Saturday, March 31, 2012

Crisis Management without Political Economists

The Greek crisis has underscored something I have known for a long time: that there are very few serious political economists out there. And this dearth has serious consequences in terms of how we think about the current economic crisis.

Of course, political economy is an old subject and one that is flourishing in academia: there are journals, professors and students specializing on the topic. But political economy means something very specific in academia: for economists, it usually means using economic tools to explain political phenomena; and for political scientists, it usually means using political tools to explain economic phenomena. Thus, in a department of politics, a political economist will study bureaucracies and power structures to explain monetary or trade policy; in an economics department, the political economist will use game theory to explain voting patterns or democratization or war.

As a result, we rarely get true political economy. Instead, we get economic interpretations of politics or political interpretations of economics. We no longer have people who write in the tradition of Frederick Hayek or Joseph Schumpeter or Adam Smith. (The one exception I would gladly grant is Benjamin Friedman, whose book “The Moral Consequences of Economic Growth” is the kind of political economy I have in mind; the book connects broad trends in a country’s economy with broad trends in the country’s politics – it is, thus, a true book of political economy because it links economics and politics thematically rather than methodologically.)

How does this relate to the Greek crisis?

Mainly this is a question of diagnosis. A purely economic interpretation of the Greek crisis that focuses on current account deficits and on public debt is incomplete without the political context that helps us understand why those numbers played out as they did. Such a diagnosis tells us “what” happened but not “why.” To do that, one needs to veer into political economy and the interaction between political participation, electoral politics, and economic decision-making. Without a proper diagnosis, it is hard to offer proper solutions. Thinking about this crisis in a political economy context yields a different view on the crisis.

Think about the most basic question: what is the purpose of bailing out Greece? In May 2010, the IMF report that authorized money to Greece noted in its first page that: “Greece is adopting an ambitious comprehensive multi-year adjustment program to lower the fiscal deficit and the debt ratio, reduce domestic demand in line with capacity, and increase supply and competitiveness so that the economy can step onto a higher growth path led by investments and exports.” Later in the same page it noted offhand that, “Risks to the program are high. The adjustment needs are unprecedented and will take time, so fatigue could set in.” In essence, this is an economic reading of the crisis, which, as a result, lays out concrete economic targets regarding the deficit and the debt, coupled with political and economic policies to achieve those targets.

A political economy reading would say: “Greece faces a legitimacy crisis. Politicians spend too much state money to buy votes. The state is thus weak and has little capacity to perform basic functions such as law enforcement or tax collection; it is also caters to special interests who demand protections of their economic privileges. The problem is that the state is both too big and too inefficient, while much of the private sector is insulated from paying taxes or from competition. An uncompetitive economy, high debt, and runway public finances are the result.”

Of course, both diagnoses may lead to similar prescriptions: reform the public sector, control public spending, promote competition in the private sector, etc. But their different point of departure would yield different metrics for success. The economist will ask: how can Greece pay down debt and reduce its deficits? The political economist, by contrast, will ask: how can Greece create a political momentum favoring a smaller but more effective state and a more competitive private sector?

These readings produce a different answer to the question: “what is success?” As I wrote in my review of the first bailout, we ought to judge success on three levels: economics, political economy and political philosophy. It is also the reason I have been against an outright default and exit from the Eurozone – because I believe that such a path does not create good conditions for reform. I don’t expect the IMF to produce a set of political economy or political philosophy benchmarks and to judge Greece on those measures. Nor can the IMF write in a report the things that I wrote above.

But conceptualizing the crisis as a political economy crisis can allow us to ask more relevant questions and allow the IMF and Europe to track progress in Greece along broader criteria. Instead of asking, “is this policy going to reduce the deficit” we can ask, “is this policy likely to help or hurt the momentum for reform?” The IMF is always keen to talk about “program ownership” where the host government is the chief architect of the program; a political economy reading would take that idea to the next level and ask, what kind of program would best appeal not just to the political class but to the Greek public; what reforms will bolster support for further measures; can we make economic concessions that may hurt specific fiscal targets in order to create a bigger coalition that favors change?

