March 12, 2015

Greece needs neither wage deflation nor more fiscal

austerity; what is needed is an emphasis on
structural reforms to boost (non-price)
competitiveness

Dr. Platon Monokroussos

Group Chief Economist
Deputy General Manager
pmonokrousos@eurobank.gr

Introduction

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This note looks beyond the present state of negotiations with official creditors in the context of
the four month extension of Greeces Master Financial Assistance Facility Agreement (MFFA) that
th
was decided at February 20 Eurogroup.. It even looks beyond the pending completion of the
program review to argue that the emphasis of any succeeding arrangement between the
Eurogroup, the institutions and Greece should aim to boost the medium-term growth prospects of
the domestic economy. This would in turn require a strong emphasis on structural reforms to
boost the non-price competitiveness of the Greek economy so as to facilitate the needed
transition to a new development model emphasizing increased investment and extroversion. On
the other hand, the absence of structural reforms along with a renewed focus on draconian fiscal
austerity and wage deflation would increase the chances of a self-defeating fiscal adjustment with
severe consequences for fiscal sustainability, social cohesion and the long term growth prospects
of the Greek economy. The rest of this document is structured as follows: Part 1 provides as brief
assessment of the socioeconomic costs and benefits of the huge fiscal consolidation and wage
adjustment implemented in Greece in the context of the two consecutive bailout programs; Part 2
explains why a strong emphasis on structural reforms is need to boost Greeces non-price
competitiveness; and Part 3 concludes.
Part 1 - Greeces fiscal consolidation and wage adjustment: a brief cost-benefit analysis
1.1 The risk of self-defeating fiscal consolidation
The specter of self-defeating fiscal consolidations was initially raised in Gros (2011), where a simple
framework was utilized to show that fiscal austerity could increase the public debt ratio in the
short-run. Separately, Delong and Summers (2012) argue that in a depressed economy even a
1
small amount of hysteresis implies, by simple arithmetic, that expansionary (contractionary) fiscal
policy is likely to be self-financing (self-defeating). The authors clarify that their argument does
not justify unsustainable fiscal policies, nor does it justify delaying the passage of legislation to
make unsustainable fiscal policies sustainable. Yet, it is clear that the notion of hysteresis is of
particular relevance for fiscal consolidations undertaken during deep economic downturns, where
multipliers are likely to be both high and persistent i.e., their recessionary effects stretch well
beyond the year that the fiscal adjustment is implemented.
1.2 Cost and benefits of fiscal adjustment
Since 2010, Greece has implemented a massive fiscal adjustment that has been unprecedented by
recent historical standards (IMF, 2013). As per the estimates presented in Greeces 2015 Budget,
the ESA2010 General Government fiscal deficit has been reduced by more than 14ppts-of-GDP in
the past 5 years to c. -1.3%-of-GDP in 2014. Over the same period, the General Government
primary balance improved by around 11.5ppts-of-GDP, generating small surpluses in both 2013

Here, hysteresis is defined as the impact of the economic downturn on potential output.

