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27 July 2015

Deutsche Welle: Can Greece invest its way out of the crisis?

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An evaluation of more than a hundred studies has revealed that public investment, even on credit, may just hold the key to long-term success in Greece.

First of all, no one doubts that Greece is in need of fundamental reforms. It requires better administration, less corruption and more competition. It is also understandable that creditors attach certain conditions to their loans.

The question, however, is why the Eurogroup put so much emphasis on austerity during its negotiations with Athens when it could have been focusing more on investment. [...]

Evaluation of 104 international studies

[...]Economists agree that Greece will only be able to overcome the crisis when its economy returns to growth and starts creating new jobs again. But to get there, it needs investments.

There have been numerous studies in which economists have investigated how countries can best give their economies a boost. One such expert, Sebastian Gechert from the Macroeconomic Policy Institute (IMK) in Düsseldorf, an independent academic body within the non-profit Hans-Böckler-Foundation, analyzed the results of 104 studies that were published between 1992 and 2012 in international scientific journals.


The result? Public investments were by far the best way to stimulate growth. For every euro invested by the state, gross domestic product, or GDP, grows by 1.30 to 1.80 euros.


Greece, along with Spain, Portugal and Ireland lost a great deal of economic strength during the financial crisis. Unemployment also took off, as the graph below shows. The austerity policies had "a negative impact on growth and employment," Gechert wrote in his meta-study for the IMK. "By contrast, publicly financed investments would have resulted in relatively large momentum for growth."

New debt?

The only question is how does one go about financing public investments when the state doesn't have any money of its own? One way could be tax increases. Cuts to public spending could be another. That's how they did it in Greece, Spain and elsewhere. The only problem is that such measures have a negative effect on growth, thus offsetting the positives that come with more investment.

That's why Gechert looked into the question of whether it would be worth it to finance investments entirely through new debt. His conclusion? "A growing deficit or a smaller surplus as a result of more investment spending does not necessarily increase the debt ratio," he said.

This is because when the investments have the desired effect and trigger growth, the expenses practically finance themselves. The costs for the state would be "comparatively low," wrote Gechert - it would only feel an additional burden of between 10 and 40 percent. This would require a functional tax system, however.

Renewed failure?

In the talks about a new aid program for Greece, there has been very little mention of new investments. Granted, European Commission President Jean-Claude Juncker has pointed to up to 35 billion euros from regular EU coffers, but this would require Greece to use its own money as co-financing - money that the government in Athens doesn't have.

The EU has now lowered its requirements for co-financing. The chief economist and director of the IMK, Gustav Horn, recommends taking things a step further.

"Our suggestion would be to permit Greece a year of access without any co-financing. The government would then be able to get an investment plan underway immediately - and they would have to due to the time pressure," Horn said.

Economically, based on the agreement that Greece has reached with the Eurogroup until now, Horn perceives there's "at least a slight chance that the Greek economy could recover." However, this will only be possible if there are investments.

"If the rescue strategy is restricted to a continuation of intensified cuts to the state budget, then this program will fail just as its predecessors did."

Full article on Deutsche Welle (with charts)

Full study on the Macroeconomic Policy Institute

© Deutsche Welle

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