Without such re-think, we end up with the kind of program that Greece has just signed up for (see here). It is a program that defies politics and economics, and which is engineered to inflict so much targeted pain that is unlikely to succeed, much less survive. The IMF and Europe, of course, are constrained by national politics – they have to design a program that parliament will pass. But this constraint is exacerbated by a narrow read of the crisis, which prevents them from focusing attention on creating the conditions for change. It also creates enormous frustration and a sense of lack of progress when progress, is in fact, taking place. We would all be better served by asking the right questions when it comes to Greece – and that requires moving beyond “how to bring down Greece’s debt” to “how can Greece’s economy change?”

Saturday, March 17, 2012

Dissecting Greece’s Second Memorandum

The IMF has finally released its detailed assessment of the second Greek loan package. The program contains many positive elements, but its excessive emphasis on internal devaluation (lower wages) as the way to create growth makes the program a very tough sell from the beginning both politically as well as economically.

The Basics of the Program. Greece will receive €28 bn from the IMF disbursed in 17 installments of €1.65 bn each with the last payment made in February 29, 2016. The IMF loan will be repaid fully by 2026 (including full repayment of the first loan by 2016). The Euro Area Member States (EAMS) will provide €144.7 bn, of which €112.6 bn will be disbursed in 2012, €17.2 bn in 2013 and €14.9 bn in 2014. There is no provision to repay these loans before 2016. By 2014, the official sector will hold 69% of Greece’s public debt. In this scenario, there is minimal need for market access before 2016.

Main Macroeconomic Parameters. GDP is forecasted to decline by 4.8% in 2012 before starting to see some growth in 2013 (0% growth for the entire year). The government is forecasted to run a primary deficit in 2012 before turning into surpluses by 2013. The debt over GDP ratio is meant to start from 163% of GDP in 2012 and decline to 116.5% of GDP by 2020. The program has scaled back its privatization targets – the government says it wishes to raise €12 bn by 2014, €46 bn by 2020 and reach the (previous) €50 bn goal by 2022.

Main strategy. The program rests on three pillars: “(i) restore competitiveness and growth; (ii) restore fiscal sustainability; and (iii) secure financial stability.” The new program has an intense focus on internal devaluation; as the IMF notes, “resolving Greece’s balance of payments problem within the euro will require a shift in the structural reform strategy to directly prioritize internal devaluation.” The IMF writes further that, “the [revised] fiscal path accommodates the impact of deflationary labor market policies in 2012 by allowing a primary deficit of 1 percent of GDP (1¼ percent of GDP below the target established under the 5th Review under the [Stand-by Agreement]).” It does note, however, that it suggested a longer fiscal consolidation period than was finally agreed to.

What to make of this program? First, the program is a lot more realistic. It seems that the IMF has a much better grasp of Greek reality. By emphasizing administrative capacity and execution, it is recognizing that frustrating gap between government promises and reality. Second, the program is incredibly more generous – while the first package foresaw market access in less than two years, this program gives Greece over 4 years to return to the market (and realistically even more). The Fund loan will take a decade to repay, while the EAMS loans will likely take longer. Third, the official sector has effectively “nationalized” Greek debt, owning 69% of the outstanding debt by 2014, converting the unwinding of Greece’s debt into a much more political rather than market affair.

Will the program work? Certainly, the new agreement contains many worthwhile reforms, as did the first memorandum. But the excessive emphasis on internal devaluation strikes me as wrong. To understand why, let us first review the path that the IMF is forecasting for the Greek economy.


The IMF forecasts another big drop in private consumption in 2012 (-5.7%), followed by a smaller one in 2013 (-1.1%), after which there will be very modest growth. Second, it assumes a big resurgence in business investment: after a fifth successive annual contraction in 2012, investment will grow by 7.7% over the 2013-2016 period. Third, is assumes that exports will rise by 6% on average between 2012 and 2016. Basically, this is a scenario where internal devaluation continues to shrink disposable income, but leads eventually to competitiveness that generates growth through investment and exports.

