The Greek Economy from Entry into the Eurozone to the Outbreak of the Crisis

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Lights and shadows in the crisis

The financial crisis of Greece has made manifest the chronic inability of its governments to carry out an efficient economic policy, of which it has shown the inadequacy in relation to both the management of the important obligations deriving from the participation of the State in the Economic and Monetary Union community, and to exploit the relative opportunities for growth and restructuring. At the same time, the crisis has highlighted the weakness and vulnerability of the eurozone in terms of structure and functions, highlighting the loss of productivity that has characterized some of the southern nations of the European Union and the impossibility of solving this problem with the coordination of economic and above all national financial policies, through the Stability and Growth Pact.

The fact that the European states have mobilized to face the Greek crisis, however, gives rise to some encouraging conclusions regarding Community integration. First, it proves that the establishment of the euro goes beyond strictly economic and political logic. It has been and continues to be more than an economic project: it is also an institutional and political process of integration, which aims to achieve a dynamic balance. European integration may proceed more or less rapidly than in the past, but it is certainly constantly in motion. This is a crucial aspect, because if the process were to stop or retreat, the consequences would not only be of an economic nature but, undermining the credibility of one of the key institutions of the Union, namely the euro, would also make political outcomes inevitable. with implications and knock-on effects on the entire European structure. For these reasons, despite the structural fragility of the eurozone and the responsibilities of the Greek executives for their economic policy, the governments of the EU states could not accept such a serious defeat of Europe and went beyond myopic short-term political forecasts..

Here we propose to examine the financial crisis in Greece and the decision of eurozone governments to create a monetary support mechanism, analyzing to what extent the solutions adopted constitute an important step towards the completion of the euro building, as well as than an act indirectly useful for a deeper community integration.

The Greek economy from entry into the eurozone to the outbreak of the crisis

Let us then analyze what factors led Greece to the crisis. The entry into the euro and the common monetary policy brought about two important changes: first, the risks of currency transactions were eliminated and, second, a decrease in interest rates was made possible. This naturally happened in all eurozone states, but as far as Greece is concerned, the impact was more significant. These historical changes could have had a positive influence on the country’s competitiveness if those in charge of preparing economic policies had committed the means and will to transform certain challenges into opportunities. Since, on the contrary, economic policy has limited itself to passively monitoring the development of the nation,

The elimination of currency risks, together with the¬†de facto¬†guarantees coming from the state’s participation in the European common market, it could have generated ample opportunities to attract foreign direct investment but unfortunately this significant facilitation could not compensate for the serious disadvantages presented by the Greek economy. The widespread corruption in the public administration, deriving from a clientelistic political system, combined with the rigidity of the markets (and in particular of the labor market), has managed to discourage the influx of foreign investments. Similarly, low interest rates in both the public and private sectors could have substantially stimulated public and private investment interested in the development and expansion of new economic sectors. Instead, we have focused only on consumption,

In the years following Greece’s entry into the eurozone, its economic growth rate has been consistently well above the European average. Growth, however, came from loans to real estate and consumer credit and from government spending. This situation was only partially noted in the reports and recommendations issued by the European Commission and the Council of Europe (ECOFIN and Eurogroup), which urged Greece to proceed with structural changes such as to strengthen the competitiveness of its economy, but at the same time they focused their suggestions on the need to reduce debt and the fiscal deficit. The trade deficit, which reflected the country’s progressive loss of ability to compete, appeared in practice as a secondary priority, or rather a subject of analysis more for economists than for politicians. For what reason? In short, because it was not directly part of any of the commitments made by the state in relation to the Stability and Growth Pact. On the other hand, prior to joining the eurozone, a country’s foreign trade deficit was an important political priority, as it had an impact on its currency reserves and could lead to the need to borrow in foreign currency, so that a series of measures to resolve risk situations, such as devaluation. The fiscal deficit was, on the contrary, a secondary political priority, since it could be managed through monetary financing. Significant effects follow from this major change in priorities, which can, in the extreme hypothesis, lead on the one hand to excessive public debt, and on the other hand to an erroneous perception that problems of competitiveness no longer require immediate political reactions. In other words, the trade deficit has been wiped off the day-to-day agenda and seen only as a long-term policy issue.

A final issue worth addressing concerns Greece’s use of EU subsidies and social cohesion funds. The bulk of EU funds have been devoted to infrastructure, with projects across the country that have undeniably improved the quality of life, but which will only increase productivity in the long run. On the contrary, investments in human resources, which would have strengthened competitiveness, endogenous growth and taxable income, have been reduced. As a result, growth did not lead to positive fiscal results and Greece found itself extremely weak as it faced the international economic crisis.

It was these, and not the falsification of the statistics, that were the reasons for the crisis.

The Greek Economy from Entry into the Eurozone to the Outbreak of the Crisis