March 12, 2015

and 2014, after recording a deficit of c. 10.5%-of-GDP in 2009. In cyclically-adjusted terms, the improvement in the primary
structural balance over the last five years has been even greater, amounting to more than 19ppts-of-GDP. Around two-thirds of this
adjustment has come from cuts in both discretionary and non-discretionary expenditure on e.g. social transfers, public wages and
government intermediate consumption. The remaining one-third has come from the revenue side, mainly as a result of higher
income and wealth taxes (Figure I.1 Appendix I). In what follows, we present a brief analysis on the potential costs and benefits
resulting from the aggressive fiscal consolidation and the significant wage adjustment implemented in recent years.
1.2.1 Costs of fiscal consolidation: exacerbation of domestic recession and rise in the debt ratio
It can be argued that the most severe costs of the aggressive, front-loaded fiscal consolidation implemented in the last 5 years relate
to: i) the exacerbation of the domestic recession; and ii) the large increase in the public debt ratio since 2009, despite the
restructuring of the privately-held Greek debt (PSI), the debt buyback (DBB) operation implemented in 2012 and the debt relief
package agreed at the November 2012 Eurogroup (i.e., further maturity extensions and lower interest rates on EU loans provided
under the two consecutive bailout programs).
Fiscal consolidation impact on domestic GDP
This section examines the macroeconomic effects of the fiscal consolidation program implemented in the last 5 years. To do so, we
first assume three alternative values for the impact multiplier: -1.5 high multiplier; -1 intermediate multiplier; and -0.5 low
multiplier. The interpretation of these values is as follows: for the high multiplier value, we assume that a fiscal contraction (i.e.,
decrease in government expenditure or rise in tax revenue) of 1 euro that is implemented in a given year leads to a decrease in
nominal GDP by 1.5 euro in that year. A similar interpretation applies to the other two impact multiplier values. Furthermore, in
order to incorporate multiplier persistence and hysteresis effects, we follow Boussard et al. (2012) and European Commission (2012,
2013) and assume that fiscal multipliers follow the convex, autoregressive decaying path analyzed in Appendix II. As a next step, we
utilize available fiscal data to get an appropriate metric for the thrust of fiscal austerity policies implemented in Greece over the
period 2010-2014. In the study presented herein, this metric represents the annual change in the structural primary fiscal balance
2
based on the relevant data presented in the IMF Fiscal Monitor (October 2014). Table I.1 of Appendix I portrays the macroeconomic
effects of the fiscal austerity policies implemented in Greece over the period 2010-2014. In more detail, it shows the estimated GDP
impact under different scenarios regarding the value of the impact multiplier, the degree of multiplier persistence and the existence
or not of hysteresis effects. In Table I.1 we actually present the results for two such scenarios, which incorporate the intermediate
3
and low impact multiplier values assumed in this study. As it is implied by the results presented in the said table, the aggressive
fiscal consolidation program implemented in Greece over the period 2010-2014 has indeed taken a heavy toll on domestic economic
activity.
Fiscal consolidation impact on the debt ratio
In what follows, we examine the paradox of the sharp increase in the debt ratio since 2009, despite the aggressive fiscal
consolidation and the debt relief operations implemented over the last several years. Greeces gross public debt ratio has increased
by c. 48ppts-of-GDP between end-2009 and end-2014 to stand to an estimated 177%-of-GDP at the end of that period. As per the
4
most recent European Commission estimates (AMECO), the cumulative snow ball effect on Greek public debt over the
aforementioned period was c. 70ppts-of-GDP, which implies that the large increase in the debt ratio since 2009 was exclusively due
to the domestic economic recession. This development comes as no major surprise, especially taking into account the steep GDP
5
contraction over that period (denominator effect) and its impact on key fiscal metrics (numerator effect) . The possibility of an initial
rise in the debt ratio following an aggressive fiscal adjustment constitutes a topic that has been analyzed, to some extent, in the
6
recent empirical literature . In fact, in a recent study we demonstrated that, taking into account Greeces present debt-to-GDP ratio,
the critical value of the fiscal multiplier that prevents a (contemporaneous) rise in the debt ratio following a fiscal adjustment

A well-known methodological issue in the empirical estimation of fiscal multipliers relates to the identification of purely exogenous fiscal shocks.
For the purpose of our analysis, we assume that fiscal shock in year t is represented by the annual change in the structural general government
primary balance (from year t-1 to year t).
3
Multipliers tend to be higher in deep economic downturns. However, some recent empirical studies have demonstrated that heightened fiscal
sustainability concerns tend to, ceteris paribus, reduce the value of the fiscal multiplier.
4
The snowball effect denotes the automatic decrease (increase) in the debt ratio when nominal GDP growth in year t rises above (falls below) the
average effective interest rate in that year. In mathematical terms, the snowball effect is defined as the difference between the average effective
interest rate and nominal growth.
5
For instance, in a deep recessionary period, the government may face higher costs for unemployment benefits. Furthermore, a sharp decline in
economic activity may see the incomes of a higher number of tax payers falling below the tax-exempt threshold than in normal economic times.
6
See e.g. European Commission (2012).

March 12, 2015

7,8

implemented in a given year is around 0.5. In other words, a fiscal adjustment undertaken in year t would lead to an initial rise in
the debt ratio if the size of the fiscal multiplier in that year is equal or greater than 0.5. For Greece, the existing literature and our
earlier empirical findings suggest that, in deep economic contractions, the size of the fiscal multiplier may well exceed the
9
aforementioned threshold and, in certain instances, be even higher than 1.
1.2.2 Benefits of the fiscal consolidation program: elimination of unsustainable fiscal deficits, provision of unprecedented
amounts of official-sector financing and decline in debt rollover risks
Since its euro area entry, Greece accumulated huge macroeconomic imbalances which could not be sustained in the new period
following the outbreak of the global financial crisis. Against this backdrop, the two consecutive adjustment programs agreed with
official creditors (in May 201o and in March 2012, respectively) have been instrumental in correcting huge deficits accumulated in
the countrys fiscal and external accounts. Moreover, the provision of an unprecedented amount of official sector financing to
replenish collapsing State cash reserves and to inject much-needed liquidity (and fresh capital) in the domestic banking system has
prevented a much more dramatic deleveraging of the domestic economy, which could instigate even more severe economic and
social costs. In addition to all these, the debt relief operations implemented in the context of the two adjustment programs (PSI,
DBB, maturing extensions and reductions in interest rates on EU loans) have greatly improved the serviceability of Greek public
debt. Indeed, over the coming 5-year period, the average effective interest rate on Greek debt is expected to be not much higher
than 3% (i.e., remaining amongst the lowest in the euro area), while the overall annual interest expense is expected to average
between 4% and 4.5% of GDP compared to levels around 9% or 10% of GDP that would prevail in the absence of the
aforementioned operations.
1.3 Wage adjustment
The implementation of the two consecutive adjustment programs has restored wage competitiveness, with Greeces ULCs-based
REER having already declined to levels prevailing in mid-90s. This has already benefited Greeces export performance as confirmed
by the results of a special econometric study summarized later in this document (see section 2.2), which documents a -0.26 longterm elasticity of real Greek goods exports with respect to the real effective exchange rate. Yet, Greeces wage adjustment over the
last few years has probably been too aggressive and, in any case, was not accompanied by a similarly aggressive decline in domestic
consumer prices. The latter is true despite the huge output gap and primarily reflects lingering rigidities/existence of oligopolistic
structures in domestic product and services markets. Undoubtedly, these developments have put additional pressure on disposable
incomes, further exacerbating the domestic recession (Figures 1 & 2).
Figure 1- Nominal compensation in manufacturing (EUR thousand)