The problem, of course, is that as the IMF admits, “Restoring competitiveness by way of internal devaluation has proved to be a difficult undertaking with very few successes.” In fact, Box 3, a two-page section in the IMF report devoted to “International Experience with Internal Devaluation” reads almost as a perfect refutation on the case for internal devaluation. And yet this is the pillar of the new program. This economic path prolongs the contraction in private consumption, making the program harder to defend politically. It also places a meager focus on shrinking the state: by 2016, primary government spending may be 14% below 2011 levels – but in absolute numbers, the decline over four years will be just as big as the decline achieved in 2010 alone. That’s too slow. Since the state is not shrinking, the economy cannot rely on tax relief and a consumption boost, thus having to rely on investment and exports to generate growth. Can investment and exports deliver?

The investment number is more defensible: on a real basis, investment in 2016 will be merely above 2010 levels and still 40% below the 2007 peak. The IMF thinks that cheap labor (via internal devaluation) will help fuel investment: “reforms to facilitate investment are being accelerated to allow firms to take advantage of cheaper labor once financing conditions stabilize.” But for investment to grow at 7% a year, reforms will have to be rapid and the business environment will have to improve dramatically, not just on paper but in reality as well.

The export boom is even harder to defend. From a modest decline in exports in 2012, the program forecasts 6% annual growth in exports to 2016. By contrast, the 2010 export boom resulted in 4.2% growth, while exports grew on average by 3.5% a year between 2001 and 2007. So 6% growth is a step-change whereby exports in 2016 will be 12% higher than their all-time high in 2008. The program does have some measures that will specifically support exports: “eliminating the obligation of registration with the exporters’ registry and establishing the framework for an e-customs system and electronic export window.”

In other words, there is considerable downside risk to this forecast. For example, if investment and exports grow at half the rates projected by the IMF in the period from 2013 to 2016, the average GDP growth rate in those years will be 1% a year versus the 2.8% growth envisioned by the IMF. So a lot hinges on this delivering this rapid growth in exports and in investment.

Final thoughts. In my mind, the program places too much emphasis on internal devaluation. In a sense, I understand the point of departure of the Fund: consumption levels in Greece are too high relative to its peers and investment is too low – a sustainable economic path would require less consumption and more investment. Plus, as the IMF writes, “Greece’ entry-level minimum wage is higher than in Portugal (by 50 percent), Spain (by 17 percent), and 5–7 times higher than in Romania and Bulgaria.”

But I also know that young Greeks who are employed in the private sector barely make ends meet, and certainly would not were it not for parental support either directly (cash) or indirectly (housing, cars, etc.). I know that a Greek consumer will hardly tolerate signing up for another four years of misery with no consumption growth and no tax relief. As a result, this program relies on overly ambitious targets for investment and for exports, while offering no relief to the Greek consumer who is burdened with excessive taxation to pay for a state whose size is declining very slowly. And that’s a tough sell.

Αναλύοντας το Δεύτερο Μνημόνιο

Το Διεθνές Νομισματικό Ταμείο (ΔΝΤ) μόλις εξέδωσε την έκθεση του για τη δεύτερη δανειακή σύμβαση της Ελλάδας. Το μνημόνιο περιλαμβάνει πολλά θετικά στοιχεία, αλλά η υπερβολική έμφαση στην εσωτερική υποτίμηση (μείωση μισθών) ως μοχλός ανάπτυξης καθιστά το πρόγραμμα πολιτικά και οικονομικά δύσκολο να επιτύχει.

Τα βασικά του μνημονίου. Το ΔΝΤ θα δανείσει στην Ελλάδα €28 δισ. σε 17 δόσεις των €1,65 δισ. με την τελευταία δόση να αποταμιεύεται στις 29 Φεβρουαρίου 2016. Η Ελλάδα θα αποπληρώσει αυτό το δάνειο ως το 2026 (το πρώτο δάνειο αποπληρώνεται πλήρως το 2016). Τα κράτη μέλη της Ευρωζώνης θα παρέχουν €144,7 δισ., εκ των οποίων €112,6 δισ. το 2012, €17,2 δισ. το 2013 και €14,9 δισ. το 2014. Αυτά τα χρήματα θα επιστραφούν μετά το 2016. Με τα νέα δάνεια, ο επίσημος τομέας θα κατέχει το 69% του δημοσίου χρέους της Ελλάδας, ενώ υπάρχει ελάχιστη ανάγκη για προσφυγή στις αγορές πριν από το 2016.

