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Pigs Issue Essay

2403 words - 10 pages

The root-causes of the Greek sovereign debt crisis
Basil Manessiotis
paper presented at the 2nd Bank of Greece workshop on the economies of Eastern European and Mediterranean countries Athens, 6 May 2011
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Introduction
To better understand the current sovereign debt crisis in Greece, a longer view is warranted The 20 year period 1989-2009 is bounded by two major fiscal crises in Greece:
the 1989-1993 crisis, and the ongoing crisis.

In both crises deficits exceeded 15,0% of GDP. In between, Greece entered the Economic and Monetary Union and adopted the Euro To facilitate discussion the 20 year period will be divided into two parts:
the 1989-1999 period, and the 2000-2009 period.
...view middle of the document...

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-3 0 1 2 3 4 5 6 7 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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-1

Diagram 1 Real GDP growth

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Diagram 2 Elections and General Government Deficit (% of GDP)
18 16 14 12 % of GDP
Elections Elections

Elections Elections

Elections Elections

10 8 6 4 2 0
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5

Elections

Elections Elections

Elections

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8 200
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Securing EMU membership: 1994-1999
Fiscal developments
Tight fiscal policy stance General government deficit declined from 13.6% in 1993 to 1.8% in 1999 (although later it was revised to 3.4%) Consolidation exceeded 10 p.p. of GDP Primary surpluses appeared, reaching 4.9% in 1999. Interest payments reached an alarming 12.7% of GDP in 1995 and then declined to 8.4% of GDP in 1999

The “quality” of fiscal consolidation
Composition of fiscal consolidation was lacking Based on tax increases and falling interest payments Primary expenditure increased from 36.2% (1994) to 39.9% of GDP (1999) Personnel expenditure rising every year, exceeding budget targets 1995-1998: the central government wage bill increased by 70.7% 7 Pensioner’s Solidarity Allowance was introduced in 1997

Diagram 3 Primary General Government Deficit (% of GDP)
12,0

10,0

8,0

6,0

4,0

2,0

0,0

-2,0

-4,0

-6,0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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10,0

12,0

14,0

0,0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 YEAR 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2,0

4,0

6,0

8,0

Diagram 4

General Government interest payments (EDP definition) (% of GDP)

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Securing EMU membership: 1994-1999
Taking all these into account, fiscal consolidation was not sustainable Fiscal policy inside the Euro-zone should have been
More active, to correct macroeconomic imbalances and asymmetric socks More flexible and autonomous More disciplined Tax competition, migration of tax bases

Greece entered EMU with two fundamental weaknesses
The debt-to-GDP ratio was too high, exceeding 100% of GDP. Adversely affects growth prospects and sets severe limitations on fiscal policy The institutional fiscal framework which determines fiscal outcomes was extremely weak (not-existing)
Budget preparation Numerical fiscal rules Independent assessment

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100,0

120,0

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160,0

20,0

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0,0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010**

Diagram 5

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