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12 June 2015

VoxEU: What went wrong in Greece and how to fix it - Lessons for Europe from the Greek crisis

Greece’s problem came from the bursting of a debt-financed growth bubble inflated with the help of EZ membership. The inevitable adjustment was more painful than necessary. The fiscal consolidation was too tight and too front-loaded, and, importantly, structural reform wasn’t properly sequenced.

By concentrating on labour market rather than product market reforms, the sharp wage fall could not be paralleled by a similar reduction in prices, and now soaring inequality is undermining support for needed reforms.

Figure 1 shows the Greek real GDP since 1990, along with Germany’s and Italy’s, all normalised to 100 at the beginning of the period. The Greek GDP took off in the second half of the 90s. At its peak in 2008, it had grown by 65%, cumulatively. The following hard landing was equally impressive, but much more rapid. By 2013, GDP had fallen back to its 2000 level.

Figure 1. Real GDP, normalised to 100 in 1990


Source: The Conference Board Total Economy Database (2015).

Full article on VoxEU(with charts)


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