Μακροοικονομικά μεγέθη. Το ΑΕΠ προβλέπεται να μειωθεί κατά 4,8% το 2012 πριν αρχίσει να ανακάμπτει το 2013 (0% ανάπτυξη για το έτος). Η κυβέρνηση θα εξακολουθεί να έχει πρωτογενές έλλειμμα το 2012 και ένα μικρό πλεόνασμα το 2013. Το χρέος θα πέσει από το 163% του ΑΕΠ το 2012 στο 116,5% του ΑΕΠ το 2020. Για τις ιδιωτικοποιήσεις, το πρόγραμμα έχει πιο μετριασμένους στόχους: €12 δις. μέχρι το 2014, € 46 δισ. μέχρι το 2020 και € 50 δισ. μέχρι το 2022.

Στρατηγική του προγράμματος. Το πρόγραμμα στηρίζεται σε τρεις πυλώνες: «(α) την αποκατάσταση της ανταγωνιστικότητας και της ανάπτυξης▪ (β) την αποκατάσταση της δημοσιονομικής βιωσιμότητας▪ και (γ) τη διασφάλιση της χρηματοπιστωτικής σταθερότητας». Το νέο πρόγραμμα τονίζει την εσωτερική υποτίμηση γιατί, όπως σημειώνει το ΔΝΤ: «για να επιλυθεί η ανισορροπία στο ισοζύγιο πληρωμών απαιτείτε μια αλλαγή στρατηγικής ώστε να δοθεί προτεραιότητα στην άμεση εσωτερική υποτίμηση». Το ΔΝΤ αναφέρει επίσης ότι, «η [αναθεωρημένη] δημοσιονομική πορεία αντικατοπτρίζει την αποπληθωριστική πραγματικότητα στην αγοράς εργασίας το 2012 και επιτρέπει ένα πρωτογενές έλλειμμα στο 1% του ΑΕΠ (το οποίο είναι 1¼% του ΑΕΠ κάτω από το στόχο που τέθηκε στην τελευταία αναθεώρηση του πρώτου μνημονίου).» Το ΔΝΤ επισημαίνει, ωστόσο, ότι είχε πρότεινε μια βραδύτερη δημοσιονομική εξυγίανση από αυτή που τελικά συμφωνήθηκε.

Πως να κρίνουμε αυτό το πρόγραμμα; Πρώτον, το νέο μνημόνιο είναι πολύ πιο ρεαλιστικό καθώς φαίνεται ότι το ΔΝΤ κατανοεί καλύτερα την ελληνική πραγματικότητα. Δίνει έτσι περισσότερη έμφαση στη εκτέλεση παρά στις υποσχέσεις. Δεύτερον, το πρόγραμμα είναι πιο γενναιόδωρο, δίνοντας στην Ελλάδα πάνω από 4 χρόνια μέχρι να χρειαστεί να επιστρέψει στις αγορές (και, μάλλον, θα υπάρχει παράταση αν χρειαστεί). Το δάνειο προς το ΔΝΤ θα αποπληρωθεί σε μια δεκαετία, ενώ το δάνειο προς την Ευρωζώνη μάλλον θα κρατήσει περισσότερο. Τρίτον, ο επίσημος τομέας θα κατέχει το 69% του ελληνικού χρέος το 2014, μετατρέποντας την αποκλιμάκωση του χρέους σε ένα πολιτικό παρά καθαρά οικονομικό θέμα.

Θα πετύχει το νέο μνημόνιο; Η νέα συμφωνία περιέχει πολλές αξιόλογες μεταρρυθμίσεις, όπως περιείχε άλλωστε και το πρώτο μνημόνιο. Αλλά η υπερβολική έμφαση στην εσωτερική υποτίμηση μου φαίνεται ότι είναι λανθασμένη. Ας δούμε πρώτα την πορεία για την ελληνική οικονομία που προβλέπει το ΔΝΤ.

