EMERGING MARKET

ECONOMIES – A
GREECE

Submitted to - Prof. Sangita Kamdar

Submitted on - 24th August 2021

Submitted by - Group 6
Kanak Daga A048
Gopika S C022
Srija Ghosh D032
Naman Shah H017
Chitra Sureka H028
Siddharth Mutalik I050
INTRODUCTION & HISTORY:
Greece is a country with a very rich history. It was the country that witnessed some of the
earliest economic activity that was undertaken by human civilization. The country emerged as a
nation-state in 1829, after being freed from the shackles of the Ottoman empire. At this time, the
country was considered an agrarian economy that had not developed because of the various war-
related factors such as poverty, inequality, and unemployment. The first signs of industrial
activity were witnessed when the shipbuilding and manufacturing sectors started being noticed
because of their performance and contribution to the economy.

As soon as the country was on the path of recovery, it was taken aback by the Turkish war and
World-war, which dented the economy. The economic costs of the war were large for the
country, but on the positive side, it led to an increase in the overall industrial activity. The
increased industrial activity was spurred on by sectors like textiles, defense, automobile,
agriculture, etc. due to the increased demand for the army. The biggest shock for the economy
came in 1922 when Mr. Petros Protopapadakis decided to split the currency into 2 halves,
something that is infamously referred to as the dichotomization of the drachma. The split of the
currency would mean that one part of it would remain with the owner of the currency and the
other half would have to be surrendered to the government as part of a 20-year 6.5% debt. This
led to deflation in the economy and a reduction in total investments, as people lost faith in the
government and made a move towards holding real assets instead of the currency.
The next shock that the economy had to face was the Great Depression in 1929, where the trade
deficits became so large enough to lead to the foreign exchange reserves being wiped off. The
quick steps taken by the Bank of Greece helped the country better deal with and survive this
shock compared to some of the other economies. The country witnessed growth at an average
rate of 3.5% from 1932-1939. But this period of growth did not last long as the country was soon
ravishing under the reigns of the 2nd World War (1939-45). The invasion by the Germans led to
heavy damages to the country and made way for a period of freakish hyperinflation, where the
prices skyrocketed to unimaginable levels. The prices had increased by 163,910,000,000% in
1944 as compared to just 4 years ago and GDP fell to $1951. After being in a dire state for
almost 3 decades, the country saw an economic boom over the next 2 decades. The country grew
at an average of 7.7% during that period. Several measures taken by the government led to a
structural revival of the country. In the 1980s the country saw the start of an impending debt
crisis, which in the future would cause a collapse of the economy. Expansionary macroeconomic
policies backfired, leading to a high debt-to-GDP ratio and deficits rose to 9%. Inflation levels
were almost 4.5 times higher than other European nations. There was a period of brief recovery
in the 1990s.
In 2001, the country became part of the Economic and Monetary Union of the EU and adopted
the Euro as its official currency. This led to an increase in trade between the European nations
while also reducing costs. The country was also swift in adopting the measures that were
recommended by the European Council which led to hopes of recovery for the economy.
MACROECONOMIC INDICATORS OF GREECE:
Below is a brief timeline of some historic economic events that have directly or indirectly
impacted the Greek Economy and its macroeconomic indicators.
1. GDP: The GDP of Greece was constantly growing till 2007-08 before it witnessed a stark
drop and kept falling till it hit the rock bottom in the year 2012. The consumption level of
Greece dropped in 2007-12 because of common reasons like global recession and other internal
factors. Capital Formation was being compromised and lower and lower investment was
witnessed here. It fell by over 200% between 2007 to 2012. Needless to say, all these factors
led to a fall in their GDP from $320 Billion to $270 Billion from 2008 to 2014. The GDP of the
country was declining at an average rate of 6% every year post which there was near to
negligible growth of 1% every year from 2016 to 2020. In the recent past due to the pandemic,
Greece saw a sharp decline in the GDP, and the annual growth rate fell to as low as -8.2% but it
steadily recovered in the year 2021.

