06 October 2015

CEPS: Where is the credit crunch in Greece?

Austerity is an easy explanation for the weakness of Greek domestic demand, argues Daniel Gros in this CEPS Commentary, but it is more difficult to see why Greek exports have stagnated in recent years.

Greek policy-makers like to make the point that their economy cannot recover because of a lack of credit. The argument that a lack of credit is among the root causes of the continuing recession in Greece is applied to exports, in particular, whose growth has been disappointing. Austerity is an easy explanation for the weakness of domestic demand, but it is more difficult to explain why Greek exports have stagnated in recent years, even though wages have fallen by over 20%. Greek exporters have thus become much more competitive and should have been able to increase their export sales. But this has not been the case. Greek exports (if calculated on a proper value-added basis) are barely higher now than just before the crisis. This is surprising, because Portugal – another programme country with a similar income per capita – has been able to increase its exports by over 30%, although wages in that country have not fallen. The only explanation that might fit this observation is that Greek exporters were starved of credit, whether for working capital or for investment in new exporting activities.

The macro-data does not fit this facile explanation, however. Overall, credit has not really fallen, at least relative to GDP, and interest rates on loans to non-financial corporations did not increase during the crisis.

The thesis that a credit crunch is holding back the Greek economy should imply that overall credit has fallen, at least relative to GDP, which is a good indicator of credit demand. But this has not been the case. The ratio of overall credit (not just bank credit) to non-financial corporations as a % of GDP has actually increased in Greece over the last few years.

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All in all it is difficult to argue that the Greek economy could not recover via export-led growth because of a credit crunch. The overall availability of credit was higher than GDP, and interest rates remained relatively low. There is some indication of a misallocation of bank credit. But the responsibility for any mistakes in this direction must lie squarely with the government and the Troika, given that the Greek banking system has been under government control since 2012.

Full commentary

 

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