 

Το ΔΝΤ προβλέπει ότι η ιδιωτική κατανάλωση θα συνεχίσει να μειώνεται το 2012 (-5,7%) και το 2013 (-1,1%), πριν αρχίσει μια μικρή ανάπτυξη το 2014. Δεύτερον, υποθέτει ότι μετά από πέντε χρόνια διαδοχικής συρρίκνωσης, οι επενδύσεις θα αυξηθούν ετησίως κατά 7.7% την περίοδο 2013-2016. Τρίτον, προβλέπει ότι οι εξαγωγές θα αυξηθούν κατά 6% ετησίως μεταξύ του 2012 και του 2016. Η βασική υπόθεση του σεναρίου είναι ότι η εσωτερική υποτίμηση (μείωση μισθών) θα συνεχίζει να συρρικνώνεται το εισόδημα των νοικοκυριών, αλλά θα οδηγήσει τελικά σε αύξηση της ανταγωνιστικότητας που με τη σειρά της θα δημιουργήσει ανάπτυξη μέσω των επενδύσεων και των εξαγωγών.

Το πρόβλημα είναι, όπως παραδέχεται το ΔΝΤ, ότι «η αποκατάσταση της ανταγωνιστικότητας μέσω της εσωτερικής υποτίμησης έχει αποδειχθεί ένα δύσκολο εγχείρημα με πολύ λίγες επιτυχημένες περιπτώσεις.» Μάλιστα, στο κείμενο του ΔΝΤ, υπάρχει ένα δισέλιδο αφιέρωμα στην «Διεθνή εμπειρία με την εσωτερική υποτίμη» το οποίο ουσιαστικά διαψεύδει τις όποιες ελπίδες για εσωτερική υποτίμηση. Και όμως αυτός είναι ο πυλώνας του νέου προγράμματος. Το πρόγραμμα παρατείνει τη συρρίκνωση της ιδιωτικής κατανάλωσης, καθιστώντας το πολιτικά πιο δύσκολο. Δίνει επίσης μια πενιχρή έμφαση στη συρρίκνωση του κράτους: το 2016, οι πρωτογενείς δαπάνες της κυβέρνησης προβλέπεται να είναι 14% χαμηλότερες σε σχέση με το 2011 – αλλά ουσιαστικά, η μείωση μέσα σε τέσσερα χρόνια θα είναι η ίδια με την μείωση που επιτεύχθηκε το 2010 από μόνο του. Άρα το κράτος δε μειόνεται αρκετά γρήγορα. Χωρίς τη συρρίκνωση του κράτους, η οικονομία δεν μπορεί να αντέξει καμία μείωση στη φορολογία για την ώθηση της κατανάλωσης, και άρα βασίζεται αποκλειστικά στις επενδύσεις και τις εξαγωγές να την ανάπτυξη. Μπορούν όντως οι επενδύσεις και οι εξαγωγές να δημιουργήσουν την απαιτούμενη ανάπτυξη;

Η πρόβλεψη για την αύξηση των επενδύσεων είναι φιλόδοξη αλλά δυνατή. Σε σταθερές τιμές, οι επενδύσεις το 2016 θα είναι μόλις πάνω από τα επίπεδα του 2010, και θα εξακολουθούν να είναι 40% κάτω από το ζενίθ του 2007. Το ΔΝΤ θεωρεί ότι το φθηνό εργατικό δυναμικό (μέσω της εσωτερικής υποτίμησης) θα τροφοδοτήσει τις επενδύσεις: «Οι μεταρρυθμίσεις για τη διευκόλυνση των επενδύσεων θα επιταχυνθούν ώστε οι επιχειρήσεις να επωφεληθούν από το χαμηλότερο κόστος εργασίας όταν οι συνθήκες χρηματοδότησης σταθεροποιηθούν». Αλλά για να αυξηθούν οι επενδύσεις κατά 7% ετησίως, οι μεταρρυθμίσεις θα πρέπει να είναι ταχείς και το επιχειρηματικό περιβάλλον θα πρέπει να βελτιωθεί δραματικά (και όχι μόνο στα χαρτιά).

