The Greek Economy and the Crisis . Panagiotis Petrakis The Greek Economy and the Crisis Challenges and Responses Prof. Panagiotis Petrakis National and Kapodistrian University of Athens Department of Economics Stadiou 5 10562 Athens Greece ppetrak@econ.uoa.gr ISBN 978-3-642-21174-4 e-ISBN 978-3-642-21175-1 DOI 10.1007/978-3-642-21175-1 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011938469 # Springer-Verlag Berlin Heidelberg 2012 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. 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Printed on acid-free paper Springer-Verlag is a part of Springer ScienceþBusiness Media (www.springer.com) Contents 1 Introduction: The Responsibility of Knowledge, Challenges and Responses 1 References 9 2 The Changing World and the Greek Economy Before the Crisis 11 2.1 Basic Sources of Growth 12 2.2 The “Unexplained Part” of Growth, or the Factors Shaping Total Productivity 14 2.3 Small Open Economies and Development 16 2.4 Fundamental Global Economic Changes . . 17 2.5 The Monetary Economy 23 2.6 Population Flows 24 2.7 Technology and Innovation 24 2.8 Energy and Climatic Change 27 2.9 The Formation of National Power 31 2.10 Southeastern Europe and Gr eece 34 References 37 3 The Pre-Crisis Growth of the Greek Economy 39 3.1 Growth in the Greek Economy 40 3.2 Financing of Growth and Wealth 42 3.3 Production and Income 46 3.4 Consumer Expenditures 48 3.5 Imports, Exports and Balance of Paym ents 48 3.6 Competitiveness and Productivity 50 3.7 Growth and Demand in the Greek Economy 57 3.8 The Size of the Shadow Economy and its Effects 58 3.9 Entrepreneurship 64 References 69 4 The Question of Growth 71 4.1 The Issue of Human Developme nt 71 v 4.2 Examination of the Greek Economy’s Convergence with the European Union 77 4.3 The Question of Quality of Life and Develo pment 82 References 86 5 Human Capital: Education, Innovation and Health 87 5.1 The Quantitative Dimension of Education 87 5.2 The Qualitative Results of the Education System 90 5.3 Education and Labour Market 96 5.4 The Relation Between Research and Innovation as a Serious Problem in the Greek Educational System 104 5.5 The Financing of Education 106 5.6 Summary of Problems in the Education System 110 5.7 The Development of the Human Capital . . 111 5.8 Innovative Activity of Enterprise s 114 5.9 Population Health 122 References 125 6 Cultural Values, Stereotypes and Historical Evolution 127 6.1 The Evolution of the Greek Economy 128 6.2 Risk, Commitment Time of Investment Funds and Productive Model in the Greek Economy 135 6.3 Cultural Values and Stereotypes 136 6.4 Empirical Facts on the Hierarchy of Cultural Values 139 6.5 Social Capital 143 6.6 The Role of Family Networks in Greece . . . 147 6.7 Economic and Social Reflections of the Cultural Model 148 6.7.1 The Basic Description of the Model 148 6.7.2 Temporal Orientation and Relationship with the Future . 153 6.7.3 Self-Employment and the Shadow Economy 153 References 154 7 Idiosyncratic Economic Institutions 157 7.1 Characteristics of Transactions 158 7.1.1 Visible Transaction Costs 158 7.1.2 Invisible Transaction Costs and Business Development . . 159 7.1.3 Invisible Transaction Costs and Corruption 162 7.2 Property Rights 163 7.3 The Oligopolistic Situation in Greece 168 7.4 Greek and Foreign Companies 170 7.5 The Structure of the Financial System: Banks or Financial Markets? 174 7.6 Key Features of the Greek Financial System 177 7.7 The Tax and Insurance System 179 7.7.1 The Structure of the Tax System 182 vi Contents 7.7.2 Organisation and Operation of Social Insurance Schemes 186 7.8 The Insurance Scheme in the Greek Economy 187 References . 191 8 Political Institutions and the Distr ibution of Income 193 8.1 Political Institutions in Greece 194 8.2 The Effectiveness of Political Institutions . . 198 8.3 Size and Efficiency of the Public Sector 201 8.4 Bureaucracy 203 8.5 Public Enterprises 208 8.6 The Influence of the State on the Functioning of the Economy and Society 211 8.7 Pressure Groups in the Greek Society 212 8.7.1 Professional Organi sations 214 8.7.2 Freelance Professionals Unions 215 8.7.3 Trade Unions 219 8.7.4 Farmers 222 8.7.5 Pensioners 222 8.7.6 The Unemployed 223 8.8 Political Institutions and Income Distribution 223 8.8.1 Distribution of Income 224 8.8.2 Redistribution of Income 226 8.8.3 Key Features of Poverty in Greece 228 References . 230 9 Human Incentives 233 9.1 Incentives and Economic Re sults 233 9.2 Formation of Incentives 236 9.3 Impact of Cultural Stereotypes on the Fo rmation of Incentives 237 9.4 Basic Incentive Mechani sms 239 9.5 Incentives and Entrepreneurial Behaviour . 