The impact of EU membership on Greek economic policy

 

 

 

INTRODUCTION

 

-    what is to follow in these two lectures

 

-    who is who etc

 

-    themes covered today

                              i.   General: EU and Greek economic policy

                             ii.   The impact of EU membership on Greek economic policy

                           iii.   The impact of EU membership on the Greek economy

 

-    themes covered next week

                              i.   The impact of EMU on Greek economic policy and performance

                             ii.   The impact of EU on domestic structural reforms

                           iii.   The prospects / conduct of Greek policy in relation to Lisbon 2000

 

 

 

IMPACT ON MACRO-ECONOMIC POLICY

 

 

General

 

-    What do we mean with “economic policy”?

 

-    What do we mean by “EU”?

 

-    Which areas of policy are covered?

Agricultural policy

Monetary and finance policies

Regional and cohesion policies

Fiscal policies

Industrial and competition policies

Trade and investment policies

Privatisation

Labour market and social security policies

 

-    What are the main episodes of the EU (that could influence policy)?

Membership (1981)

SMP / Maastricht (1985/92)

EMU-1 (1999)

SEA (1986)

CSF-II (1993)

CSF-III / Lisbon (2000)

CSF-I (1988)

EMS-2 (1994/98)

EMU-2 (2001)

EMS-1 (1990)

GSP / Luxemburg (1997)

Rome (2004) ?

 

-    We need to separate between EU-effects (e.g., cohesion, integration) and EMU-effects (GSP-related)

 

 

 

Four ‘periods’ / regimes of the EU – Greek policy relationship

 

Period
Circa

Policy expectation

Policy & economy

Early membership

1974-1983

Remove barriers to trade

Modernise economy

Harmonise policy environment

Stabilisation policies

 

Inflation and instability

European integration

1984-1993

Liberalise markets

Achieve real convergence

Harmonise policies

Expansionary policies

 

Stagnation with inflation

EMU preparation

1994-2003

Integrate economy

Achieve nominal convergence

Harmonise fiscal environment

Disinflation policies

 

Growth and convergence

Beyond EMU

(Lisbon strategy)

2004-???

Move to a really single market

Achieve structural reforms

Harmonise institutions

(pensions, LM, privatisation)

Stabilisation policies

 

???

Unemployment?

 

 

 

EFFECTS ON ECONOMIC PERFORMANCE

 

 

Economic performance circa 1981-1993

 

-    the effects of EU membership on economic performance are difficult to measure / quantify

 

-    important to look at overall economic performance and try to see whether / how much membership coincided with

                              i.   improvements in outcomes (direct ‘effects’)

                             ii.   changes in policy and policy conduct that can be related to improvements in outcomes (indirect ‘effects’)

 

-    economic performance in the 1980s and the early-1990s has been poor at best (stagflation)

                              i.   exploding public debt and deficit

                             ii.   reduced growth rates and investment

                           iii.   increasing unemployment and prices

 

-    pre-1981 convergence with EU-9 was halted: divergence throughout the 1980s

 

-    …but the EU was hardly responsible for the deterioration in economic performance

                              i.   structural problems of the Greek economy

                             ii.   PASOK’s statist economic programme / policies

                           iii.   the international business cycle (e.g., oil shocks)

                           iv.   as well as pressures from increased exposure to international competition and subsiding protectionism

 

 

 

Macroeconomic situation in Greece, 1986-1995

 

 

1986-90

1991-95

 

1986-90

1991-95

Total domestic demand

2,2

1,3

GDP pc (PPS, EU-15=100)

60,1

63,3

Exports of goods and services

3,8

4,4

GDP growth rate

1,3

1,3

Imports of goods and services

8,4

3,6

Unemployment

6,6

8,3

Public consumption expenditure

-0,1

 

0,5

 

Output gaps (% deviations from potential GDP)

-1,5

 

-2,1

 

Private consumption expenditure

3,2

 

1,8

 

Relative unit labour costs (1995=100)

94,6

 

94,5

 

Cur. account deficit (%GDP)