60
50

40
Eurozone

30

Germany

20

Greece
10

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

The fiscal multiplier is defined as the ratio of a change in output to an exogenous change in the fiscal deficit with respect to their baselines.
The Challenge of Restoring Debt Sustainability in a Deep Economic Recession: The case of Greece, Platon Monokroussos, GreeSE Paper No.87,
Hellenic Observatory Papers on Greece and Southeast Europe, October 2014
8

http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/CMS%20pdf/Publications/GreeSE/GreeSE-No87.pdf
9

Monokroussos, Platon and Thomakos, Dimitris, 2012, Fiscal Multipliers in deep economic recessions and the case for a 2-year extension in Greeces
austerity programme, Economy & Markets, Global Markets Research, Eurobank Ergasias S.A.
Monokroussos, Platon and Thomakos, Dimitris, 2013, Greek fiscal multipliers revisited Government spending cuts vs. tax hikes and the role of public
investment expenditure, Economy & Markets, Global Markets Research, Eurobank Ergasias S.A.

March 12, 2015

Figure 2- Nominal compensation in services (EUR thousand)

50

40
30

Eurozone

20

Germany
Greece

10
2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Source: AMECO
Part 2 Why a strong emphasis on structural reforms is needed to boost competitiveness
The material included in this section is based on the key findings of a special study we presented at a major Eurobank event that was
organized in Athens in November 2014. The study consisted of three main sections. The first one analyzed the intertemporal
evolution of Greek exports of goods and services and examined Greeces export performance vis--vis its main trade partners. The
second presented the results of an empirical study on the main drivers of Greek manufacturing and non-manufacturing goods
exports, based on monthly data spanning the period Jan. 1998 Dec. 2013. Finally, the third section presented the main findings of a
poll we conducted among 222 (large and medium-sided) domestic exporters with the purpose of getting a better understanding of
the industrys view as regards the main factors hindering export performance as well as current trends and prospects. In what
follows, we summarize some of the main results of the aforementioned study, which highlight the need for a strong emphasis of
structural reforms in the domestic product and services markets with a view to further boost Greeces non-exports competitiveness.
Additional analysis on the said results is provided in Appendix III at the end of this document.
2.1 A brief overview of the progress made in recent years to improve Greeces competitiveness
Dynamic bounce in investment and improved export performance are needed to boost medium-term growth

Final consumption expenditure (private and public) continues to account for a disproportionately high share of Greek GDP (c
90% vs. 75% in the euro area). This implies that a key prerequisite for a return to positive and sustainable growth rates going
forward is a stronger exports performance coupled with a notable recovery in domestic investment activity.

The latter is especially relevant taking into account the still negative saving rate of households (-6% of average nominal
disposable income) and the need to maintain significant primary fiscal surpluses in the following years.

The performance of Greek goods and services exports has improved in the last couple of years, but continues to lag behind that
of other EU countries in the period following the outbreak of the global financial crisis. As a percent of GDP, Greek exports
remain significantly lower than the euro area average (c. 33% vs. 47%).

Lingering structural problems hindering Greeces competiveness and export performance

Greece remains a small and closed economy with limited gains in world market shares, even following the huge wage
adjustment in the past several years that has reduced Greeces ULCs-based Real Effective Interest Rate (REER) to levels
prevailing before the EUR adoption.

With the exception of maritime shipping and mineral fuels, lubricants & related material all other main categories of goods and
services exports have seen their share (as % of total Greek exports) shrinking over the last two decades.

The technological content of Greek manufacturing exports remains low relative to that of the main EU trading partners.

March 12, 2015

Greece features a competitive advantage in more traditional manufacturing sectors which, to a large extent, are of low
technological content and low added value.