241 9.6 The Importance of Investment Funds’ Commitment Duration and of Risk Taking 243 9.7 Psychological Needs and Ince ntives 247 9.8 Returns of Investments in Human Capital . 247 9.9 Incentives and Economic Institutions 251 9.9.1 The Financial System 254 9.9.2 Financial System, Crisis and Financial Managers’ Incentives 255 9.9.3 The Tax System 256 Contents vii 9.9.4 The Social Security System 257 9.9.5 Parallel Economy and Incentives . 258 9.9.6 Incentives and Capital Returns 262 9.10 Incentives and Entrepreneurial Activity . . . 263 References . 267 10 The 2008–2010 Crisis and the European Stability Mechanism 269 10.1 Financial Crises in the Global Economy . . 270 10.2 The 2008 Crisis and the Real Global Economy 271 10.3 The 2008 Crisis and the Greek Econom y 275 10.4 The Phases of the Crisis over Time 279 10.5 Internal Conditions of the Crisis 286 10.5.1 Public Debt and its Maturity 287 10.5.2 Spreads 289 10.5.3 Credit Default Swaps 289 10.5.4 The Three Credit Rating Agencies 291 10.5.5 The Problem of the Financial System 292 10.5.6 Public Lending 295 10.6 External Conditions of the Crisis 296 10.6.1 Germany’s Role 296 10.6.2 The Obama Administration’s Policy and the US Financial System 299 10.6.3 Creation of Rescue Packages in Europe 300 10.7 The Creation of the ESM and the Entrance of the Greek Economy 300 10.7.1 Measures of December 2009 (Stability and Growth Program, SGP) 301 10.7.2 March 2010: The Result of Aggressive Market Pressure and the Additional Corrective-Supplementary Decisions of the Greek Government 302 10.7.3 May 2010: Inclusion in the European Stability Mechanism 303 10.8 The Evolution of Economies: The Unbalanced Recovery and the Global Imbalances 305 References . 308 11 The Deeper Causes of the Greek Economic and Social Problems . . 311 11.1 Special Features of the Institutional Background 312 11.1.1 Cultural Background and Its Significance 315 11.1.2 Property Rights Obscurity 318 11.1.3 Political Institutions as a Defining Factor for Restructuring Economic Institutions 320 11.2 Common Resources as the Mai n Source of Wealth 322 viii Contents 11.3 The Moral Hazard in the International Financial System and the Institutional Weakness Within the EU 324 11.4 The Long-Term Social Choice of Expanding the Public Sector as a Means to Absorb the Excessive Workforce 328 11.5 Systematic Existence of High Risk Levels in the Greek Society and Economy 330 References . 331 12 The Greek Economy and the Crisis 333 12.1 The Social Perception of the Crisis 333 12.2 The Medium-Term Perspective in the International and European Economy 336 12.3 The IMF, Growth and Adjustment 345 12.4 The Classical and Peculiar Market Models, the Crisis and the Economic Adjustment Program (EAP) 348 12.5 The Economic Adjustment Program, Policy and Income Distribution 361 12.6 Economic Adjustment Progr am, Cultural Background, Motivation, Social Capital and Business Capital 363 References . 366 13 The Effectiveness of Economic Adjustment Interventions 367 13.1 Fiscal Adjustments and Economic Developments 367 13.2 Structural Interventions 380 13.3 The Financial System and the Real Economy 386 13.4 Education and Innovation 393 13.5 The EAP’s Working Hypothesis and the Greek Economy 396 References . 399 14 The Medium-Long Term Outlook of the Greek Economy 401 14.1 The Medium-Long Term Persp ective on the Greek Economy and the Sources of New Growth 401 14.2 The Relationship Between the Key Factors of Growth and Other Factors (TFP) 408 14.3 Overcoming the Trend 415 14.3.1 The Political Conditions 415 14.3.2 The Specifications of the Growth Model 417 14.4 The Target, Instruments and Time Required to Overcome the Growth Trend 419 14.4.1 The Objectives of the Growth Model 420 14.4.2 The Instruments for Implementing the Growth Model . 426 References . 429 Contents ix Appendix: A Sectoral Proposal for Potential Growth in the Greek Economy. Climate Change, Population Ageing, Tourism and Culture 433 1 Geophysical Components of the Long-Term Evolution of the Greek Economy 434 1.1 Climate Change and Its Effects 434 1.2 Population Ageing 435 2 The Tourism Sector and the Greek Economy . 437 3 The Productive Sector of Culture 442 4 Health . . . 446 References . . 449 x Contents [...]