1,4

0,5

Inflation (GDP deflator)

17,2

14,0

Private GFCF (non-residential)

2,9

2,2

Total GFCF

1,5

-0,4

Private GFCF (residential)

3,6

-7,0

Government deficit (%GDP)

12,0

11,6

Short-term interest rate (1yr)

17,8

22,1

Gross public debt (%GDP)

61,7

99,4

Real effective exchange rate (1991=100)

98,8

103,6

Net inflows from EU (%GDP)

3,0

4,3

Sources: European Economy; OECD, Economic Outlook; Bank of Greece, Annual Report

 

 

 

EFFECTS ON POLICY

 

 

Agricultural / CAP

 

-    CAP has been a significant source of financial transfers into Greece

                              i.   more than 50% of total EU funding came through the Agriculture Guarantee Section

                             ii.   governments fought hard to protect against CAP reform / accession of competitors (e.g., Spain)

 

-    Agricultural policies favoured protectionist-like support of existing businesses

                              i.   initial response was negative due to fears of bias towards large (foreign) producers

                             ii.   fears not unsubstantiated – but challenge not taken

 

-    Little effective effort on restructuring

                              i.   the state of agriculture

1.  small / segmented unproductive farms

2.  low capital ratios and technological content

3.  casual / seasonal employment and low skills

                             ii.   effort to contain unemployment and urbanisation

                           iii.   under farmers’ pressure production diversification has been incomplete / unsuccessful

 

-    Conclusion: CAP / EU used as a source of public transfers – not of restructuring / modernisation – not dissimilar to, e.g., France

 

 

Regional & cohesion

 

-    The CSFs have been a significant source of financial transfers into Greece

                              i.   averaging around 4% of GDP per year

                             ii.   almost €40bn in 2000-2006

 

-    Greek RDPs targeted sustainable development through

                              i.   Improving infrastructure

                             ii.   Supporting fixed capital formation

                           iii.   Increasing competitiveness

                           iv.   Improving education / training provision

                             v.   Modernising the public sector

                           vi.   Fostering regional development

 

-    The impact of the CSF funds is noticeable but limited

                              i.   Due to concentration of spending (horizontal)

                             ii.   Lack of focus / strategy / coordination

                           iii.   Mainly short-lived demand-type effects – not supply-side (cumulative) spillovers

                           iv.   Relative neglect of ‘dynamic’ areas (R&D, education, skills, networks, etc)

 

-    The uncertain future of CSFs post-2006 poses extreme challenges for Greek policy and economic well-being

                              i.   Reduced / phased-out funding

                             ii.   Increased competition

 

 

Regional policy and reform have been little affected by EU support

 

-    History of concentration / centralisation

                              i.   Limited funding: only almost a third of all EU funding goes to regional development (outside Athens / non-horizontal policies)

                             ii.   Centralised administration: responsibility for regional allocations and budgets lies with the MNE and the central government

                           iii.   Lack of autonomy of local institutions

a.  regional and sub-regional authorities were centrally appointed and thus did not challenge the central planning

b.  this reproduced the culture of clientelism and dependence

 

-    Restructuring of local governance / devolution was particularly slow due to political / partisan considerations

                              i.   ‘need’ for state / centralised control

                             ii.   lack of local ‘actors’ and initiatives to contest the central decision-making processes

                           iii.   PASOK’s early programme cancelled by New Democracy governments (1990-1993) - eventually administrative decentralisation (but partial) post-1994

                           iv.   History of concentration / centralisation

 

-    More recent RDPs (PEPs) have been more targeted and successful

                              i.   Higher local autonomy

                             ii.   Greater involvement from local actors

                           iii.   More coordinated programmes (esp. on infrastructure)

 

 

Industrial and competition

 

-    Greece’s modernisation of policies was slow

                              i.   partly because of its weak administrative and institutional structures (esp. at the sub-national / local levels)

                             ii.   partly because of political barriers and short-run considerations

                           iii.   partly because of the need to support industries of national interest / importance

 

