The article provides a big picture of Greece’s economy in the third quarter of last year and it also

reports about the ‘stubborn’ unemployment rate at present. From the article, the sign of recovery
seems to be taking place since there are slight falls in its Gross Domestic Product and recession (a
business cycle contraction and it is a general slowdown in economic activity). Even though Greece’s
economy may recover in future, unemployment rate still remains high as a result of several factors.
According to the article, unemployment keeps holding at the rate of 27.3% in August 2013.

Generally speaking, the slight reduction in Greece’s economy was due to the small fall in GDP (the
total of all economic activity in a country, regardless of who owns the productive assets). There was a
strong impact from tourism as it rebounded and gained a great amount of revenues (increased by
13.7% compared to last year). Tourism directly boosted Greece’s beleaguered economy as the
government strategized for a tourism development including promotion of a brand new travel
experience. GDP rate experienced a slight fall as tourism accounts for fifth of Greece’s GDP and at
recession or contraction stage, GDP will stop deceasing at certain rate because consumption
continues hence GDP eventually bounce back in future.

Moreover, recession occurred in Greece might have come mostly from reduced consumption,
investment and by lower government spending. Firstly, reduced consumption of households might be
caused by several problems, namely, unemployment, less disposable income and higher prices.
During a recession, falling aggregate demand (the total spending on goods and services in a period of
time at a given price level) will lead firms to lay off workers, so unemployment rises. If more people
are unemployed, there will be even less spending within the economy.

Average Price
Level ($)
LRAS SRAS

P1 A

P2

AS1
AS2
Real GDP
0 Yrec Yf

Recessionary gap

Figure 1. Recessionary gap in the new classical model

From the new classical graph below, it can be seen that the left-shift from AD 1 to AD2 represents the
condition of Greek economy currently. LRAS (long run aggregate supply) is where the labour market
is at the full employment level with a minimum rate of natural unemployment. Point A is the initial
equilibrium point when Greece was at economically. The intersection of AD 2 and SRAS is best
represented for Greece’s situation where the price level decreases from P1 to P2, and the GDP
decreases as well from Yf and Yrec. The distance between Yf and Yrec is the deflationary gap or
recessionary gap, which decreased for 3%, less than forecasted. Furthermore, the gap between Yf and
Yrec can also be seen as cyclical unemployment while LRAS is the natural rate of unemployment.
Additionally, the economy is unstable at the current situation and it is expected to gradually return
back to the LRAS with a lower price level and a full employment level. However, it is almost
impossible for Greece to return back to the full employment level, or if they did, it would take quite
amount of time.

Unemployment in Greece occurred mainly as a result of long-time recession thus it could be

concluded that this type of unemployment is cyclical unemployment (type of unemployment
associated with business cycles occurring in the economy). Cyclical unemployment occurs during
recessions because when demand for goods and services in an economy falls, firms respond by
cutting production and reducing number of workers hence unemployment must result. In addition,
unemployment in Greece was also caused by the government’s use of austerity measures, which
reduces budget deficits during adverse economic conditions by spending cut or increase tax.

From the article, the unemployment rate was steady at 27.3 % in August and it was almost tripled the
percentage in 2008 when Greece’s economy first met recession. In short run, if government keeps
using austerity measures thus unemployment will increase eventually as government deficit reduces.
In the long run, the unemployment rate may be increasing if economy continues to slow down or
maintains at high rate yet the country’s economy outlook remains uncertain. Additionally, the
required fiscal consolidation will restrain domestic demand and very high unemployment will persist,
keeping inflation negative.

In conclusion, recession and unemployment have prevented Greece from meeting its
macroeconomics goals such as full unemployment, achieving stability or economic growth. Even
though, according to the article, there was a sight of recovery as recession ‘eases’ yet unemployment
still remains as one of the most controversial problems in Greece thus it cannot be denied that Greece
might have to come up with some new innovative policies in order to archive their economic targets
and overcome these problems.