(Source: Greece-GDP || OECD.org)

2. Inflation: The inflation levels of Greece in the years 2007-08 were somewhat stable at
around 3%, however, it saw a spike of up to 4.7% in the year 2010. Post that, Greece saw
deflation because of ‘Austerity Measures’ like pension cuts, reduced Government spending,
lower subsidies, wage cuts imposed by the EU-IMF. The lowest phase of the country was in
2013 when the prices dropped by a sharp 2.9%. Currently, Greece is experiencing inflation of
about 0.25%.

(Source: Greece-Inflation || OECD.org)

3. Government Deficit: For Greece. Its government deficit was a point of contention for the
country’s entry into the Eurozone. It became a criterion for being placed by the European
Commission under the ‘Fiscal Monitoring’ program. It was lowest in 2009 when it was 15% of
the GDP while regulatory bodies like EU and IMF insisted on it being as low as 0.5% of the
GDP. EU and IMF funded Greece with bailout packages which led to the Government Deficit
falling significantly. It stood at 4% in 2014 and gradually improved to fall at 0.5% by the end
of 2016. Ever since then, it has remained approximately the same.

(Source: Greece-Government Deficit || OECD.org)

4. Unemployment: In Greece, the unemployment rates have increased due to the many
ramifications of the Great Recession. The investments in the economy dropped both for capital
formation and industry expansion, Government spending was reduced, labor was not available
at cheap rates and inflow from FDI was low. This caused an increase in unemployment.
However, with some reforms and restructuring coupled with bailouts for the economy, the
unemployment rates have fallen considerably after 2013. At present, the unemployment rate
stands at a dismal 17.2% of the working population

(Source: Greece-Unemployment || OECD.org)

5. FDI: Greece was preferred by foreign investors but it has witnessed a relatively dull phase in
the last decade owing to the ‘sudden stop’ in private investment. This halt made the foreign
investors shaky and they lost trust. The fiscal mismanagement, depreciation in the Euro, low
return rates, poor creditworthiness, and value depreciation of the Euro also discouraged foreign
investments. In 2016 an outflow of $1.6 Billion in terms of FDI was witnessed. The economy
requires FDI inflow for a comeback.

(Source: Greece-FDI || OECD.org)

GOVERNMENT INITIATIVES FOR ROBUST DEVELOPMENT:

The pandemic further battered an already distressed and debt-ridden Greek economy. The
biggest blow came in the form of international travel restrictions which entirely shut down the
Tourism sector – a major source of employment and revenue for the Greek economy. The
government quickly sprang into action by strengthening the health sector to minimize the
spread of the virus. The ECB also took some strong measures to boost an already fragile
banking and financial sector. Key decisions taken by the Greek government to drive the
economy out of the Covid-19 crisis include:
• A fiscal stimulus package measuring 24 billion Euros was announced to revive
economic activity in 2020 and an additional 11.6 billion Euros was announced in
2021
• Major funds were diverted to provide unemployment benefits to support vulnerable
individuals, full coverage to pensioned individuals, subsidies to households etc.
• Provision of moratorium facility for household and corporate borrowers till the end
of 2020 in addition to the interest payment subsidies declared
• Announcement of ‘BRIDGE’ liquidity program to support suffering businesses in
the form of working capital loans, interest payment subsidies, reduction in rent
payments, deferred payment of taxes, etc.
The aforementioned measures were focused on short-run recovery of the economy. They were
more precautionary than diagnostic in nature. The European Union had borne serious brunt of
the pandemic and in response, the EU formulated the ‘Recovery and Resilience Fund’ in April
2021 to protect all its members from the ongoing crisis and to put their economies on the path
of sustainable development. This led to the “National Recovery and Sustainability plan” for
Greece and was popularly termed as “Greece 2.0” – with the aim of making a revitalized and
futuristic economy. It entails a set of structural reforms and development projects to be
completed by the end of 2026. Greece currently ranks a lowly 43rd out of the 45 members of
the EU and this mega plan will ensure dynamic, sustainable and permanent growth for the
country. Greece 2.0 is not just a mere formula to improve investments in the economy but it
aspires a fundamental, economic and social transformation of the country.
Greece 2.0 is the brainchild of Nobel laureate Prof. Pissarides whose committee recommended
a slew of ambitious reforms in tandem with the ‘Country specific recommendations’ addressed
by the European Union. Output, Investment and employment are prime target areas to achieve
both economic efficiency and social justice. The 2 main elements of Greece 2.0 are technology
and environment as the reforms focus on making the Greece a green and digital economy. The
Recovery and Resilience fund set up by the European Union has allotted 31.2 billion Euros to
Greece for completing all the projects by 2026 out of which 37% are devoted to green
initiatives and 20% focus on technology adoption and digitization. There are 6 main pillars of
Greece 2.0 that will help in bringing long-term stability and sustainability for the Greek
economy which are:

