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News : EU Economy Last Updated: July 9, 2015 - 9:10 AM

Greece was star economic performer in 1950-1973; Budget deficits every year since 1974
By Michael Hennigan, Finfacts founder and editor
July 9, 2015 - 9:00 AM

See European Commission report link below

Greece had the best economic performance as measured by annual economic growth, across the continent of Europe in the period 1950-1973 but from 1974 the economy has had long periods of weak growth and an annual budget deficit every year from 1974 to 2014.

Angus Maddison (1926–2010), the late British economic historian who is renowned for his work on estimating the size of economies over the last three millenniums (he calculated that the size of the world economy in 1 AD was about one five-hundredth of what it was in 2008), published data which show that Greece was the poorest member in 1950 of the pre-2004 enlarged European Union — a year after a four-year civil war. Greece then grew at a blistering pace of 6.2% per annum in the period 1950-1973 and by 1970, its real per capita GDP (gross domestic product) in the EU15* exceeded that of Spain, Ireland and Portugal. Monitoring the World Economy (1995, OECD, Table 3-1). The European Economic Community the then name for the EU, had the six founding member countries  until 1973.

Greece's per capita GDP was 88% of the UK level in 1970 and had fallen to 73% by 2010.

Irish average GDP growth was at 3.1% in 1950-1973 compared with Spain at 5.8% and Portugal at 5.7% — Irish GDP was lower than GNP (gross national product) because of significant emigrant remittances.

1974 was an important year for Greece as democracy was restored following the collapse of a military junta that had ruled since 1967. It was also an important year for western economies as Arab oil producers had quadrupled the price of crude oil and they also imposed a supply embargo following a war with Israel that had broken out in October 1973.

Greece had about 40% of the workforce in self-employment coupled with a significant informal sector, and the official unemployment rate averaged 2.3% in the 1970s, 6.6% in the 1980s, and 9.0% in the 1990s. It exceeded 11% in 2001 when Greece joined the euro and fell as low as 7.5% in 2008.

The general government budget balance was at an average surplus of about 1% of GDP in the 1960s; from 1974-1980 the annual deficit was below 3% of GDP. The deficits averaged 9% of GDP in the 1980s and peaked at 16% in 1990 — similar to the revised level in 2009.

In 1973 the public debt to GDP ratio was almost 17% and it rose steadily from about 27% of GDP in 1979 to 111.6% in 1993. It exceeded 100% when Greece joined the euro system in 2001 compared with the Euro Area rules maximum 60%.  Italy and Belgium had debt in the same range when they adopted the single currency two years before.

In respect of Balance of Payments, Greece ran small current account deficits which were on average about 2% of GDP up to 1973. These small current account deficits were made up of large deficits in the trade balance (about 7% on average) and significant surpluses (about 5% on average) on the income and transfers accounts, mainly reflecting remittances from Greek seamen and emigrants.

Greece grew at an annual rate of 4.9% in 1974-1979 and then it experienced stagnation for about 15 years with an average growth rate of 0.8% compared with 3.5% in Ireland, in the period 1980-1994. Greece joined the European Economic Community in 1981.

In the twenty years before 1974, average inflation in Greece was 4%, the same as in the rest of the OECD. In the next twenty years it rose to 16% on average, more than ten percentage points above the OECD average. However, inflation converged to the Euro Area average during the 1990s, and has remained only slightly above that average since Greece became part of the Euro Area in 2001.

Following a long period of weak growth, sluggish productivity increases, and high inflation, with a goal to join the single currency, Greece’s output and inflation performance improved markedly beginning in the mid-1990s. Output growth accelerated after 1994. From 1996, it has exceeded the Euro Area average. The growth rate of real GDP in 1999 was about 3.5%; it was 4.3% in 2000.

The European Commission in a report in 2010 wrote:

With average real GDP growth at close to 4% per year between 2000 and 2009, against 2% in the Euro Area, Greece's income gap with the Euro Area average was reduced from 25 to about 10%. This reflected a
domestic demand boom, in particular in consumption and residential investment. High real wage increases, rapid credit growth — supported by financial sector liberalization and low real interest rates associated with euro adoption — and loose fiscal policy contributed to buoyant growth. Over 2000-2009 period, external trade imposed a drag on growth and the share of exports in GDP declined from 25 to 19%

Real wage growth consistently outpaced productivity gains over the past decade, in part reflecting spillovers from very high public wage increases. The resulting increase in ULC (unit labour costs) eroded external competitiveness, not least with respect to the rest of the Euro Area. Greece's real effective exchange rate (REER) appreciated by some 10-20%, depending on the deflator used, over 2000-2009 and according to Commission services’ calculations was overvalued by 10 to 20% in 2009. The combination of high domestic demand growth and deteriorating external competitiveness translated into a rapid worsening of the current account deficit, which peaked at 14% of GDP in 2008...The size of the government sector grew from 44% of GDP in 2000 to over 50% in 2009."

As in Ireland, the early 1980s were a time of recession — there had been a second Arab oil embargo in 1979 and another price hike — and in 1981 PASOK (the Pan-Hellenic Socialist Movement) won the general election.

George Alogoskoufis, a Greek professor of economics, has said that until the mid-1970s Greek governments followed a so-called "golden rule' of fiscal policy, "allowing deficits only in the public investment program. Since 1978, this rule started being gradually abandoned, and the fiscal deficit exploded during the electoral 1981. After the socialists were elected in October 1981, fiscal deficits remained consistently high, and, as a result, public debt exploded."

1981 was also the year of entry to the then EEC and the authors of a joint Bank of Greece/ Brookings Institution report which was published in 2001 point to the deterioration in exports following entry as Greece had to remove tariff barriers.

The report says that in terms of exports of goods and services, "based on the new national accounts data, their share of GDP fell from 26% in 1981 to a trough of 18% in 1996. Their share has subsequently increased, rising to 22% in 1999. Further differences emerge in the 1990s, when the balance-of-payments (BOP) measure of goods trade shows a decline of the export share of GDP to a level below that of the 1960s."

Prof Alogoskoufis concluded in respect of the period from 2001 until the financial crisis:

The public debt to GDP ratio was stabilized and solvency was not a problem. However, the fiscal situation remained precarious, as underlying fiscal problems remained. The public debt to GDP ratio was stabilized at about 100%, which was much higher than the average for the Euro Area. In addition, Greece’s mechanisms of controlling primary government expenditure remained weak, in areas such as local authorities, social security funds and the health sector, while tax evasion undermined the effectiveness of the tax system. It is for these reasons that, when the international financial crisis deteriorated in 2008, the fiscal situation emerged as Greece’s Achilles heel once more."

France last posted an annual budget surplus in 1974 when Greece began its unbroken trail of red ink. France had a public debt to GDP ratio of 22% in 1974 and the IMF forecasts gross debt at 97% in 2015.

Italy has not posted an annual budget surplus in any year since Second World War

Irish lessons for Greece on growing exports and investment

Greece and other poor countries in Euro Area will not become rich

*Austria, Belgium, Denmark, Finland, France, Germany, Greece, Luxembourg, Netherlands, Ireland, Italy, Sweden, Portugal Spain and UK.

Irish standard of living in 2014 below Euro Area average, Italian level; Prices 5th highest in EU28

Irish Export Performance: Myths and reality - Ireland is a poor exporter

Centre for European Reform: The euro is no place for poor countries

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