... tomorrow’s reality The book consists of 14 chapters and an Annex Chapter 2 describes the changing world and the position of the Greek economy up to the 2008–2010 crisis Chapter 3 describes the development conditions of the Greek economy up to the great crisis Chapter 4 deals with the actual effectiveness of the economic development model in the Greek economy, i.e., human development by controlling the relation... industrialization Bank of Greece, Athens 2 The Changing World and the Greek Economy Before the Crisis The worldwide economic and social environment is changing rapidly The rate of economic and social developments is the main characteristic of the twentieth and especially the beginning of the twenty-first century These changes concern all participants in the global economic process, whether they are national economies,... describes the target conditions for the Greek economy, which will allow it to overcome the emerging trend in the long term Finally, the Annex includes a dynamic sectoral development proposal for the Greek economy that is based on the long-term significant changes occurring in the wider environment The book discusses the political economy of the Greek social and economic problem Political economy is the area... plan Ultimately, the development problem remains unexplored Therefore, today it is imperative to think about the growth conditions of the Greek economy Let us not forget that, now and in the foreseeable future, this issue will affect not only the Greek population and the Greek economy but also Europe and the world at large The challenge of solving the Greek problem is international The key objective... introduce the reader to the dynamics of these changes and to enable the reader to place the Greek economy (as a small open economy and society) in the context of the wider global developments To achieve this, it is necessary to identify the main components of global economic structuring and restructuring Which are the real forces that shape new value in the economy, and which are the forces that shape the. .. 2 The Changing World and the Greek Economy Before the Crisis Thus, at first glance we can characterise the Greek economy by taking into account the standard of living, exports and imports of capital A strong relation exists between capital imports and growth Of course, a similar relation could exist in any developing economy Therefore, much deeper analysis is required to clarify the nature of the Greek. .. (Fig 2.1) 3 Maybe the most important example of all of the empirically observed cases is the comparison between North and South Korea, which started from the same level of growth and development and today present a vast gap in growth and quality of life of their citizens 16 2 The Changing World and the Greek Economy Before the Crisis Fig 2.1 Configuration of growth and development levels and rates 2.3... population flows and Sect 2.7 changes in technology and innovation Section 2.8 analyses the field of energy and climate change and, more specifically, the depletion of resources and the demand for energy Section 2.9 describes the process of configuring the national force of a P Petrakis, The Greek Economy and the Crisis, DOI 10.1007/978-3-642-21175-1_2, # Springer-Verlag Berlin Heidelberg 2012 11 12 2 The Changing... blame the Chinese funding for the “bubble” of the financial structure in the United States and the rest of the Western world The actual capital flows from China are much smaller compared to the value of the monetary instruments generated in the West (see Sect 2.5) This financing influx has kept interest rates in the USA, and consequently in the rest of the world, low and the exchange rate between the (depreciated)... book, the Greek economy is noted for this deviation The Greek economic system is largely oriented towards the control of the instrument (function) rather than towards the maximisation or improvement of the 6 1 Introduction: The Responsibility of Knowledge, Challenges and Responses outcome If, in forming the development prospects of the future social action, policy makers concentrate again on the organisation . The Greek Economy and the Crisis . Panagiotis Petrakis The Greek Economy and the Crisis Challenges and Responses Prof. Panagiotis Petrakis National and Kapodistrian University of Athens Department. Athens Department of Economics Stadiou 5 10562 Athens Greece ppetrak@econ.uoa.gr ISBN 97 8-3 -6 4 2-2 117 4-4 e-ISBN 97 8-3 -6 4 2-2 117 5-1 DOI 10.1007/97 8-3 -6 4 2-2 117 5-1 Springer Heidelberg Dordrecht London New. Outlook of the Greek Economy 401 14.1 The Medium-Long Term Persp ective on the Greek Economy and the Sources of New Growth 401 14.2 The Relationship Between the Key Factors of Growth and Other Factors