(Source: 6 pillars of Greece 2.0, Hellenic Republic)

The government has called for a proactive approach to come out of the clutches of the
pandemic. Greece 2.0 will be achieved by a combination of the following key investments and
key reforms. A total of 68 reforms and 106 investments have been planned for implementation
in phased manner by the end of 2026.
Key investments announced and underway for implementation:
• Development of 5G infrastructure, faster broadband connections and fiber optics
• Digitization of public sector endeavors (Health, Education, Justice, Taxation)
• Upgradation of energy efficiency in households, offices and government buildings
• Investment in energy storage, electric vehicles and electronic interconnectivity
• Public private investments in irrigation and railways sectors
• Strengthening of culture, tourism and agri-food sectors
Key reforms announced and underway for implementation:
• Labour law reforms including reform of active/passive labour market policies to
increase female participation in workforce
• Simplification of licensing, trade facilitation and improvement in Ease of doing
business
• Adoption of Artificial intelligence and big data to fight tax evasion
• Preparation of ‘Strategic Urban plans’ to promote balanced regional development
• Incentivizing companies to increase enterprise size and mergers to achieve
economies of scale
• Reforms in primary health care and introduction of digital telemedicine services

(Source: Split-up of Greece 2.0 plan, Hellenic Republic)

The Greece 2.0 plan is expected to bring unprecedented results for the Greek Economy. A
study by the Bank of Greece has forecasted the following projections for Greece after the
conclusion of Greece 2.0 plan by 2026:
• An increase of 7% in real GDP
• Creation of employment for 1.8 lakh individuals
• Investment in private sector to grow by 20%
• Economic value creation will be led by private investments, and increased public
expenditure
RISKS
1. Over-dependence on the tourism-driven service industry & speed of vaccination-
Dependence on tourism up to 20% of GDP poses a huge risk for the Greek economy and has
been a huge factor for the hit it took during the global pandemic since the beginning of 2020.
By the end of March 2021, only 3.6% of Greece’s population had been fully vaccinated. It will
still take the next few months for Greece to lift social distancing norms to ultimately support
the vital tourism season of the country. Thus, tourism-led growth is a huge risk for the
economy.
2. Fragmented business landscape
The business landscape of Greece is the most fragmented among all the nations in the
Eurozone, especially in terms of global competition and innovation. As per a report by OECD,
97% of the businesses in Greece are in fact micro-enterprises with less than 10 employees. Post
pandemic growth of such micro, small & medium enterprises is key for the growth of the
economy. However, EU funds not trickling down to these enterprises is a risk faced by the
nation. These businesses face the imminent risk of closing down due to bankruptcy.
3. Corruption due to Cumbersome Bureaucracy and Judiciary
Bribing, corruption, and irregular payments by businesses are very often exchanged for legal
proceedings in their favor. Companies and businesses operating in the nation do reveal an
overall dissatisfaction with the efficiency and integrity of the legal frameworks. Further
challenges pertain to settling of transactional conflicts & cumbersome regulations. These pose a
high risk of offshoring businesses by the nation’s companies and the low appeal of Greece as
an investment center and even higher chances of tax evasions that restrict the funds for
government revenues. Further, the crime rates and trust in government is low sentiment for the
residents of Greece. As per Transparency International Corruption Perception Index ratings of
2019, Greece is ranked 60th, thus implying an inadequate level of anti-bribery enforcement due
to delays in judicial processes and system-driven loopholes.
4. Intellectual Property Rights
With the country enlisted on the U.S Special 301 Watch list for inefficient enforcement of
implementation of IPR, Greece businesses face the risk of being a victim of and also getting
away with several trademark violations across industries such as apparel, audiovisual, music,
and growing industry of software. These violations are likely to cause unrest in many industries
due to the increasing penetration of the internet. This furthers the risk of imporation and selling
of counterfeit products.
OPPORTUNITIES
The main aim for the Greek economy over the next decade is to progressively raise real per
capita income to match the European average. In addition, strengthening social cohesiveness
and improving environmental performance are important goals in the convergence process.
1. Production and investment:
Significant cost reductions in formal work due to reduced tax and insurance burdens.
Investments in mechanical equipment and innovation receive a more advantageous tax
amortization treatment. Buildings are being upgraded to save energy. Infrastructure investments
with a focus on freight transportation and citizen and tourism transit in congested areas. Reduce
energy costs and administrative hurdles to strengthen export processing companies. Waste
management and the circular economy go hand in hand.
2. Human Resources:
New training programs and institutions for employees and jobless people. Interventions in
educational units' organizational structures. Preschool education should be expanded and
improved. Facilitating women's full participation in the work economy. Adapting the
institutional structure to promote cutting-edge research at universities and research institutes
that will support clusters and manufacturing.

