Assignment during my study in the two-year master programme in EU studies

organized by the Centre international de formation européenne

in cooperation with the Jean Monnet Chair of the University of Cologne
(info: http://www.eu-online-academy.org/)

Assignment for the course ‘Economic challenges for the enlarged EU’
Professor András Inotai
Topic: Why could Greece not become a more competitive economy
after three decades of EU membership?
Christina Kontaxi, 30/05/2010

Greece acceded to the EC in 1981, after being an associate member for almost 20 years, since 1961,
the year in which the (first) association agreement between Greece and the EC was signed. According
to the European Navigator [1], at the period of accession there were substantial economic hurdles to
overcome, since Greece:

· had a much lower gross domestic product (GDP) and a higher unemployment rate than its
European partners. Its GDP was 50 % below the Community average
· more than 26 % of the working population in Greece was employed in agriculture, whereas
this primary industry accounted for just 8 % of the working population in the Community
· the Greek agricultural products (olive oil, wine, fruit & vegetables) threatened to compete
with products in Italy or France which were already in surplus under the common agricultural
policy (CAP)
· the Greek merchant fleet and the competition with the European one

Greece became the tenth Member State of the European Community on 1 January 1981, but
Greece’s backward economy and its geographical isolation — it had not a single common border
with a Member State of the European Community — exacerbated regional disparities within the
Community [1]. It was no secret that the Greek economy differed substantially from those of the
other nine member countries. Indeed many studies, including those by the Commission itself,
expressed reservations about the ability of the relatively underdeveloped Greek economy to merge
successfully with the much more developed and prosperous economies of the EC [2]. Greece hoped
to benefit in particular from guaranteed agricultural prices, from Community structural funds, the
growth in tourism and inflows of hard currency but the disparities between the economic structures
in Greece and in the Community made it difficult to apply immediately and uniformly all the
operating rules of an internal market that was designed for developed economies [1]. It’s important
to add also that in the beginning, when Greece was seeking to join the EC, the effort did not enjoy
widespread support among Greek political parties. Greece joined (January 1981) with the support of
the conservatives, while months later the elections were gained by those who were fiercely
opposed, the socialists (October 1981). Some say, that the first years of membership were lost while
the government was gradually accepting the fact the Greece was a member state.

The state in Greece, in 1981, occupied a hegemonic position in practically every aspect of the society,
often referred as “gigantism” because of [3]:

(1) the over-employment in the public sector;

The number of public sector employees amounted in 1981 to 351,028 people, rising to 615,956
people in 1992, or 17 per cent of the total Greek population, dominating in this way the labor
market. Furthermore, the clientelistic nature of Greek politics was an important factor for swelling
employment in the public sector.

(2) the high amount of public expenditure as a share of GNP;

Total public expenditure amounted in 1981 to 49.6 per cent of Greek GDP, much higher than the EU
average, while public debt rose from 17.6 per cent of GDP in 1970 to 28.3 per cent in 1981, and 112
per cent in 1986. The huge public deficits incurred by the steadily expanding activities of the Greek
state were described as 'the blight of the Greek economy'

(3) the extensive regulatory role performed by the state and the latter's overwhelming participation
in economic activities [3].

In the areas of production (regulation for product production) and the labour market, Greece was
viewed as the most tightly regulated country in the EU. The regulatory rules imprinted in tens of
opaque bureaucratic provisions, laws or texts, governed the allocation of state subsidies, grants and
aids in every form (to business, exports, economic activities, transfers, etc.).

According to Mr Ioakimidis [3], gigantism resulted from a varied set of socioeconomic conditions, the
most important of which was the patron-client system operated by the political parties in order to
maximize their electoral appeal. The net effect was that at the time of Greece's entry into the EU as a
full member, the state was regarded as the greatest entrepreneur and employer, controlling an
unspecified number of businesses in practically all areas of economic activity.

According to Mr Stamatopoulos’ article [2], ex senior economist at the Bank of Greece, on the Greek
experience between 1981 – 1994

· The economy was struggling hard to keep up let alone reduce the gap with other member
states
· Despite the net direct transfers from the Community budget, Greece's economic per-
formance failed to improve
· The poor results can be attributed mainly to internal factors - successive governments'
inability and lack of commitment to tackle structural problems.
· The Community's net transfers created a 'moral hazard' problem since a softening of
budgetary discipline allowed necessary structural reform to be postponed.

In the major sectors, he notes that [2]:

Farming sector: CAP regulated the excessive production of cereals, meat and dairy products when
Greece is a traditional producer and exporter of products such as fresh fruits and vegetables (with
very little or no CAP protection) resulting in the subsidize of cereals, cotton, tobacco and olive oil
when wine, fresh vegetables and pork, stagnated, and production of milk, beef and wheat fell
dramatically.

