There is much talk about the impasse between Greece and its official lenders in their bail-out negotiations, so I thought I would write about something else instead: the changes in the Greek economy towards a new growth model.
Greece’s pre-crisis growth model was clearly unsustainable. It was characterised by widespread state control, inefficient public administration, corruption, excessive increases in public sector employment and wages, large increases in private sector wages well over productivity growth, and insufficient structural reforms. This model led to very unfavourable business conditions, which was reflected in Greece being ranked 108th out of 181 countries in the World Bank’s Ease of doing business indicator in 2008. Major vulnerabilities emerged, such as the -16.5% GDP current account balance in 2008, the -74 % of GDP net international investment position and the huge budget deficit and public debt. In 2008, the budget deficit was 10 % of GDP, which increased to 15% in 2009, by far the largest values in the EU, despite that economic contraction in these two years was not particularly large in Greece (GDP growth was -0.4% in 2008 and -4.4% in 2009). Public debt climbed to 127 % of GDP in 2009 and was on an exploding path. Clearly, the Greek crisis which erupted from late 2009 onwards was self-inflicted.
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