Greece lags behind its main EU trading partners in merchandise trade specialization

Greece continues to lag behind its main trading partners in business R&D expenditure and foreign direct investment.

The average size of Greek manufacturing companies remains significantly lower relative to EU trading partners. This hinders
the generation of economies of scale and prevents a better integration into global supply chains.

thought significant progress in several important areas has been attained in recent years

Significant progress has been made in recent years as regards the diversification of Greek exports in terms of structure and
geographical destination.

The technological content of Greek exports has increased significantly over the past decade and a higher share of domesticallyproduced manufacturing goods is now exported to high growth foreign economies.

Greeces manufacturing exports have rebounded in the last couple of years.

Significant progress has been attained in recent years in a number of international indicators for Greeces competitiveness,
governance as well as the functioning of the domestic business and regulatory environment. However, additional
improvements are needed to bridge the gap with the rest of the Eurozone

2.2 Summary of results of empirical study on the main drivers of Greek exports
Data and methodology
The study utilizes monthly-frequency, time-series data for the value of Greek goods exports (SITC classification). The source of the
data is EL.STAT and the period under examination is January 1998-December 2013. The data have been seasonally adjusted and
deflated by the producer price index for exports. Initially, the series were examined for their statistical properties, so as to determine
the appropriate modeling strategy. Then, a number of model specifications were created to explain the volatility of the real value of
exports based on a number of explanatory variables.
The explanatory variables include, among others:

alternative proxies of foreign demand e.g. weighted GDP volume index of 37 trading partners; EU-28 merchandise import
demand index; OECD merchandise import demand index; OECD-Europe industrial production index; 37 trading partner
merchandise import demand index (EU28, Australia, Canada, Japan, Mexico, N. Zealand, Norway, Switzerland, Turkey, US)

alternative proxies for price competitiveness e.g. real effective exchange rate (REER) indices for Greece based on relative
ULCs and consumer price inflation rates against different trade partner groups.

more than 20 non-price competiveness indicators measuring various important aspects of the domestic business, institutional
and regulatory environment, such as: technological content of Greek exports; degree of market size, concentration and average
exporting firm size in the Greek manufacturing sector; degree of Greek exports concentration (Herfindahl Hirschman
concentration index); relative performance (vs. main trade partners) as regards Business R&D and FDI; ease in starting a
business, ease in getting credit, corporate tax burden and ease of paying taxes; enforcement of contracts; quality of regulatory
environment etc.

Empirical results
Figure 1 below provides a graphical depiction of the estimated long-term elasticities of Greek goods exports with respect to external
demand and price competitiveness indicators. Another important result of our study is the statistical significance of some of the
non-price competitiveness indicators under examination, when they enter (either individually or jointly) as explanatory variables

March 12, 2015

along with foreign demand and the real effective exchange rate in a number of model specifications. (Full set of empirical results is
available upon request).
Figure 1 - Long-term effect of external demand and REER on Greeces real goods exports
Estimated long-term elasticities (% Increase/decrease of exports for every 1% increase/decrease of explanatory variables
Long-term impact of external demand

Long-term impact of the real effective exchange rate

-8.0 -6.0 -4.0 -2.0

0.0

2.0

4.0

6.0

8.0

10.0 12.0

FOOD & LIVE ANIMALS (SITC 0)

BEVERAGES & TOBACCO (SITC 1)

CRUDE MATERIALS, INEDIBLE EXCEPT FUEL (SITC 2)

MINERAL FUELS, LUBRICANTS & RELATED MATERIALS
(SITC 3)
ANIMAL & VEGETABLE OILS, FATS & WAXES (SITC 4)
CHEMICALS & RELATED PRODUCTS N.E.S. (SITC 5)
MANUFACTURED GOODS CLASSIFIED CHIEFLY BY
MATERIAL (SITC 6)
MACHINERY & TRANSPORT EQUIPMENT (SITC 7)
MISCELLANEOUS MANUFACTURED ARTICLES (SITC 8)
COMMODITIES AND TRANSACTIONS NOT CLASSIFIED
ELSEWHERE (SITC 9)
ALL MANUFACTURING SECTORS (SITC 5-8)
ALL SECTORS EXCLUDING MANUFACTURING (SITC 0-4 &9)
ALL SECTORS EXCLUDING MINERAL, FUELS (SITC 0-9
EXCL. 3)