3. Public sector and administration:

Accelerate the digitalization of public sector services. Increasing the effectiveness of primary
health care and hospital units, as well as their involvement in monitoring systems. Expansion of
out-of-court conflict settlement procedures and the creation of separate divisions of the courts
for financial issues. Improving the financial supervision system in the realm of investor
protection.
Since the crisis, public investments have decreased as Greece has focused on debt reduction
through a consolidation program. The European Commission has assisted Greece through the
EU Structural and Investment Funds (ESIF).
4. Strengthening Manufacturing Sector:
The manufacturing sector has recovered from record lows in 2020 as the economy has
progressively reopened through 2021. The IHS Markit Greece PMI Manufacturing Output
Index showed the most substantial increase in output in over two years, buoyed by a large
increase in new orders. Client demand was fueled, according to anecdotal evidence, by the
early May easing of virus-fighting regulations. However, short-term problems continue, as
severe supply chain interruptions increased cost pressures significantly in May. Even though
supply chain pressure remained high, it appeared to have eased significantly as supplier delays
prolonged to a lesser extent.

CHALLENGES
In the short and medium-to-long term, the Greek economy continues to face significant
challenges. The primary challenges in the short term are containing the pandemic and returning
the economy to a solid growth trajectory.
In the medium-to-long term, the pandemic has created new challenges and exacerbated pre-
existing macroeconomic imbalances, which are associated with chronic weaknesses in the Greek
economy.
These challenges are the following:
● The re-emergence of twin deficits, as well as a private and public debt overhang, raises
risks and may impede the achievement of the National Recovery and Resilience Plan's
objectives.
● Banks are still burdened by a large stock of NPLs, which is expected to grow even more
once the support measures are lifted. Furthermore, the capital base of banks is expected to
deteriorate further as a result of the current NPL reduction policies.
● Despite improvements in some sectors, the Greek economy's structural competitiveness
remains low
● Unemployment remains high and is likely to rise further once support measures are
phased out, particularly in service sectors hit hard by the pandemic. Because the
pandemic alters consumption patterns, recovery in these sectors may be delayed, posing
the risk of structural unemployment.
● The previous decade's large investment gap dampens the economy's long-term prospects.

