Research Topics

The Greek economy—still fragile due to the lingering effects of the 2009–10 crisis—was hit particularly hard by the COVID-19 pandemic. Greece’s 2020 GDP decline was one of the worst among the group of EU and eurozone member states, along with the highest levels of unemployment and underemployment.

Dimitri B. Papadimitriou, Christos Pierros, Nikos Rodousakis, and Gennaro Zezza update their analysis of the state of the Greek economy on the basis of recently released provisional data for 2020Q4, and model three projections through 2023: (1) a baseline scenario in which no agreement is reached on the disbursement of EU funds (the Recovery and Resilience Facility); (2) a scenario in which EU grants and loans are distributed in a timely manner; and (3) an additional scenario that pairs EU funds with implementation of an employer-of-last resort program. The second scenario would see Greece’s GDP growth return to its pre-pandemic trend—albeit still leaving the economy below the level of real GDP it reached in 2008. The third scenario has the most favorable impact on growth and employment—raising real GDP above its pre-pandemic trend. Failure to achieve a proper recovery of GDP in Greece would be directly related to an absence of fiscal policy expansion.

This Strategic Analysis is the joint product of the Levy Economics Institute of Bard College and INE-GSEE (Athens, Greece). It is simultaneously issued in both English and Greek.

While the effects of the COVID-19 pandemic have been broadly similar for individuals, families, societies, and economies globally, the policy responses have varied significantly between countries. In the case of Greece, the pandemic abruptly ended the country’s fragile recovery and threw its economy into a dramatic contraction beginning in 2020Q2. Fiscal stimulus programs financed by reserve funds and European-backed structural funds have been implemented, but to date there is no evidence of a significant impact. Given the emergence of COVID-19’s second wave of contagion and the economic consequences of business shutdowns and further job losses, our own growth projections, as well as those from the European Commission, IMF, OECD, and the Greek government, have been revised downward for 2021 and prospects for the beginning of a recovery before the end of 2020 have died out.
 
Using their stock-flow consistent macroeconomic model developed for Greece (LIMG), we run simulations for a baseline scenario and two alternative policy outcomes. The results of the projections for a “business as usual” baseline scenario are pessimistic and show that a V-shaped recovery is not in the cards. The European “recovery funds” alternative scenario projections, while more pessimistic than our report from May 2019, indicate that implementing these funds beginning in 2021Q3 will result in accelerating growth with positive outcomes. A more robust GDP growth rate and consequent employment growth can be realized with the combined effects of the European recovery funds together with an enhanced public job guarantee program. It is this mix of policies that can gain traction and bear fruit in putting the Greek economy on a path to sustainable and inclusive growth.
 
This Strategic Analysis is the joint product of the Levy Economics Institute of Bard College and INE-GSEE (Athens, Greece). It is simultaneously issued in both English and Greek. 

2019 marked the third year of the continuing economic recovery in Greece, with real GDP and employment rising, albeit at modest rates. In this Strategic Analysis we note that the expansion has mainly been driven by net exports, with tourism playing a dominant role. However, household consumption and investment are still too far below their precrisis levels, and a stronger and sustainable recovery should target these components of domestic demand as well.

Fiscal austerity imposed on the Greek government has achieved its target in terms of public finances, such that some fiscal space is now available to stimulate the economy. Our simulations for the 2019–21 period show that under current conditions the economy is likely to continue on a path of modest growth, and that the amount of private investment needed for a stronger recovery is unlikely to materialize.

With the anti-austerity Syriza party continuing to lead in polls ahead of Greece’s election on January 25, what is the outlook for restoring growth and increasing employment following six years of deep recession?   Despite some timid signs of recovery, notably in the tourism sector, recent short-term indicators still show a decline for 2014. Our analysis shows that the speed of a market-driven recovery would be insufficient to address the urgent problems of poverty and unemployment. And the protracted austerity required to service Greece’s sovereign debt would merely ensure the continuation of a national crisis, with spillover effects to the rest of the eurozone—especially now, when the region is vulnerable to another recession and a prolonged period of Japanese-style price deflation.   Using the Levy Institute’s macroeconometric model for Greece, we evaluate the impact of policy alternatives aimed at stimulating the country’s economy without endangering its current account, including capital transfers from the European Union, suspension of interest payments on public debt and use of these resources to boost demand and employment, and a New Deal plan using public funds to target investment in production growth and finance a direct job creation program. 

In this report, we discuss alternative scenarios for restoring growth and increasing employment in the Greek economy, evaluating alternative policy options through our specially constructed macroeconometric model (LIMG). After reviewing recent events in 2013 that confirm our previous projections for an increase in the unemployment rate, we examine the likely impact of four policy options: (1) external help through Marshall Plan–type capital transfers to the government; (2) suspension of interest payments on public debt, instead using these resources for increasing demand and employment; (3) introduction of a parallel financial system that uses new government bonds; and (4) adoption of an employer-of-last-resort (ELR) program financed through the parallel financial system. We argue that the effectiveness of the different plans crucially depends on the price elasticity of the Greek trade sector. Since our analysis shows that such elasticity is low, our ELR policy option seems to provide the best strategy for a recovery, having immediate effects on the Greek population's standard of living while containing the effects on foreign debt.

Why the Troika’s Greek Strategy Is Failing

Greece’s unemployment rate just hit 27.6 percent. That wasn’t supposed to happen. Why has the troika—the European Commission, International Monetary Fund (IMF), and European Central Bank—been so consistently wrong about the effects of its handpicked policies? The strategy being imposed on Greece depends in large part on the idea of “internal devaluation”: that reducing wages will make its products more attractive, thus spurring a return to economic growth powered by rising exports. Our research, based on a macroeconomic model specifically constructed for Greece, indicates that this strategy is not working. Achieving significant growth in net exports through internal devaluation would, at best, take a very long time—and a great deal of immiseration and social disintegration would take place while we waited for this theory to bear fruit. Despite some recent admissions of error along these lines by the IMF, the troika still relies on a theory of how the economy works that badly underestimates the negative effects of austerity.

Technical Paper

In this report Levy Institute President Dimitri B. Papadimitriou and Research Scholars Gennaro Zezza and Michalis Nikiforos present the technical structure of the Levy Institute's macroeconomic model for the Greek economy (LIMG). LIMG is a stock-flow consistent model that reflects the “New Cambridge” approach that builds on the work of Distinguished Scholar Wynne Godley and the current Levy Institute model for the US economy. LIMG is a flexible tool for the analysis of economic policy alternatives for the medium term and is also the analytic framework for a forthcoming Strategic Analysis series focusing on the Greek economy.  

A Strategic Analysis

Employment in Greece is in free fall, with more than one million jobs lost since October 2008—a drop of more than 28 percent. In March, the “official” unemployment rate was 27.4 percent, the highest level seen in any industrialized country in the free world during the last 30 years.

In this report, Levy Institute President Dimitri B. Papadimitriou and Research Scholars Michalis Nikiforos and Gennaro Zezza present their analysis of Greece’s economic crisis and offer policy recommendations to restore growth and increase employment. This analysis relies on the Levy Institute’s macroeconomic model for the Greek economy (LIMG), a stock-flow consistent model similar to the Institute’s model of the US economy. Based on the LIMG simulations, the authors find that a continuation of “expansionary austerity” policies will actually increase unemployment, since GDP will not grow quickly enough to arrest, much less reverse, the decline in employment. They critically evaluate recent International Monetary Fund and European Commission projections for the Greek economy, and find these projections overly optimistic. They recommend a recovery plan, similar to the Marshall Plan, to increase public consumption and investment. Toward this end, the authors call for an expanded direct public-service job creation program.