-0.26

0.95

2.88

-1.88
-0.28

0.88

Source: EL.STAT, Eurobank Economic Research

Explanatory note
The estimated long-term elasticities presented in Figure 1 are based on the following proxies
External demand: weighted GDP volume index of 37 trading partners on the basis of share of exports of Greece towards respective
markets;
Real effective exchange rate of Greece against 138 trading partners based on the relevant CPI (total economy);
Real effective exchange rate of Greece against 30 trading partners on the basis of relative cost per unit of output (business sector)
Part 3 - Concluding remarks
The two consecutive adjustment programs implemented in Greece over the last 5 years have been instrumental in correcting huge
fiscal imbalances accumulated in the period leading to the global financial crisis and in improving the serviceability of Greek public
debt. The concomitant provision of an unprecedented amount of official-sector financing has also prevented a more aggressive
deleveraging in the domestic economy that could further exacerbate the domestic recession. However, the horizontal and frontloaded nature of the applied fiscal adjustment conspired with an inadequate degree of focus on structural reforms to instigate
sizeable macroeconomic and social costs. With domestic authorities having already managed to stabilized the fiscal balance (and to
even generate small primary surpluses in 2013 and 2014), any succeeding arrangement agreed with official lenders should aim to
maintain the sizeable improvement attained in Greeces fiscal account in recent years. Yet, as we have argued in a in one of our
10
recent research notes , the provision of additional debt relief (OSI) coupled with a certain relaxation of the primary fiscal target and
an increased emphasis on structural reforms could go a long way towards facilitating a return to positive and sustained economic
growth rates.
10

Why a relaxation of the primary fiscal target may prove to be a self-financing policy shift, Greece Macro Monitor, Eurobank Economic Research,
February 26, 2015, http://www.eurobank.gr/Uploads/Reports/GREECEMACROFOCUSFebruary262015.pdf.

March 12, 2015

Appendix I
Figure and Table for Part I
Figure I. 1 - Structure of Greeces fiscal adjustment in 2008-2013

4
Fiscal Adjustment in Expenditures, 2008-13
(percent of potential GDP)

-1

Gross capital
formation

Social benefits

-1

Intermediate
consumption

Compensation of
employees

Interest

Capital transfers

Other current
transfers

Subsidies

4
Fiscal Adjustment in Revenues, 2008-13
(percent of potential GDP)

-1

-1

Income& wealth
taxes

Sales

Production&
import taxes

Capital transfers

Social
contributions

Other current
transfers

Property income

Source: EC, IMF, Eurobank Research

Table I.1 - Estimated impact of fiscal austerity on nominal GDP, ceteris paribus basis (in EURbn)

Low multiplier/low persistence/"no hysteresis"

Intermediate multiplier/low persistence/"no
hysteresis"

2010

2011

2012

2013

2014

-8.4

-9.3

-8.1

-6.6

-3.6

-16.8

-18.6

-16.3

-13.2

-7.2

-10.7

-18.8

-13.7

-12.0

-3.5

7.4

4.9

3.6

2.8

0.3

16.8

10.2

7.0

5.1

0.5

Memorandum items
Annual change in nominal GDP (EURbn)
Annual change in structural primary balance in pptsof-GDP / + sign for improvement
Annual change in structural primary balance in
EURbn / + sign for improvement
Source: IMF (Oct 2014), EL.STAT. Eurobank Research

March 12, 2015

Appendix II
Impact multipliers, multiplier persistence & hysteresis assumptions (Part I)
In order to incorporate multiplier persistence in our simulation exercise we follow Boussard et al. (2012) and European Commission
11
(2012, 2013) and assume that fiscal multipliers follow the following convex, autoregressive decay path :
i-t

mt,i = (m1 ) +
where, m1 is the impact (i.e., first year) multiplier, mt,I is the fiscal multiplier applying in year i following a permanent fiscal shock in
year t, 0 < < 1; and is the long-run impulse response of GDP to fiscal consolidation. negative value of indicates that
hysteresis effects are present (see e.g. de Long and Summers, 2012). A positive one represents a situation in which a consolidation
today boosts long term growth by e.g. reducing the interest rate and by lessening the crowding out on private investment.
The figure below depicts the decaying path of the fiscal multiplier assumed in the simulation exercise presented in this study. Here,
the initial value of the (impact) multiplier is assumed to take one of the following three values: -1.5 high multiplier; -1.0
intermediate multiplier and -0.5 low multiplier. Moreover, high persistence corresponds to the following parameter value:
=.8 and low persistence corresponds to =.5. Finally, for the presence of hysteresis effects we assume =-0.2, while the case
of =0 corresponds to no hysteresis effects.
Figure: Response of GDP to one-off cyclical adjustment

0.0
1

11 13 15 17 19 21

-0.2

High multiplier /high

persistence/"hysteresis"

-0.4

High multiplier / high persistence / "no

hysteresis"

-0.6

High multiplier / low persistence /"no

hysteresis"

-0.8

Intermediate multiplier / high

persistence /"hysteresis"

-1.0

Intermediate multiplier / high

persistence /"no hysteresis"

-1.2

Intermediate multiplier / low

persistence /"no hysteresis"

-1.4

Low multiplier/low persistence /"no

hysteresis"

-1.6

Source: EC (September 2013); Eurobank Global Markets Research

Note: Response of GDP in years t=1,,21 per one unit cut in cyclically adjusted primary balance in year t=1. Assuming that the same
logic applies, then a unit increase in the cyclically adjusted primary balance in year t=1, would lead to a GDP response that could be
portrayed by inverting the above figure.