-    Little effort on modernisation / competition / competitiveness

                              i.   PASOK’s programme of nationalisation

                             ii.   Reliance of old/traditional industry

                           iii.   State aid and nationalisation versus deregulation and openness / competition

 

-    Greece continued to support many ‘traditional’ policies, including export promotion and (in)direct subsidies often in exception from or in violation of EU directives

 

-    Industrial policy largely failed to enhance the dynamism of aspects like networks / clusters / etc which are increasingly important – but one has to acknowledge that the entrepreneurial / etc base was also lacking

 

-    Post-1993 change: e.g., the 1994 White Paper on Growth, Competition and Employment emphasised the modernisation of industrial policies

 

 

Privatisation

 

-    The privatisation process was similarly slow because

                              i.   public companies were not very attractive / profitable

                             ii.   there were significant reactions by the public and key actors (unions, etc)

                           iii.   there was attention to securing continuing control over key sectors of national interest

                           iv.   the financial sector (ASE) was not fully developed

 

-    Nevertheless, EU momentum towards flexibility / deregulation reinforced domestic shift towards privatisation – EMU criteria gave further stimulus

                              i.   New Democracy adopted a Thatcherite programme since mid-1980s

                             ii.   PASOK was slow to adapt: selected privatisation, mainly of ailing companies

                           iii.   Privatisation more targeted / linked to modernisation post-1996

                           iv.   Programme helped achieve nominal convergence and shrink public sector

 

-    However state companies still have large deficits – absorbing significant EU funding for support

 

-    Greek state is still largely protectionist and seeks control over public and state enterprises

 

 

Monetary / finance and fiscal - financial liberalisation and reforms proceeded quite successfully, but only at a rather late stage (more under the EMU section next week)

-    reforms started in late 1980s but became more concrete / rigorous in the pre-EMU period

-    the actual impact of EU membership as such was rather minimal – mainly regime change

-    financial sector easier to regulate – lower political costs (a win-win situation)

 

 

Trade and investment

-    Trade liberalisation (removal of tariffs & quotas; reduction of export promotion / subsidies) was de facto required and proceeded relatively fast – but not without problems

-    Removal of non-tariff barriers (border controls; regulations on procurements & standards; VAT & excise) was slower, more controversial, and more challenging

                              i.   conflict with domestic ‘culture’ of protectionism and statism

                             ii.   Greek economy not ready for extreme openness

                           iii.   Established interest groups / clientelism

-    Openness to investment / deregulation, especially of services, was notably slow

                              i.   slow removal of protected monopolies

                             ii.   financial sector not too developed to accommodate financial flows

                           iii.   economic conditions not favourable for FDI

 

 

Labour market and social security

-    Reforms have been slow owning to strong labour movement and sentiment in the public: (i) not binding EU pressures; (ii) reforms mainly dictated by economic conditions; (iii) deregulation only post-1993 - more under Lisbon strategy section (next week)

 

 

 

SUMARY AND DISCUSSION

 

 

Summary

 

-    Defining areas of economic policy and identifying relevant episodes in the development of the EU

 

-    Identifying policy regimes and economic periods

 

-    The performance of the Greek economy since the 1970s

                              i.   Lost its earlier dynamism

                             ii.   Encounter significant structural problems

                           iii.   Fiscal and budgetary aggregates deteriorated significantly

 

-    EU developments and the conduct of Greek economic policy

                              i.   Areas of economic policy

                             ii.   Largely little response to both challenges and requirements of EU membership and integration (deepening / enlargements)

                           iii.   Progress only in a limited number of areas

                           iv.   Policy divergence not unrelated to economic divergence

 

 

Discussion

 

-    What other areas of policy (not covered here) have been affected by EU membership?

 

-    What is the relation between the political and economic cycles in the conduct of economic policy and the prevailing economic performance?

 

-    Has EU membership influenced political aspirations / partisan strategies?

 

-    Why was Greece slow in adopting EU-inspired policies / adapting to the new international / competition environment?

 

 

 

END.-