CAP and IMPs contributed strongly to the restructuring of remote and mountainous agrarian
activities by financing infrastructure improvements, introducing new technologies and preserving
employment in deprived and isolated regions.
Manufacturing / industry sector: there was a severely hit by EC membership. Manufacturing activity
has traditionally been insulated from foreign competition, heavily regulated and subsidized by the
state. Protection through tariffs and quotas, indirect taxation, subsidies and easy access to credit all
led to poor competitiveness and weak financial discipline. With the Single Market programme during
the 1980s and early 1990s industry was shaken up, as barriers to trade were gradually dismantled
and goods, services and capital markets were deregulated in line, resulting in an intensified
competition and as credit was drying up, many firms in mining, textiles, metallurgy and shipbuilding
became over-indebted and others were forced to close or discontinue some operations. A state
organisation (OAE) was founded in the mid- 1980s to take over the liabilities of the largest over-
indebted firms with the aim to reorganise their activities, improve their financial structure and
safeguard some employment, something that failed. Viable firms were sold to the private sector,
otherwise they were liquidated. The Single Market plan also imposed strains on the typical
manufacturing units forcing enterprises to adopt new community rules on everything from technical
standards to accounting and industrial rights, leading to merges with larger distribution networks or
to becoming sub-contractors of larger international companies. The country was not sufficiently
prepared to face the increasing openness to world competition in the eighties, and the challenges of
the Single European Market.

Today, it’s commonly said, that resources given by CAP and IMPs were not been used in the most
effective way. The state organization (OAE) - seized the last decade - actually turned all the factories
and industrial installations into ghosts and the selling of the “viable firms” to the private sector has
been related to scandals and black money transfers. As far as Single markets strains are concerned,
the patron-client system operated in a way that some gained access to the European market while
others seized.

Between 1981 and 1985, when Greece seek EU's assistance two large devaluations of the drachma
(currency) occurred in 1983 and in 1985 while the government practiced a wild expansionary fiscal
policy in order to satisfy the pressing social demands as well as demands of its electorate, increasing
the total volume of public expenditure from 30 per cent of GNP in 1980 to 42 per cent in 1985 [3].
The net effects of this reckless fiscal policy were uncontrollable public deficits, rapidly raising public
debt and a bloated public administration with a steadily increasing number of employees in the
public sector [4].

As soon as the tight fiscal and monetary restraints of the Stabilisation Program 1985-1987 were
relaxed in 1988/89 the familiar pattern of the growing deficits was inevitably resumed, something
that happened again years later when with the new EEC loan new strict terms were imposed with the
1990-1992 Stabilisation Program [5].

At the start of the new decade, the Maastricht (1992) treaty introduced the single European
currency, the euro and the euro convergence criteria. Greece was very far from meeting the
convergence criteria. Kostas Simitis, (1996 – 2004 prime minister of Greece) aimed to achieve the
convergence criteria for the accession of Greece to the euro and introduced radical reforms of the
Greek public finances and economy, something which unavoidably created a large number of 'losers'
among those who depended on the state for their economic survival [3]. In 1999 the economy of
Greece changes remarkably and in 2001 (surprisingly) Greece joined the euro area.

Over the years the Greek manufacturing has lost its pace and dynamism, in spite its promising
performance in the sixties and the share of manufacturing production as percentage of GNP declined
from 19.5% in 1980 to 16.7% in 1990, whilst it retracted further to below 13% by 2000 [7].

The parties that governed Greece since 1981 policy is ‘socialist approach to development’ with the
aim everything to be public/state owned, preserving with this attitude gigantism and patron-client
systems. And even when something is privatized, like the Greek telecommunication company OTE,
then there is an economic scandal of black money transfers (Siemens in this case). The fact that
foreign or even private capital has not played a significant restructuring role in Greece's economic
restructuring there is a serious doubt of success of this strategy [5], at least as far as Greece is
member of the European family.

All this period, the state was forced to introduce EU legislation aiming at securing transparency in the
transactions between the state and public enterprises. This, coupled with the introduction into the
Greek economy of the plethora of EU directives underpinning the internal single market, directives
designed to establish a competitive regulatory regime for the whole of the European economy, the
liberalization of the banking system and the general reduction of the economic role of the state,
resulted in shaping a new competitive regulatory regime for the Greek economy congruent with that
of the wider European economy and the single market [3]. With this rules, economic scandals started
appearing massively.

Greece adopted the euro as its currency in January 2002. The adoption of the euro provided Greece
(formerly a high inflation risk country under the drachma) with access to competitive loan rates
leading to a dramatic increase in consumer spending, which gave a significant boost to economic
growth.