11

This decay function reproduces relatively well the shape of the impulse-response function by typical DSGE models for most of the permanents
fiscal shocks.

March 12, 2015

Appendix III - Why competitiveness and extroversion constitute the cornerstones of a new economic development model for
Greece
Continuing fiscal prudence and domestic household dissaving suggest long-term growth must necessarily come from higher exports
and investments (figures 1&2)
Figure 1 Final consumption expenditure continues to represent a disproportionally high share of Greek GDP; investment spending
(as % of GDP) has collapsed due to the domestic recession and currently stands well below the respective euro area average
120.0

Final consumption expenditure (% GDP)

Greece

100.0

90.0

80.0

60.0

Euro area (annual average = 76.6%)

40.0

Greece

Gross fixed capital formation (% GDP)

20.0

2014(f)

2013

2012

2011

2010

2009

2008

2007

11.5

2006

2005

2004

2003

2002

2001

1999

1998

2000

Euro area (average annual average = 21.6%)

0.0

Figure 2 Greek exports of goods and services (as % of GDP) remain significantly lower than the respective euro area average
46.7

50

Exports of goods & services (% GDP)

40

32.5
30
20

10

Greece

Euro area
2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

Source (Figures 1 & 2): EMECO, Eurobank Economic Research

Greeces exports performance has broadly lagged behind that of other euro area countries throughout the crisis period
Figure 3 Exports of goods & services in 2010 prices (2008=100)
150
140
130

Ireland

120

Greece

110

Spain

100

Latvia

90

Portugal

80
70
2008

2009

2010

2011

2012

2013

2014

Source (Figure 3): EMECO, Eurobank Economic Research

2015

2016

March 12, 2015

despite the huge adjustment in wages and, to a lesser extent, in relative inflation rates vis a vis main trading partners
Figure 4 Greeces REER relative to 37 trading partners (cumulative annual change)
25.0%
based on relative inflation rates

20.0%

based on relative ULCs

15.0%

10.0%
5.0%
0.0%

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2001

2002

-5.0%

Figure 5 Nominal wage expenditure per employee (annual change)

15.0%

Euro area

10.0%

Greece

5.0%
0.0%
-5.0%

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

-10.0%

Source (Figures 4 & 5): EMECO, Eurobank Economic Research

Greece remains a small closed economy with limited gains in world market shares over the last two decades
Figure 6 Average ratio of Greek exports of goods & services to GDP (1995-2013)
(Bold columns indicate size of economy smaller than the median)
160

140
120
100
80
60

23.0%

40

L
IE
M
S
B
E
H
N
C
SI
L
B
A
L
D
C
C
S
M
K
N
IS
FI
H
M
D
P
C
R
P
R
N
M
G
E
IT
F
T
G
A
J
U

20

Figure 7 Greece: exports as % of world imports

1.6
1.4

% 1.2

Services

1.0
Goods

0.8
0.6

Goods &
Services

0.4

0.2

Source (Figures 6 & 7): OECD, UNCTAD, Eurobank Economic Research

10

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0.0

March 12, 2015

Declining share of manufacturing exports and increasing share of shipping services exports (as % of total respective Greek
exports)
Total value of exports in 2013 (USD billions)
Goods = 27.57bn /Services = 27.9bn
Figure 8 Goods exports - main categories as % of total
50.0
40.0
30.0
20.0
10.0
0.0

Manufacturing
2013

Other

Michellaneous
manufacturing
articles

Machinery and
transportation
equipment

Manufactured
goods classified
chiefly by material

Chemicals &
related products
(n.e.s.)

Animal &
vegetable oils,
fats and waxes

Mineral fuels,
lubricants &
related materials

Crude materials
except fuels

Beverages &
tobacco

Food & live

animals

1998

Figure 9 Services exports - main categories as % of total

60.0
50.0
40.0
30.0
20.0
10.0
0.0

1998

Other business
services

Royalties

IT services

Monetary

Insurance

Communications

Travel (mainly
tourism)

Transportation
(mainly shipping)

2013

Source (Figures 8 & 9): EL.STAT. BoG, Eurobank Economic Research

The technological content of Greek manufacturing exports remains low relative the main EU trading partners
Figure 10 Production of manufacturing goods of high & medium-high technological content
(% total manufacturing output)
70.0

