth rate was 3.8%. This is among the highest rates in the EU and the Eurozone, where the average growth rates for these periods were estimated to stand as 2.7% and 1.7% respectively. Current challenges include the further reduction of unemployment which currently stands at 8.8%, the reform of the social security system, the further privatization of the public sector, the overhauling of the tax system and the further reduction of certain bureaucratic inefficiencies. Reduction of the fiscal deficit to the Eurozone target of 3% of GDP had also become a key issue. Under a negotiated agreement, the EU had given Greece a two year deadline (budgets of 2005 and 2006) in order to bring the deficit in line with the criteria of the EU's stability pact, namely below 3%. In 2005, the deficit stood at 5.5% of GDP, while in 2006 the deficit fell below 3%, standing at 2.6% (figure approved by Eurostat in April 2007). Based on this figure and forecasts for the following years, EU's Excessive Deficit Procedure for Greece officially ended on June 5, 2007.
Following European Union rules, Greece revised its GDP in October 2007 upwards by 9,6% (a much smaller revision than the one originally planned in 2006). In contrast to other member states, Greece had not revised its base of measuring its GDP for several years.
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