THE ECONOMY OF THE ISLES OF GREECE

The isles of Greece! the isles of Greece!
Where burning Sappho loved and sung,
Where grew the arts of war and peace,---
Where Delos rose and Phoebus sprung!
Eternal summer gilds them yet,
But all, except their sun, is set.

Lord Byron

According to today’s Financial Times of London, the sun may have set, economically, on the isles of Greece. Its slanting may rays still gild Mount Aegaleo, but the vault of the exchequer in Athens has nothing that glitters. Authors Dave Oakley and Kerin Hope of FT.com report the sad and disturbing news that Greece, "where grew the arts of war and peace," has seen its credit rating downgraded to the lowest level in the eurozone. The result has been a heavy sell-off of Greek stocks and bonds amid fears that the country is heading toward financial disaster---all due to its dangerously high debt-levels. See: Greece downgraded over high debt, (http://www.ft.com/cms/s/0/2763a1d6-e3fc-11de-b2a9-00144feab49a.html) dl 12-09-09.

Since joining the euro in 2001, Greece has consistently failed to carry out difficult financial “structural reforms” which would keep its deficit within the eurozone limit of 3% of gross domestic product (GDP). The present deficit, according to the FT, is between a whopping 9 and 13 percent of GDP. With a downgrade of their bonds immanent the Greek government will face serious problems in raising money through the European Central Bank where they exchange Greek bonds for European Central Bank loans.

So what has happened to Greece since I was there last in 1999?

Greece has a mixed economy, with a large public sector which accounts for half of its GDP which is the 27th largest in the world, (http://en.wikipedia.org/wiki/Economy_of_Greece). Any one who has traveled in that country knows that Greece is largely agricultural, and that is what makes it so attractive as a tourist destination. According to Greeka.com(http://www.greeka.com/greece-economy.htm--dl December 9, 2009, about 20% of the workforce is employed in agriculture such as growing wheat corn, barley, sugar beets, olives, tomatoes, tobacco, potatoes, beef, dairy products and wine. This sector accounts for about 15% of the GDP. While 21% are employed processing food and tobacco, manufacturing textiles, employed in mining, and in the chemicals and metal production industry and the petroleum industry. The remainder of the population, about 59%, is employed in the services sector. This includes the large tourism industry. Up until the recent recession beginning in 2007, tourism attracted more people than the total Greek population each year. Let us not forget the Greek shipping industry, one of the largest in the world.

In 2004 (op cit above) Greece exported a total of about $13 billion dollars of manufactured goods, fuels, food, and beverages to its main trading partners in the EU and US. However, it imports were more than two times that amount, or nearly $30 billion dollars worth of imported manufactured goods, such as food, fuel and chemicals from the EU and the US. Even with economic aid from the EU of nearly $6 billion dollars annually (2004), Greece had an imbalance of trade, of more than $18 billion per year (which has contributed to the nation’s external debt of $42 billion dollars (as of 2004---and fueled its financial problems.

By 2008 (See Wikipedia) Greece’s GDP, estimated at $343 billion, had grown to nearly 3%, its exports were $29 billion dollars, while imports had jumped to $93 billion dollars. The balance of trade deficit at $64 billion dollars, indicates that for every dollar of goods Greece exported, it spent 2.2 dollars for imported products. Figures for its estimated public debt indicate that value grew to a whopping 97% of GDP, while revenues were for that period were $126 billion, and its expenses $144 billion. For comparison, neighboring Turkey, for the same period, recorded a public debt of 40% of GDP (2008), with revenues of $160 billion and expenditures of $173 billion (See https://www.cia.gov/library/publications/the-world-factbook/geos/tu.html).

How did Greece get into this economic hole?

Back in 2001 when Hellas joined the European Monetary Union (EMU) and gave up the drachma, the nation’s leaders could have staunched the growth of debt, but instead behaved like children in candy store. At that time the liberal rules of the European Central Bank (ECB) permitted the Greek government to borrow easily, and with nearly the same interest rate as economically unchallenged Germany. They took up this challenge with gusto. According to Ambrose Evans-Pritchard of the UK Telegraph (Nov 22, 2009) dl December 8, 2009 (See: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6630117/Greece-tests-the-limit-of-sovereign-debt-as-it-grinds-towards-slump.html) the center-right government dug themselves into a deep hole by low-cost loans and profligate spending, they pumped up public- sector salaries to meet perceived and unrealistic EU standards and gaily went into big debt for the Summer Olympics in 2004 (which some claim cost the nation 10 billion euros and brought only modest and short term benefits) and, most foolishly, they ran "budget deficits near 5% of GDP at the top of the boom” (Ambrose Evans-Pritchard, op cit) rather than decreasing spending to close the deficit gap.

As a result, post 2001 prices have continued to rise in Greece. This had its clear effects on the important tourist trade, encouraging many holiday makers to seek other, less costly and equally sunny destinations..such as neighboring Turkey. But the rising cost of living, also had its effects on the country as a whole, straining household budgets, and risking long term economic growth. The devastating world economic slump, combined with pinched household budgets have had its pernicious impact on the perceptions and sense of well-being of its citizenry. Such feelings can lead to dangerous social instability, such as was demonstrated in the recent December 2009 violent clashes between police and striking shipyard workers in Piraeus, and the December 2008 riots in Athens (sparked by the tragic shooting-death of a 15 year old student by the police) and the reprise of these December riots on the anniversary of the sad event just this week (December 7, 2009).

Unfortunately, as an EU member, stuck within the economic rules of the EU, Greece has few ways open to help itself, warns Evans-Pritchard, who suggests one option as “EU beggary”. In past times, the Greek government would simply print new drachma, devalue the currency and hold their purses tight for purchases from abroad, but enjoy the increased sales of Greek commodities, the pleasure of full hotels and tourist buses--and improved employment figures. But those options are not open to them now. We must wait and see, if this summer the sun will again gild the hills of the lovely isles of Greece.

Get the picture?


rjk