Greece, in 1997-2007, averaged 4% GDP growth, almost twice the EU average. As with other
European countries, the financial crisis and resulting slowdown of the real economy have taken their
toll on Greece’s rate of growth, which slowed to 2.0% in 2008. The economy went into recession in
2009 and contracted by 2.0% as a result of the world financial crisis and its impact on access to
credit, world trade, and domestic consumption--the engine of growth in Greece. Key economic
challenges with which the government is currently contending include a burgeoning government
deficit (13.6% of GDP in 2009), escalating public debt (115.1% of GDP in 2009), and a decline in
competitiveness. "Hosting the Olympics in 2004, which cost double the original estimate of €4.5
billion, only made matters worse". Greece is the country in Europe with the longest time in
rescheduling debt, next comes Hungary with 37.1 years. Greece defaulted five times since
independence, being a total of 50.6 years in rescheduling

The EU placed Greece under its Excessive Deficit Procedure in 2009 and has asked Greece to bring its
deficit back to the 3% EU ceiling by 2012. In late 2009, eroding public finances, misreported statistics,
and inadequate follow-through on reforms prompted major credit rating agencies to downgrade
Greece’s international debt rating, which has led to increased financial instability and a debt crisis.
Greek economy is characterized by informal economy, lack of competitiveness and no
countermeasure to limit debt capacity. Only for military expenses Greece spent 3.6% of GDP in 2008,
the EU’s highest, and became the world’s fifth-biggest weapons importer between 2005 and 2009,
according to the Stockholm International Peace Research Institute.

In April 2010, under intense pressure, Greece requested activation of a joint European Union-
International Monetary Fund support mechanism designed to assist Greece in financing its public
debt. Greece' two key problems are: high debt and a lack of competitiveness.

After joining the EMU, countries agree on keeping their spending at a certain level (Stability and
Growth Pact). Under that, governments that run excessive budget deficits and do not attempt to
solve this problem may be fined. In 2003 both Germany and France broke the rule stating that
governments cannot run a yearly deficit of more than 3% of the Gross National Product (GNP). They
were not fined. After the 2008 financial crisis more member states found themselves in breach of the
ceilings for public spending and were threatened with fines. In 2010 it was Greece’s turn.
Following the economic crises, George Provopoulos the Governor of the Bank of Greece and member
of the ECB Governing Council, stated that the future of our economy is unwaveringly tied to the mast
provided by the euro [6]...without telling us how the mast will support the sail.

[End of assignment]

As an aftermath, all these years Greece simply conspicuously ignored all guidelines, irrespectively of the topic
(economy, environment etc.) and has always been the last to implement / enforce law. This arrogant behaviour
in combination with the false data and figures has lead to the numerous times Greece has gone under Financial
Surveillance without anything changing from one time to another. Above all, the economic system of Greece
cannot be explained with any macroeconomic hypothesis (twin deficit or whatever) simply because the
structure of it lies on corruption. But since the European family can do business in Greece no –one will support
this theory and macroeconomics would always be found to give an explanation.

In my point of view, with nowadays crisis, Greece should restructure its debt (by its own), regardless that’s not
what the eurozone or IMF or future EMF would recommend, simply because the tax revenues collected with
the measures agreed are comparable in size with the black money Greek economy is missing…Greek politicians
have lost their credibility. The government’s actions to strengthen revenue administration and reduce tax
evasion – which is a significant drain on the government’s finances and a source of unfairness in Greek society,
as the experts say - will lead to poverty, rage and violence, social phenomena that cannot be dealt neither by
IMF nor by ECB etc. Until today, from my own personal experience – as a public servant in Greece – the burden
has fallen to those with small salaries and not to those with high salaries as our economic adjustment and
transformation program implies. Searching on the internet I cannot find a salary of 966 euro per month (being
998 euro before the economic crisis) for high educated employees (holding university & master degree) in any
old EU member state, except for myself in Greece.

Sources:
[1] European Navigator / Centre Virtuel de la Connaissance sur l'Europe : http://www.ena.lu/
(Historical Events à 1980-1986 Enlargement to the south à Second Enlargment: Greece)
[2] Stamatopoulos, H. , 1994. Benefits to members?: The Greek experience identifies the limitations
of EU membership when a country doesn't fit the mould, Public Policy Research, Vol. 1, No 2, pp 116-
121 (http://dx.doi.org/10.1111/j.1468-0041.1994.tb00011.x)
[3] Ioakimidis, P.C., 2001. The Europeanization of Greece: An overall assessment (pp. 73-94) in K.
Featherstone & G.A. Kazamias «Europeanization and the southern periphery », Frank Cass Publishers,
Great Britain, pp. 295.
[4] Christodoulakis, N., 1995. Fiscal developments in Greece 1980-1992: A critical review, European
Economy, Vol. 3 pp. 97-134.
[5] Fotopoulos T., 1992. Economic restructuring and the debt problem: the Greek case. International
Review of Applied Economics, Volume 6, Issue 1, pp. 38-64.
[6] Provopoulos, G., 2010. Greece will fix itself from inside the eurozone -
http://www.europeanbusiness.gr/page.asp?pid=691
[7] Mamatzakis, E.C., 2007. EU infrastructure investment and productivity in Greek manufacturing,
Journal of Policy Modeling, 29, pp. 335–344
[8] IMF - http://www.imf.org/external/np/exr/faq/greecefaqs.htm &
http://www.imf.org/external/np/vc/2010/051610.htm