Governance issues within Greece and the Eurozone

The trend described above seems to be consistent with Paul Krugman’s analysis, according to which, in the interior of a single monetary area, each region will further develop its specificity, that is, the point of its relative and competitive advantage, such as industry, tourism, services, or agriculture, respectively. In Geography and Trade, he argues: ‘the economics of Europe are in the process of ceasing to be international and becoming interregional instead. If this means increased localisation of industries, it will pose some problems of adjustment, presumably offset by increased efficiency. But what if it turns out that an integrated Europe gravitates toward a geography in which everything footloose clusters in the northwest corner of the Continent, at the expense of outlying regions. Can the European Idea survive?’ (Krugman 1991a: 92) Professor Krugman continues, ‘Nonetheless this center-periphery pattern is there: The poorer regions of Europe are in general relatively distant from markets. What will happen to these regions as Europe becomes more closely integrated? The general presumption has been that with improved access of low-wage regions to the advanced European core, manufacturing will want to shift out to the periphery. This may be how it will work out. But Tony Venables and I have argued that this presumption isn’t necessarily right: improved access might actually hurt, not help, peripheral industry’ (Krugman 1991a: 95; cf. also Krugman and Venables 1995).

The data available for the period after the introduction of the Euro offer a more complex picture. During the first years the European periphery - and Greece - grew faster than the center and the north of Europe, probably due to the fact that European periphery regained financial credibility in the global markets.[1] On the other side, it is true that further European integration has not changed, until now, the basic trend according to which the South is characterised by higher levels of consumption, while the North becomes more and more productive on an international level. Furthermore, a recent study by Prognos AG-Bertelsmann shows that in the long term the trend of European integration has been much more profitable to the northern European countries than to the countries of Europe’s southern periphery.[2] It is not obvious how this trend can become politically acceptable and how Europe/Eurozone can survive without significant changes in the EU architecture. The peripheral governments/authorities are and will continue to be under constant pressure in order to achieve some sort of real social and economic integration within the European Union. In that sense, the ‘governance failures’ and the ‘markets’ inefficiencies’, to be discussed below, seem to be at the same time consequences of and partial, even though sometimes inappropriate, responses to this trend and to the pressure exercised by local populations to democratically elected governments.

In fact, these imbalances were clearly identified several years ago. Already, in January 2004, a study published in the ECFIN Country Focus highlighted the increasing imbalances in the case of Greece: ‘However, widening current account deficits, persistently high inflation, the prospect of temporary factors conducive to growth petering out and a progressively loosening fiscal stance have heightened concerns about macroeconomic imbalances building up and hence about the long-term sustainability of Greece’s macroeconomic policies.... The key question then becomes whether these imbalances will gradually and spontaneously unwind or whether a change in policies is needed to engineer the wished-for soft landing. This could usefully consist of some combination of (i) fiscal consolidation to make room for the automatic stabilisers and put the public finances on a more sustainable footing and (ii) structural and income policies to contain inflationary pressures, rebuild competitiveness and raise the economy’s flexibility and productive potential.’ (Albers et al 2004).

The institutional response to these imbalances whether on a national or European level was, to say the least, inadequate. A few months after the introduction of the euro, on 18 April 2001, Greece attempted a substantial and thorough reform of its pension system in order to ensure its medium-term sustainability in the new environment. This became known as the ‘Giannitsis reform’, from the name of the Minister of Labour who studied, organised and attempted to promote it. It was a complete failure, as the project faced general rejection from the entire political spectrum, and the government was forced to ‘freeze’ it.

In the following national elections in Greece, both in March 2004 and in September 2007, the ‘imbalances’ issue’ was not even addressed. On the contrary, in 2006 the Greek government announced its intention to revise the country’s GDP by 25 per cent, something that would lend more flexibility to the management of fiscal aggregates. A year later, in October 2007, Eurostat announced that it would accept a revised rate of 9.6 per cent. It was obvious that Greece had entered deeply into the field of creative accounting in an effort to address the imbalances of the Greek economy without touching the basic trends. However, the response of the EU and the Commission was extremely polite and discreet. Two reasons for this lack of reaction can be seen here: The first and more structural is, probably, that the model chosen for the operation of the EU and Eurozone was based on discrete multilateral surveillance rather than a more advanced (con)-federal model. The second and more cyclical reason could be that shortly after the introduction of the euro, the northern European countries, including Germany and France, were facing a period of stagnation and thus favoured an expansive economic policy throughout Europe, which could help rebalancing the North.

Apparently, in Greece, this lack of reaction has been seen as a signal that a significant room for fiscal manoeuvre could be allowed. Just a few months later, the Greek government11 almost abolished tax on inheritance and parental donations: In fact, for real estate transfers due to inheritance or parental donations, the tax was set at 1 per cent (!) of the value of real estate property and this regardless of the total amount of the inheritance or the donation. This allowed a large-scale transfer of wealth between generations, without any charge. Fiscal imbalances could intensify further.

Beyond these individual events, the economic characteristics of the period are clear: widening of deficits, with relative stability of public revenues as a percentage of GDP but significant increase in public spending, increase of public debt and a disproportionate increase in wages in both the private and - most importantly - the public sector, compared with what was happening in the rest of the Eurozone. All this may have postponed the adjustment, making it, later, much more painful, but could not stop the evolution, since the Greek


Law 3634/29.1.2008.

Table 4.5: Greece GDP data (Source: Eurostat and European Commission)






Public revenue % of GDP






Public expenditure % of GDP






Budget deficit % of GDP






Real GDP growth






Public debt (billions of euros)






Table 4.6: Evolution of Greece’s rating by Fitch


Fitch Rating

4 June 1997


25 October 1999


27 July 2000


20 June 2001


20 October 2003


16 December 2004


22 October 2009


economy officially went into recession in the third quarter of 2008 (see Table 4.5).

  • [1] The cumulative growth in the Eurozone between 2002 and 2005 was 5.5 per cent. The same forGermany was 1.5 per cent, for Italy 3.2 per cent, the Netherlands 4.6 per cent, France6.1 per cent, Spain 12.7 per cent and for Greece 16 per cent. Source: Eurostat.
  • [2] The highest integration-related GDP growth, among all countries since the establishment of theEU internal market, recorded Denmark with 500 euros annually per capita. The second placedGermany (450 euros), is followed by Austria (280 euros), Finland (220 €) and Belgium andSweden (180 euros). The growth benefit is significantly lower for the southern EU countries.Thus, the average annual income growth due to increasing European integration is in Italy at 80euros, in Spain and Greece at 70 euros and in Portugal at 20 euros per inhabitant’ (
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