Growth for Greece: Ten plus One Points for a Post-Austerity Agenda

We wrote this article with Prof. Karl-Heinz Paqué because we believe that public discourse on the crisis and on the adjustment programmes should now move beyond ideological conflict and national recriminations, and focus on the practical topics of growth policy. Our message is addressed to Greek politicians, as well as to the institutions of the EU and to political leaders in all member states. The paper was presented at an event organized by the Friedrich Naumann Stiftung in Athens on 23rd November 2015.

The setting

The past six years have been hard on the Greek people, as incomes have dropped dramatically, unemployment has rocketed, and a sense of despair has taken hold. The adjustment programs that followed the balance of payments crisis of 2010 failed to stabilize the economy before 2014, and have been widely blamed as being inadequate, wrongly designed or even responsible for the crisis. Whatever the final judgment about past policies may be, it would be wrong to underestimate the adjustment that has actually taken place. Continue reading

Ten tips about Greece

On the eve of the elections (19th September), I spoke at the Monthly Barometer Gathering at Chamonix, in a very condensed format, called Speed Ideas: Ten Tips in Ten Minutes. The audience was investors and policy entrepreneurs from around the world. Here is what I said.


  1. We should see this as a balance-of-payments rather than sovereign-debt crisis
  • Greece had a trade deficit every year since 1962,
  • It had a current account deficit since 1982.
  • The deficit was financed for the most part by borrowing from abroad:
  • The government, borrowed by issuing bonds;
  • And the Greek banks borrowed from foreign banks and they also bought Greek government bonds.
  • The government then spent money on salaries, and pensions, boosting domestic demand.
  • This is what created the trade deficits.
  • The business sector adapted to this long-term imbalance. It focused on the local market, in the so called non-tradable sectors.
  • Such as retail, or construction.
  • The so called internationally tradable sectors shrunk.
  • Exports, as a % of national income, were the lowest in Europe.
  • In 2010, inflows of capital from abroad stopped suddenly, domestic demand dropped, and this started the spiral of the crisis.
  • Ireland, Portugal and Spain were in a similar “sudden stop” situation. They managed deal with this rather quickly, by increasing exports. Greece did not.
  • That is why the crisis has been so deep and long.

Continue reading

Supply side issues in the new Greek programme

This quick note (written as an email to a German friend) highlights issues beyond debt and fiscal targets, that should be considered in shaping the third Greek bailout.

1. There are many SMEs in Greece that had adapted to the crisis by lowering costs to serve a poorer domestic consumer, or who had started having international clients; in my view (which I cannot prove) they would have done well in 2015, which would mean growth in exports, GDP and employment. This prospect was interrupted by the new uncertainty before and after the January elections.

2. Capital controls in banks, plus the real possibility of Grexit, have been the most threatening developments that Greek businesses have witnessed since 2010. Up to now, businesses were hurt by austerity, but at least most reforms were meant to create a more business-friendly environment. But now some of the most resilient entrepreneurs are saying they are thinking of emigrating.

Continue reading

The Sleepwalkers: Germans and Greeks must avoid a Grexit

Karl-Heinz Paqué and Aristos Doxiadis

The German version of this article was published in Wirtschaftswoche on 13th April 2015.

It is an eerie picture. In a few days or weeks, the Greek government runs out of money to pay its internal bills and external debt service. The threat of default looms larger than ever, but both the Greeks and the Germans remain remarkably calm, though for completely different reasons. The Greeks somehow assume that, eventually, Europe will support them whatever they do. In turn, the Germans somehow assume that a Grexit will not really be such a bad thing.

Alas, both Greeks and Germans are wrong. The Greek error is most obvious. By now, 18 of 19 Eurozone governments are quite convinced that a Grexit would not anymore lead to a massive contagion of other crisis countries. They are right as these countries are dealing with their imbalances, and that is clearly recognized by financial markets. An invisible firewall has emerged around the western Mediterranean plus Ireland, with vast political consequences: the Spanish, the Portuguese and the Irish governments are by now among the loudest voices against special favors to Greece – in view of the hardships that their own populations had to suffer to regain credibility. In short: Greece stands alone. The consequences of this isolation are dire. If the Greek government really ignores the need for Eurozone-conditionality on financial aid, there will simply be a default. This will probably lead to Grexit and to a new currency that very few in Greece want to have. Wages will be massively lowered and paid in (soft) new Drachmas; and savings will be drastically devalued, thus leading to an expropriation through the backdoor. Eventually, ordinary Greek people will come out dramatically impoverished. Continue reading

Politics and microeconomics in the Greek crisis

A slightly edited version of this article was published in the New York Times, on 26th February 2015.

Everyone frames the depression in Greece as an issue of macroeconomics: fiscal policy was tightened too quickly; government debt is too high; the tools of currency devaluation and monetary expansion are not available inside the euro zone. No doubt these are important factors, but they tell less than half the story. Local politics and microeconomic factors are at least as important in explaining the depth of the crisis.

Greece has fared much worse than other euro zone countries, which also faced a ‘sudden stop’ of foreign financing, and then enacted similar austerity programs. It lost 26% of GDP from the pre-crisis peak, while Portugal, Ireland and Spain lost no more than 7% each. Much of this difference is due to foreign trade.

In all four countries, when capital from abroad stopped flowing in, increasing exports became a primary goal, to offset the drop in domestic demand. The other three achieved this quickly, as projected in their adjustment programs. Greece did not. If it had, its recession would have been much shallower; by one estimate, a 25% rise in exports could have limited the drop of GDP to just 3%. Fiscal contraction would have caused much less damage.

This failure of trade adjustment is a puzzle to those economists who tend to view competitiveness in terms of labor cost. Wages did in fact drop by much more in Greece since 2010 than in any other country, and labor cost is no longer a barrier to exports. Firms have not taken advantage of this for three reasons: regulations, fear, and size. Continue reading

Stavros Niarchos Foundation Lecture: Aristos Doxiadis

This is the video of my lecture at Yale on 5th December 2011, titled Greeks Behaving Badly? The micro-origins of crisis and revival.

Stathis Kalyvas has an interesting introduction, on how modern Greece has been often been a forerunner or exemplar of global developments, even before the current crisis (starting at 6′ 00″). The lecture starts at 16′ 35″.  There is thirty minutes of discussion at the end.



Employment by institutional segment (work in progress)

I now have a first estimate of the size of the four quadrants in the Tradable/Non-Tradable, Big/Small classification, for employment in the Greek economy. It is in the attached worksheet.

Only 25% of all employment is in businesses or organizations that are considered big by EU standards (i.e. having more than 250 employees). This includes the government and the broader public sector.

The whole tradable economy (big and small units) employs about 25% of all employment — not very low, by EU standards. But big units in the tradable sectors (over 250 employees) account for only 2.6% of total national employment. This is very low, and lies at the root of Greece’s low competitiveness.

Better estimates and international comparisons to follow. Plus a further breakdown of the very small units (self-employed, or 1-9)