Η εκρηκτική αύξηση των εξαγωγών είναι λιγότερο βάσιμη. Σε σχέση με μια μικρή μείωση το 2012, το πρόγραμμα προβλέπει ετήσια αύξηση των εξαγωγών κατά 6% έως το 2016. Ως μέτρο σύγκρισης, η μεγάλη «άνθηση» των εξαγωγών το 2010 οδήγησε σε αύξηση 4,2%, ενώ οι εξαγωγές αυξήθηκαν ετησίως κατά 3,5% μεταξύ του 2001 και του 2007. Άρα, η επίτευξη μιας ετήσια αύξησης 6% αποτελεί ένα υπερβολικά αισιόδοξο στόχο, σύμφωνα με τον οποίο οι εξαγωγές το 2016 θα είναι 12% πάνω από το υψηλότερο τους σημείο το 2008. Βέβαια το πρόγραμμα προβλέπει μέτρα για την ενίσχυση των εξαγωγών όπως την «εξάλειψη της υποχρέωσης για εγγραφή στο μητρώο των εξαγωγέων και τη θέσπιση του πλαισίου για ένα σύστημα ηλεκτρονικών τελωνείων».

Άρα, υπάρχει σοβαρός κίνδυνος να μην επιτύχει η Ελλάδα αυτούς τους οικονομικούς στόχους. Για παράδειγμα, αν οι επενδύσεις και οι εξαγωγές αυξηθούν κατά το ήμισυ σε σχέση με τις προβλέψεις του ΔΝΤ στην περίοδο από το 2013 έως το 2016, ο μέσος ρυθμός αύξησης του ΑΕΠ για τα έτη αυτά θα είναι 1% έναντι 2,8% που προβλέπει το ΔΝΤ. Έτσι τόσα πολλά θα κριθούν από την ταχεία αύξηση των εξαγωγών και των επενδύσεων.

Συμπεράσματα. Το πρόγραμμα δίνει μεγάλη έμφαση στην εσωτερική υποτίμηση. Εν μέρει το καταλαβαίνω το ΔΝΤ: σε σχέσει με τα άλλα Ευρωπαϊκά κράτη, το επίπεδο κατανάλωσης είναι πολύ υψηλό και των επίπεδο επενδύσεων πολύ χαμηλό – η οικονομία απαιτεί λιγότερη κατανάλωση και περισσότερες επενδύσεις. Επιπλέον, όπως γράφει το ΔΝΤ, «ο αρχικός κατώτατος μισθός είναι υψηλότερος από ό,τι είναι στην Πορτογαλία (κατά 50%), την Ισπανία (17%), και 5-7 φορές υψηλότερος από ό,τι είναι στη Ρουμανία και τη Βουλγαρία».

Αλλά γνωρίζω επίσης νέους που απασχολούνται στον ιδιωτικό τομέα που μόλις τα βγάζουν πέρα και που βασίζονται στη γονική υποστήριξη είτε άμεσα (μετρητά) είτε έμμεσα (στέγαση, αυτοκίνητο, κλπ.). Γνωρίζω επίσης ότι ο Έλληνας καταναλωτής δε θα ανεχθεί άλλα τέσσερα χρόνια δυστυχίας χωρίς αύξηση στην κατανάλωση και χωρίς καμία φορολογική ελάφρυνση. Το πρόγραμμα αυτό στηρίζεται σε υπερβολικά φιλόδοξους στόχους για τις επενδύσεις και για τις εξαγωγές, ενώ παράλληλα δε προσφέρει καμία ανακούφιση στον Έλληνα καταναλωτή ο οποίος βαρύνεται με την υπερβολική φορολογία προκειμένου να πληρώσει για ένα κράτος που δεν συρρικνώνεται. Και αυτό είναι πολύ δύσκολο να το χωνέψει κανείς.

