Transcript Slide 1

From Grexit to Growth,
or Trapped in Recession?
Nicos Christodoulakis
Athens University of Economics & Business,
and Hellenic Observatory LSE
Brussels, November 2013
2007
The Adjustment …
Fiscal deficits back
at pre-crisis levels
2009
2010
2011
2012
2013
2014
-2
-7
-12
-17
Greece from -16%  -4% in 2013
Ireland from -32%  -5% in 2013
2008
-22
DEF_GR
DEF_PT
DEF_IR
-27
DEF_SP
-32
5
0
External deficits
all in surplus
-5
CAB_GR
CAB_PT
-10
CAB_IR
CAB_SP
Source: Ameco Database, 2013
-15
The Result …
All economies in serious contraction for six consecutive years
Greek economy collapsed by -23% of GDP
105
100
95
GDP_GR
90
GDP_PT
85
GDP_IR
80
GDP_SP
75
2007
2008
Source: Ameco Database, 2013
2009
2010
2011
2012
2013
2014
Output gap from potential GDP much higher
and proportional to the intensity of austerity programs
The intensity of austerity
the size of adjustment programs as % GDP,
per country j=GR, IR, IT, PT, SP and GE
Source: Financial Times
http://www.ft.com/cms/s/0/feb598a8-f8e8-11e0-a5f7-00144feab49a.html#axzz2JSOwncys.
Recessionary impact is defined as
a simple time-trend projection in 2000-2007
For details: Christodoulakis (2013), Austerity and Recession in the Euro Area
0
-1
Avg Recession per year, % GDP 2008
-3
-5
2
4
6
8
10
Austerity package, %GDP
GE
PT
IT
SP
-7
As austerity gets
more intense,
its impact
becomes stronger
-9
-11
-13
12
correl = - 0.92
t - stat = 4.74
IR
GR
-15
This is in sharp contrast with the early optimism adopted by IMF and ECB,
that a front-loaded adjustment would have only small and transient effects
Optimism #1: The growth impact of fiscal consolidation was estimated
to be mild and in any case disappear soon
IMF WEO Report (2010, p. 94):
• The deflationary impact would be limited and recession would bottom-out
in late 2010 and gradually rebound afterwards.
• A fiscal correction by 1% of GDP, reduces output by 0.50%
and raises unemployment by only 0.30%.
Optimism #2:The optimal-debt theories
Debt to GDP above a range 80-90% is detrimental to growth
AER:
IMF:
OECD:
ECB:
Reinhart and Rogoff (2010)
Kumar and Woo (2010)
Cecchetti et al (2011)
Checherita and Rother (2010), Baum et al (2012).
Thus, Governments should
“… swiftly implement ambitious strategies for debt reduction
GREECE: Fiscal Punishment and Failure
35
180
30
DEBT
% GDP
160
25
140
20
120
15
UNEMPLOYMENT
%
100
10
80
5
2006
2007
2008
2009
2010
2011
2012
2013
Unemployment from 8.5% to 27%
Debt from 125% in 2009 to 180% of GDP in 2013!
The snow-ball effect on debt in Greece and the Euro area
Percent of GDP
20
Greece
15
10
Euro17
5
0
2008
2009
2010
2011
2012
2013
After 2008, Greece adds 5-15% of GDP on debt
every year, solely due to the lack of Growth
The case of Greece: Major shortcomings
1.Private sector salaries fiercely attacked
2.Public sector universally cut, hitting incentives
3.Too many taxes, most on the same households
4. Banks’ recapitalization by issuing new public debt
5.The Grexit scare: lack of strategy, referendum, etc
6.RECESSION: Debt burden increases in recession
Domestic Devaluation and Competitiveness
14,000
12,000
10,000
1,600
14,043
14,594
1,400
2013
12,132
1,200
2012
1,000
8,000
800
6,000
600
4,000
400
2,000
200
0
MONTHLY , MIO EURO
ANNUAL NON-OIL EXPORTS,
MIO Euro
16,000
0
Non-Oil Exports improved in 2012 by only 3.90% vs. 2011
despite a wage cut by -23% in the private sector
Source: Bank of Greece, Conjectural Indicators, Aug 2013
2,000
14,631
1,800
12,000
2012
11,683
1,600
1,400
9,238 est
1,200
8,000
1,000
800
4,000
600
2013
400
200
0
MONTHLY REVENUES, MIO EURO
ANNUAL REVENUES, MIO EURO
16,000
0
Income Tax Revenues not improving, despite rates surging
In 2013, nearly 1.5% GDP below 2012
Source: Bank of Greece, Conjectural Indicators, Aug 2013
VAT rates rise, VAT Revenues fall !
PSI 2012 had only limited effect in cutting debt
I. Banks recapitalization annulled most of the “haircut”
II. Haircut in Social Funds, no effect on current debt of GG
Banks
Capital
Injection
Social Funds
PSI+
PSI+
Recapitalization
haircut
Govt. Debt
Central
Government
haircut
Bailout
Installment
Debt fully restored
GG Debt cut = 0
PREREQUISITES for Exiting Recession in Greece
1.Recapitalize Banks via EFSF, not Greek Public Debt
(Financial Times, editorial, 22/2/2013)
2.Change the Policy Mix: More reforms, less austerity
 More Public Investment
 Fewer taxes to raise demand & liquidity
 Selective actions, no universal cuts
3.Create a Growth Front: More CSF, EIB initiative
4.For credibility, endorse fiscal rules in the Constitution
The official scenario (European Economy, 2012)
GDP growth real (%)
Gross debt (% of GDP)
Primary surplus (%of GDP)
2012
2013 2014 2016 2017 2018 2019 2020
-4.70
0.00
2.50
3.00
2.80
2.60
2.50
2.30
160
164
161
145
137
130
123
116
-1.00
1.80 4.50 4.50 4.50 4.30 4.30 4.30
All failed!!!
Impossible figures !!!
An alternative scenario with more growth, less austerity
1. Primary surplus less by 2% of GDP. From 4.5% to 2.5% per year
 Finance Public investment, cut taxes, etc
2. Growth higher by 1.80 to 3.40% per year
(according to the higher fiscal multipliers)
Result: Debt/GDP ratio falls more, because of the snow-ball effect
Debt Forecast 2020: Push Less to Get More
More investment, fewer taxes can spur growth,
cut unemployment & achieve debt sustainability
Some General Conclusions:
1. Before the crisis, fiscal multipliers were very low.
 Fiscal policy homogenized via SGP,
growth affected by other structural factors.
2. After the crisis, countries got differentiated
 Fiscal cuts seriously affected incomes.
3. Intense and front-loaded austerity programs
fuelled uncertainty and caused deep recession
4. Adjustment programs should relax immediately,
thus causing milder effects on recession