CONCLUSION
The economic policy mix implemented through the memorandums has always focused on
treating the symptoms of the crisis rather than dealing decisively with its root causes. These
factors include the Greek economy's structural weaknesses, such as its limited productive and
innovative capacity, the dominance of traditional, lower knowledge- and technology-intensive
sectors, the introversion of the production system, and the low percentage of exports, as well as
Greek enterprises' limited participation in international production and distribution chains.
For many decades, GDP was primarily determined by domestic consumption, with little regard
given to investment. Furthermore, several flaws in the political and economic system's
organization and operation, such as clientelism, corruption, bureaucracy, over-regulation, market
rigidity, reduced domestic competition, legislative complexity, and legal uncertainty, the
instability and complexity of the tax system, and other barriers to doing business, were major
impediments to investment and entrepreneurship long before the 2009 crisis. Finally, the
deterioration of public finances and the resulting over-indebtedness were primarily caused by
two chronic problems of the public economy, namely excessive spending on and subsidization of
the pension system, which resulted in high tax evasion.
As a result, unless the chronic weaknesses of the Greek economy and public administration are
addressed, Greece's adjustment policies will not help the country enter a path of sustainable
growth thereby, preventing it from emerging from the recession and entering a new era of
modern institutions and a competitive economy. Simply continuing with necessary
macroeconomic adjustment policies will not solve the Greek problem indefinitely. The country
requires a strong structural policy to aid in the development of a new production model based on
extroversion, innovation, and sound entrepreneurship, as well as a domestic economic system
with functioning markets, stable and transparent institutions, and an effective public
administration.

THE WAY FORWARD

The central goal for the Greek economy over the next decade will be to gradually increase real
per capita income so that it converges with the European average. Furthermore, the convergence
process's primary goals are to strengthen social cohesion and improve environmental
performance.
Two fundamental conditions are outlined to achieve a significant convergence of Greek and
average European income.
1) Employment: There has been a significant increase in employment, both through
unemployment reduction and increased labor market participation of underemployed
groups of the population, such as women and young people.
2) Labour productivity: There has been a significant increase in labor productivity,
which will ensure household well-being in the long run. Increasing productivity
necessitates an increase in productive capital and, as a result, new investment from
both domestic and foreign firms. It also necessitates the incorporation of novel
production methods and technologies. Because these activities necessitate a high level
of specialization and the internal market in small countries, such as Greece, offers
few opportunities, increasing the economy's export potential is essential.
IMMEDIATE PRIORITIES
1. Production and investment:
Costs in formal work are reduced by lowering the tax and insurance burden. Tax amortization
treatment is more favorable for investments in mechanical equipment and innovation. To
strengthen export processing industries, energy costs are reduced and administrative barriers are
removed.
2. Human capital:
Workers and the unemployed will benefit from new training programs and structures.
Interventions in school units on an organizational level; Preschool education is being expanded
and improved; Facilitating women's full labor-force participation; Adaptation of the institutional
framework to boost cutting-edge research in universities and research centers, which will support
clusters in tandem with production.
3. Public sector and administration:
Accelerate the digitization of government services. Strengthening primary health care and
hospital units through a strong role in system monitoring. Expansion of special sections in courts
for financial cases, as well as the expansion of out-of-court dispute resolution mechanisms
Improving the financial supervision system in the field of investor protection.
References:
1. https://ihsmarkit.com/research-analysis/lack-of-tourism-set-to-drag-on-greek-
economic-recovery-Jun21.html
2. https://www.oecd-ilibrary.org/sites/cedf09a5-
en/1/3/2/index.html?itemId=/content/publication/cedf09a5-
en&_csp_=ee25a605ced7ab5be262996aeeaef879&itemIGO=oecd&itemContent
Type=book#section-d1e7196
3. https://www.imf.org/en/News/Articles/2019/03/11/na031119-greece-economy-
improves-key-reforms-still-needed
4. https://www.intereconomics.eu/contents/year/2017/number/5/article/how-
greeces-systemic-weaknesses-limited-the-effectiveness-of-the-adjustment-
programmes.html
5. https://www.economy.com/greece/indicators
6. https://government.gov.gr/schedio-anaptixis-gia-tin-elliniki-ikonomia/
7. https://government.gov.gr/topothetisi-tou-ipourgou-ikonomikon-k-christou-
staikoura-gia-to-neo-paketo-metron-ikonomikis-stirixis/
8. https://ec.europa.eu/commission/presscorner/detail/en/ip_21_3022
9. https://primeminister.gr/wp-content/uploads/2021/03/Greece-2_0-April-
2021.pdf