Friday, March 16, 2012

Unemployment During the Greek Economic Crisis from 2008 to 2011

In Q4 2011, there were 1,025,900 unemployed people according to the Greek Statistical Authority, as the unemployment rate reached 21%. Who are the unemployed and how has their composition changed in this crisis?

Gender. There are as many unemployed men (49.5%) as women, even though the unemployment rate for women (25%) is higher than that for men (18%). Due to higher male unemployment, the ratio between female and male unemployment has changed: while males generally accounted for ~40% of the total people who are unemployment, they now make up 50%.


Age. Around 41% of the people who are unemployed are aged 30 to 44, bracketed on either end by the people who are 25-29 (20% of the total unemployed) and 45-64 (23% of the unemployed). The rise in unemployment during the economic crisis has been driven by a big increase in the number of people aged 30-44 who are unemployed – in fact, around 42% of the people who have become unemployed between Q4 2008 and Q4 2011 were in this age group. There have been smaller but equally noticeable increases in the people who are unemployment aged 25-29 and 45-64.

When it comes to unemployment rates for various age groups, however, the story is different. The incidence of unemployment is highly correlated with age as younger groups have higher unemployment rates than older ones and with females having higher unemployment rates than men. For young people, the unemployment rate ranges from 48% to 59% for men and from 55% to 70% for women, underscoring the difficulty in finding jobs for people who are just starting their careers.

Education. Around 37% of the people who are unemployed are people whose education extends just to a high school diploma. This group also accounts for 38% of the growth in unemployment between the end of 2008 and the end of 2011. After people with only a secondary education, people with a vocational degree make up the second largest unemployed group, making up 20% of the total.

Regarding unemployment rates, people with all educational levels have seen a marked increase in their unemployment rates, ranging from a 131% increase in the unemployment rate of people with a vocational degree to a 218% increase for people with only a primary education (the growth for people with no primary education is greater, but this is really due to the very small volume of people in that category, making up less than 0.5% of the total). 
Duration. Chronic unemployment (when someone has been looking for a job for over 12 months) has been a chronic problem for Greece. In fact, people who have been unemployed for over 12 months have always made up anywhere from 40% to 60% of the total unemployment pool. Since 2008, there has been a rise in unemployment duration for all types – from very short term (1 month), to medium term (up to a year) and long term. by the end of 2011, 55% of the unemployed have been so for over a year.

Sector. In the three years from Q4 2008 to Q4 2011, the Greek economy has shed 657,000 jobs. Three sectors which make up 34% of the country’s total employment (there are 21 sectors in total) accounted for 67% of the lost jobs, led by construction (160,000 jobs lost), manufacturing (146,000) and then wholesale and retail trade (111,000). There were also some sectors where employment actually grew, albeit modestly: “financial and insurance activities” and “human health and social work activities.”

Region. Of the people who are unemployed, 40% live in the Attica region (which includes Athens), a share that is slightly higher than its population (36%). Central Macedonia makes up another 18% of the total employed population, roughly on par with its 17% of the population. In terms of unemployment rates, the Peloponnese, Northern Aegean and Crete tend to (and continue to) rates below the national average, while Macedonia and Sterea Ellada are above the national average.

Labor Costs. The average monthly labor cost has been declining consistently since early 2010 at an average rate of 3.4% on a year-on-year basis. But in Q4 2011, there was a much more significant decline of 14.9% Relative to the peak, labor costs have come down by about 18%, thus correcting some of the competitiveness adjustment necessary to correct the imbalance that was created earlier in the decade.

Overall profile. An unemployed person in Greece is as likely to be a man as a woman. There is a 41% chance that they are 30 to 44 years old, and there is a 37% change that they have only a high school diploma. They are 55% likely to have been unemployed for over a year, they are likely to have lost their jobs from construction, manufacturing or wholesale and retail trade, and they most likely live around the major urban centers in Athens or Thessaloniki. As for the people who are employed, their cost to employers has gone down by about 18% on average as a result of lower wages or lower indirect payments.