60.0
50.0
40.0

U-27

30.0

Germany
Greece

20.0

10.0
0.0
2003

2004

2005

2006

2007

2008

2009

2010

Source (Figure 10): UNCTAD, Eurobank Economic Research

11

2011

2012

2013

March 12, 2015

Greece features a competitive advantage in more traditional manufacturing sectors which, to a large extent, are of low
technological content
12

Figure 11 Greece - Revealed Comparative Advantage (SITC, Rev.4)

(A comparative advantage is revealed if RCA>1)
10
2008
2013

8
6

4
2

62 - Rubber
manufactures

54 - Medicinal and
pharmaceutical
products

5 - Chemicals and
related products

33 - Petroleum,
petroleum products
and related materials

64 - Paper,
paperboard and
related products

63 - Cork and wood

manufactures

61 - Leather, leather
manufactures

85 - Footwear

84 - Articles of
apparel and clothing
accessories

65 - Textile yarn,
fabrics, and related
products

12 - Tobacco

11 - Beverages

0 - Food

6
5
2008
2013

4
3
2
1

82 - Furniture

8 - Miscellaneous
manufactured
articles

7 - Machinery and
transport equipment

6 - Manufactured
goods classified
chiefly by material

4 - Animal and
vegetable oils, fats
and waxes

3 - Mineral fuels,
lubricants and
related materials

2 - Crude materials,
inedible, except fuels

69 - Manufactures of
metals, n.e.s.

66 - Non-metallic
mineral
manufactures, n.e.s.

Source (Figure 11): UNCOMTRADE, Eurobank Economic Research

Greece lags its main EU trading partners in merchandise trade specialization
13

Figure 12 Merchandise trade specialization index (Greece vs. EU-27)

Greece
0.0
-0.2

-0.4
-0.6
1995

-0.8

2012

12

Other manufactured
goods (SITC 6 + 8
less 667 and 68)

Electronic excluding
parts and
components (SITC
751 + 752 + 761 +
762 + 763 + 775)

Machinery and
transport equipment
(SITC 7)

Chemical products
(SITC 5)

Manufactured goods
(SITC 5 to 8 less 667
and 68)

-1.0

The Revealed Comparative Advantage Index is contracted as the ratio of a products share of exports (or category of exports) as % of a countrys
total exports to the corresponding ratio of a trading partner or group of trading partners. A comparative advantage is revealed if RCA>1
13
The Merchandise Trade Specialization index compares the net flow of goods or groups of tradable goods (exports minus imports) to the total flow
of the respective product or tradable product group (exports plus imports) The range of values is between -1 and 1. A positive value indicates that an
economy has net exports (hence it specializes in the production of that specific product) and a negative value means that an economy imports more
than it exports (net consumption).

12

March 12, 2015

14

Figure 12 continued Merchandise trade specialization index (Greece vs. EU-27)

EU-27
0.2
0.1
0.1
0.0
-0.1
-0.1
-0.2
-0.2

2012

Other manufactured
goods (SITC 6 + 8
less 667 and 68)

Electronic excluding
parts and
components (SITC
751 + 752 + 761 +
762 + 763 + 775)

Machinery and
transport equipment
(SITC 7)

Chemical products
(SITC 5)

Manufactured goods
(SITC 5 to 8 less 667
and 68)

1995

Source (Figure 12): UNCTAD, Eurobank Economic Research

Greece: significant underperformance in R&D expenditure and foreign direct investment relative to main trading partners
Figure 13 Inward and outward foreign direct investment stock, annual (% GDP)
60
50
40
Greece
30

World
EU-28

20

10
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 14 Business R&D expenditure (% GDP)

25.0
20.0

Greek R&D as %
German R&D

15.0
10.0

Greek R&D as %
EU-27 R&D

5.0
0.0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source (Figures 13 & 14): UNCTAD, Eurostat, Eurobank Economic Research

14

The Merchandise Trade Specialization index compares the net flow of goods or group of tradable goods (exports minus imports) to the total flow
of the respective product or tradable product group (exports plus imports). The range of values is between -1 and 1. A positive value indicates that
the economy has net exports (hence it specializes in the production of that specific product) and a negative value indicates that the economy imports
more than it exports (net consumption).

13

March 12, 2015

However, not all trends are problematic. Significant progress has been made in recent years in relation to the diversification of
Greek exports in terms of structure and geographical destination
Figure 15 Greek exports of goods towards main geographical destinations (bn US dollars)
40
35
30

EU countries excl.
Euro Area

25
20

Non EU Countries

15
10

Euro Area

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 16 Share of exports of major branches of Greek manufacturing industry (% of total)

A food, beverage; and tobacco

B textiles and textile products

J basic metals and fabricated metal products

other and plastic mineral products

C leather and leather products

K machinery and equipment nor elsewhere classified

D wood and wood products

L electrical and optical equipment

E paper and paper products

M transport equipment

G chemicals and chemical products N not elesewhere classified

H rubber and plastic products
Source (Figures 15 & 16): OECD, IMF, Eurobank Economic Research

