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Greece: Recovery, austerity and international imbalance

Matthieu-MaulleGlobal austerity leads to global crisis. Therefore, the European Union austerity policy will deepen the European crisis. On the contrary, in particular given the rating of some European member states on their ability to reimburse their sovereign debt, a global expansionary policy could weaken the Euro in international markets and endanger the European cohesion, at least on the productive aspect and at worst on the political side.
As much as the roots of the global economic crisis are said to lie in global imbalances, those of the Eurozone or of the European Union lie in uncoordinated economic policies. It seems then necessary to assess the cause(s) of the debt crises some member states are experiencing, on global[1] and sectoral levels, and analyse the possible way(s) of exit of the crisis in some of those member States given their regional and international interconnections, both on the real and financial spheres. In this respect, it will be defended that austerity all over Europe would be detrimental to growth and consequently to the debt crisis and finally to the Euro system.

However, the recent rise in world trade could be seen as an argument supporting austerity packages in the European Union, in particular in Greece. The value of world merchandise trade was around 25% higher in the first three months of 2010 than in the same period of 2009,[2] according to the WTO:[3]

World Merchandise trade growth rates, Jan-March 2010

Exports Imports
Year-to-YearQuarter-to-Quarter Year-to-YearQuarter-to-Quarter
27 -3 World 24 -2
18 -5 European Union (27)[4] 16 -3
16 -4 intra EU 16 -4
22 -7 extra EU 16 -1

Even if world merchandise trade decreased on a quarter-to quarter basis, it is still increasing from a year-to-year basis. However, exports outside the European Union increased more than exports within the European Union, while the rates of increase in imports coming both from intra and extra EU are equal. However, this rise in world merchandise did not have the same impact on the current account of the member States countries:

Current accounts (in Million Euros)

Source: Eurostat Database

However, a rise in world trade could not represent a window of opportunity given that Greece’s exports share outside the EU-27 outside European Union[5] remained at 0,5% while Germany’s exports share increase from 25% to 27%. In addition, differences in the changes of current account deficits and surpluses depicted in the table above can be explained by the level of the different countries’ exports share within EU-27 outside the European Union:

Extra-EU 27 trade, Share of exports by member State

Source: Eurostat Database

In addition, Greece’s exports outside the European Union 27 counts for less than 1% of Greek GDP while the German ratio for the same measure is higher than 10%.[6] Greece therefore cannot count on a world recovery for a stimulus of its economy.

In this respect, one can say that net exporters outside the EU 27 took the opportunity of a growth in world trade to improve their current accounts.[7] On the other hand, we could say that the rise in world trade was detrimental to net importers within the European Union.[8] If one is looking at the evolution of the current account surpluses and deficits in percentage of GDP, one can notice the opposite evolution of the accounts:

Current account deficits/surpluses as % of GDP

Source: Eurostat Database

It then seems problematic to count on the world recovery for being a stimulating factor for the Greek economy. The resulting foreign indebtedness of the net importers is one of the main reasons, together with the very slow reaction of European leaders, towards speculative attacks against these countries on the financial market. Indeed, long term interest rates in these countries are now all higher than in Germany.[9]

Moreover, as depicted in the graph below, it would be very unfair to the Greek economy to treat it as the free-rider only benefiting from the European Union without making any efforts to increase its productivity:

Real GDP per employee, 1999=100

Source: AMECO Database

Germany experienced around 4 percentage points better than average, but this performance was dwarfed by that of Greece where real output per worker in the economy as a whole rose by close to 30%. The image – often repeated by the media in the context of the Greek crisis – of innovative Germany powering ahead, driving its export successes with faster productivity growth is thus clearly at best only part of the story (and is simply wrong in terms of the Greek-German comparison). Similarly, to treat southern countries as PIGS (Portugal, Italy, Greece and Spain) is misleading, average annual working hours are the longest in Europe.

However, the following graph illustrates a higher increase in nominal wages in Greece than in Germany which offset the higher productivity growth in Greece compared to Germany:

Nominal compensation per worker, 1999=100

Source: AMECO Database, ETUI calculation

The chart clearly shows nominal wage moderation in Germany. While productivity growth was above average by around 4 percentage points, nominal wage growth in Germany was below average by almost 10 percentage points (to 2008). The Iberian countries had 12-14 percentage points faster nominal wage growth, despite below average productivity. In the case of Greece it was almost 40 percentage points more which more than offset the positive productivity gap, which was around 10%.