Sunday, March 11, 2012

The Greek Economy Remains in a Vicious Cycle

The Greek economy contracted by 6.9% in 2011 according to preliminary statistics by the Greek Statistical Agency, bringing the gross domestic product (GDP) down to almost 2003 levels. At the same time, the Greek Ministry of Finance has published its first estimates for the consolidated budget in 2011. According to the figures, the budget deficit actually rose in 2011 due to a slower decline in expenditures versus 2010 and a large decline in revenues. These numbers underscore the futile effort to draw more money from a contracting economy to pay for a state that is not shrinking quickly enough.

In 2010, the government made progress in reducing its budget deficit: revenues rose by €1.7 bn as higher taxes offset the decline in receipts that comes from a recession. Spending also fell by €10.4 bn despite a €1.3 bn increase in interest payments, meaning that primary spending was cut by €11.7 bn. Thus, the budget deficit declined from €36.6 bn in 2009 to €24.5 bn in 2010. This progress, however, fizzled in 2011 as the consolidation effort moved past the “low hanging fruit.” Revenues plummeted by €3.8 bn and reached their lowest point since 2007. Spending, on the other hand, did fall, but only by €3.4 bn. Since interest payments once again rose by €3.1 bn, the decline in primary spending was €6.6 bn, which is notable, but almost half the decline in 2010. As a result, the budget deficit rose by €0.4 bn to 11.6% of GDP versus 10.8% in 2010.


The effect of this consolidation has been to plunge the economy in a deeper recession. The economy contracted by 6.9% in 2011 (versus 3.5% in 2010 and 3.3% in 2009). Yet the composition of this recession has changed (see here). Throughout 2009 to 2011, there has been a steady reduction in imports (M), which acts as “growth” for GDP. Contrary to news reports which tout an export boom in the country, exports (X) contributed modestly to GDP in 2010 and they were flat in 2011. Investment (I) has been declining since 2008 – not only is investment now 50% down from its 2007 peak, but it has fallen below 2000 levels. Government expenditures (G, which only capture a share of total spending) also declined in 2010 and 2011. The big problem, however, is consumption, which fell by 7.1% and which was, by far, the biggest driver of the 2011 recession.


These numbers show that despite some progress in shrinking the state in 2010, government spending is not falling enough. Instead of making a more serious effort to roll back the state, the government is trying to increase revenues – but since it is unable to raise revenues by fighting tax evasion, it is doing so by raising taxes on everyone. This, in turn, is squeezing money from households (which can’t spend) and from companies (who can’t invest) causing an ever deepening recession.

To get out of this vicious cycle, Greece needs a more serious effort to cut government spending. If spending is lower, then the government can achieve its budget deficit targets with a lower level of taxation, meaning it can lower taxes on households and companies. Such tax relief is essential to reignite spending and resuscitate a moribund economy. Greece’s big state is literally squeezing the life out of the economy.

Thursday, March 08, 2012

The Number That Still Gives Me Hope About Greece

It is hard to find good news about Greece these days. And yet there is one number that I keep looking at, and it’s a number that gives me hope about the country and its future: it’s the share of the electorate whose current vote intention is to abstain.

According to Public Issue, this number has averaged about 34% over the past year, and it has ranged from 27% to 38%. More than any other number, it captures the prevailing mood in Greece, and it reinforces the near two-thirds abstention rate in the second round of the local elections in November 2010. That number says that a big share of the public feels disenfranchised and thinks that it has no good political alternatives from which to pick. It’s a number that says people don’t have faith in any of the political parties, their promises, their agendas and their people (or, even, their promise of patronage). There is a huge void developing in the center of the Greek political system waiting to be filled.

Of course, as I have written in the past, this void can be filled in a destructive way. But what is encouraging is that even in the midst of an ever worsening crisis and heated rhetoric, the demand for something different, for something fresh, for real solutions – the demand for those things hasn’t gone down. This number says there is a still silent plurality that is up for grabs. The supply of good politicians has not increased – but neither has our demand for them decreased. And that is an incredibly hopeful sign in the midst of such difficulty and tragedy.