14

March 12, 2015

Increase in exports of the Greek manufacturing industry to rapidly developing economies in recent years, albeit at a slightly lesser
extent than the rest of the Eurozone
Figure 17 Greeces manufacturing industry exports to the 27 fastest growing economies as % of total exports of the Greek
15
manufacturing industry
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

To the extent that the recent increase in the concentration of Greek exports enhances the degree of market power in export
businesses, this process must be continued and intensified through eg. mergers & acquisitions in key manufacturing sectors
Figure 18 - Concentration index of Greek merchandise exports to EU27 and the euro area
16
(Herfindahl-Hirschmann bilateral concentration index)
0.15
0.14

0.13
0.12
0.11
0.10

Greece - Eurozone

0.09

Greece - U27

0.08
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source (Figures 17 & 18): UNCTAD, Eurobank Economic Research

Visible signs of recovery in domestic industrial and manufacturing activity

Figure 19 - Greeces Purchasing Managers Index
60

Expansion
55
50

Contraction

45

48.8 Oct.

40

15

Aug-14

Mar-14

Oct-13

May-13

Dec-12

Jul-12

Feb-12

Sep-11

Apr-11

Nov-10

Jun-10

Jan-10

Aug-09

Mar-09

Oct-08

May-08

Dec-07

Jul-07

Feb-07

Sep-06

Apr-06

Nov-05

Jun-05

Jan-05

35

Fastest growing economies are defined here as those that featured average annual GDP growth of more than 4% over the last 10 years and
nominal GDP higher than $100bn in 2013.
16
The Herfindahl-Hirschmann index measures market concentration. It indicates whether the exports of a country or group of countries are
concentrated on certain products or alternatively distributed more homogeneously among a range of products. It takes values from 0 (zero
concentration) to 1 (maximum concentration).

15

March 12, 2015

Figure 20 Business expectations in manufacturing

20
10
0
-10

-20
-30

Greece

Eurozone

-40

Aug-14

Dec-13

Apr-13

Aug-12

Dec-11

Apr-11

Dec-09

Aug-10

Apr-09

Dec-07

Aug-08

Apr-07

Aug-06

Apr-05

Dec-05

Aug-04

Apr-03

Dec-03

Aug-02

Apr-01

Dec-01

Aug-00

Dec-99

Apr-99

Aug-98

Dec-97

Apr-97

-50

Source (Figures 19 & 20): EC, Markit, Eurobank Economic Research

Greece - Significant progress in a number of international indicators for competitiveness, the domestic business environment and
governance, although further improvement is needed to bridge the gap with the rest of the Eurozone
Figure 21 Greece - World Bank Doing Business Report; Key indicators
95.0
85.0
EU-17 (mean)

75.0
65.0

Greece

55.0

min-all countries

45.0
35.0

max-all countries

25.0
2010

2011

2012

2013

2014

2015

Greece

Euro area

Executive
Accountability

Environmental
Sustainability

Social
Sustainability

Economic
policies

Rule of Law

Civil rights

Access to
Information

Electoral
Process

9
8
7
6
5
4
3
2
1
0

Executive
Capacity

Figure 22 OECD Sustainable Governance indicators, 2014

Figure 23 Greece: World Bank Doing Business Report; Key Indicators

100
DB 2005

80

DB 2015

60

40
20

16

Resolving
Insolvency

Enforcing Contracts

Trading Across
Borders

Paying Taxes

Protecting
Investors*

Getting Credit*

Registering
Property

Dealing with
Construction
Permits

Starting a Business

17

Greece

Innovation

(smallest number denotes better position)

Business
sophistication

Market size

Technological
readiness

Financial market
development

Labor market
efficiency

Goods market
efficiency

Higher
education and
training

160
140
120
100
80
60
40
20
0
Health and
primary
education

Macroeconomic
environment

Infrastructure

Institutions

March 12, 2015

Figure 24 WEF: Global Competitiveness Indicator, 2014 Rankings

Euro area

March 12, 2015

Eurobank Global Markets Research

Global Markets Sales
Global Markets Research Team
Dr. Platon Monokroussos: Group Chief Economist
pmonokrousos@eurobank.gr, + 30 210 37 18 903
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gphoka@eurobank.gr, + 30 210 37 18 922
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andimitriadou@eurobank.gr, + 30 210 37 18 793

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nlaios@eurobank.gr, + 30 210 37 18 910
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apapathanasiou@eurobank.gr, +30 210 37 18 996
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yseimenis@eurobank.gr, +30 210 37 18 909
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astogioglou@eurobank.gr, +30 210 37 18 904
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vgioulbaxiotis@eurobank.gr, +30 210 3718995

Eurobank Global Markets Research

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