In other terms, the European Union as a whole cannot simply blame Greece for its poor management in the last 5 or 10 years. The deterioration of its current account allowed some European countries to benefit, both because they were relatively more competitive and because workers had the money to buy goods and services coming from abroad: “In particular, the loss of competitiveness by Greece (and a number of other countries, including Spain and Ireland) is the mirror image of an increase in relative competitiveness by others, notably Germany, Austria and the Netherlands. In addition, the latter countries could not have increased their net exports without the faster demand expansion in the former group, which, it is often forgotten, were also responsible for much of Europe’s economic and jobs growth in recent years, while demand and output growth in the surplus countries has been sluggish. The problem is symmetrical and the solution must be as well”.[10] Thus, it seems undue to now insist that Greece cures its problems on its own by cutting expenditure only, without any stimulus coming from the European Union, following the principles: “we keep our own house in order and if others do not, then too bad for them”.[11] Moreover, as the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have and will surely continue to collapse, bringing output down with them.

Recently, European leaders agreed to build a special purpose vehicle for managing the debt crisis in Europe. However, first of all, it seems problematic to consider that such a financial construction can fulfill the role of an economic government. Moreover, in doing so, European leaders are not acting in the sole interest of Greece but rather for preventing their potential future economic losses if they were not to do so. In the event of bankruptcy, losses would have been suffered by all those savers and investors that hold Greek bonds, almost half of whom are French, Germans and Italians. In this respect, on the one side they are acting for preventing a future collapse of the banking system, preventing therefore a collapse of the Euro system, but on the other hand, nothing is done to give a new impulse to the Greek economy: “It virtually guarantees that Greece, Spain, and others with large private and public debts will be condemned to years of economic decline and high unemployment”.[12]

In addition, it seems difficult to claim that a decrease in public expenditure is favorable for productivity gains. Indeed, a decrease in civil servants wages, while reducing the indebtedness, cannot bring an improvement of the competitive state of Greece. Greek civil servants do not produce goods and services for exports. So a decrease in their wages will surely favor a recession. Greek wage growth should be slower and linked with productivity growth. The surplus countries should also play the game and catch up the delay in real wage growth. In no case the German wage policy, qualified as mercantilist policy, can be a source of recovery. Subsequently, if national debts are problematic, surely, the decrease in public expenditure, far from curing the problem, will aggravate it through a decrease in growth, i.e. recession.

Finally, the opportunity of restructuring debts having being missed,[13] the cost of a default of any country within the European Union will be higher than what it could have been. It would surely have cost less to the net exporters. Moreover, the degree of procrastination and the time it took to propose solutions to the debt crises surely gave an incentive for speculators to attack the Euro. In this respect the partial monetisation of the Greek debt by the ECB is surely a good start. Such measures should be expanded under provision of article 122 of the TFEU, in order to avoid the default of any member States. However, in the medium term, Germany, Austria and other surplus countries should commit themselves to maintaining fiscal stimulus and to enter a period of faster-than-productivity-growth wage increases. On the other side, indebted countries should be able to consolidate their public finances tending towards fiscal surpluses in the medium term. In any case, exit strategies have to be desynchronised in time and differentiated between countries. The European Union should review its various policy coordination mechanisms with a view to strengthening and refocusing them in the direction revealed to be necessary by the crisis, namely: a symmetrical focus on surplus and deficit countries; the monitoring of private debt-savings dynamics, rather than just the public sector, and thus a focus on current account positions; incorporating wage and price settings and accordingly strengthening the role of social partners. Finally, those medium term measures should be implemented with a clear vision of the future of the European Union production patterns. Certainly, Greece could have an important role to play in Europe for diversifying energy sources.


[1] – We will only treat the macroeconomic roots of the crisis in this paper. Their differentiation on a sectoral level remains to be done.

[2] – In current US dollars.

[3] – WTO Press releases, International trade statistic, 2nd June 2010, available at

[4] – “Intra EU” is trade within the EU; “extra EU” in this table is trade between the EU and non-EU economies.

[5] – The 27 member States.

[6] – See Eurostat and AMECO Databases.

[7] – In the last ten years the positive current account for trade outside the EU 27 of Germany increased by 258% while the negative one for Greece deteriorated by 94% (Eurostat Database).

[8] – In the last ten years the positive current account for trade within the EU 27 of Germany increased by 177% while the negative one for Greece deteriorated by 41%. In fact Greece’s exports share within EU 27 was below 1,5% in the last ten years while the same share for Germany was over 19% in the last ten years (Eurostat Database).

 [9] – See ECB tables, available at:

 [10] – P. Arestis & G. A. Horn (2010), “Open letter to Europen policymakers: The Greek crisis is a European crisis and needs European solutions beyond emergency packages”, available at

 [11] – In T. Padoa-Schioppa (2010), “The debt crisis in the Euro Area: Interest and Passion”, Policy Brief, Notre Europe.

[12] – D. Rodrik (2010), “Who lost Europe?”, Social Europe Journal, June.

[13] – See M. Aglietta (2010), “La longue crise de l’Europe”, Le Monde, 17th May.