“… (W)e believe that it’s legally not possible in the Eurozone to have a debt write-down.” Responded German Chancellor Ms. Merkel to in face of IMF’s urge to ease Greece’s debt burden before it continues a bailout for Greece.
After five years of fiscal austerity and internal devaluation, the Greek economy is 27.6 percent smaller than the pre-crisis year and it still doesn’t signal a robust recovery. And there emerges the “structure reform fatigue” across EU, with some stating that austerity had crippled the European economy.
So let us come back to the very beginning to find out the effect of euro adoption on Greek trade and economy – and was it worth it?
What do Greeks trade?
Greece is a relatively closed economy, with its total trading value as a share of GDP of only 67% in 2014. However, the country has “sustained” an average of 8% GDP trade deficit for the past 50 years until the deficit topped at 12.6% in 2008 and led to its sovereign debt crisis in 2009. Was Greece a developed country with so many investment opportunities that it could sustain a capital account surplus to offset its current account deficit, like the US? Not likely seen from its trade pattern.
Exhibit 1 illustrates the revealed comparative advantage (RCA) of Greece across goods categories from 2000 to 2014. For each category, the 15 bars from left to right stands for RCA for 2000 through 2014. A grey bar stands for RCA > 1 (revealed comparative advantage), while a red bar stands for RCA < 1 (revealed comparative disadvantage).
Several findings can be summarized from this chart:
- Overall RCA of Greece has been consistently declining, a phenomenon due to erosion of competitiveness.
- Greece has changed from showing comparative advantage to disadvantage in product categories like iron and steel, textiles, and clothing.
- Greece now specialize in agricultural products and fuels and mining products (esp. oil refinery). Both fall under the mid-to-low tech category.
It seems that Greece should neither be categorized as labor abundant nor capital abundant, instead the country takes advantage of its marine resources and convenient water transportation. If the RCA statistics were calculated within the EU, both comparative advantage and disadvantage would be enlarged – in terms of specialization, joining the EU should have more beneficiary effects.
To Which Countries Do Greeks Trade?
Chart 2 illustrates the trade deficit pattern of Greece after the government took on the fiscal austerity policies. Half of the trade deficit happened within EU, which is no surprise since intra-EU trade had less tariffs and non-tariff barriers than extra-EU trade. The worrying fact is that 75% of the deficit was attributed to trade with the four core Eurozone (EZ) countries – Germany, France, Italy and Netherlands. This deficit cannot be adjusted through the floating exchange rate regime, since Greece and the four countries use the same currency.
Adoption of Euro
Greece entered the Eurozone on January 1, 2001, and was given a one-year period to transit from the original currency (drachma) to the new currency. The official conversion rate was set at 340.75 drachma to €1, which was close to the product of drachma-dollar and dollar-euro exchange rate at the end of 2000. However, the drachma was experiencing a continuous depreciation since 1985, partly offsetting the erosion of competitiveness in Greece. By adopting the euro, Greece effectively fixed its exchange rate at the level of year 2000 and experienced a jump in labor wage (Exhibit 3). This phenomenon was never found in Germany during its adoption of euro.
The adoption of euro might also lure the Greek government into spend more than it had earned to keep the national welfare from declining. A strong currency provided temporary advantageous terms of trade, because the major trading partners needed time to switch from Greek exports to lower-cost exports, and the Greeks could use euro to import more. Further pushing the Greek government into the debt trap, Goldman Sachs had helped to disguise the huge public debt under the vein of a “swap” contract. And the “deficit bomb” created by apparently conflicting economic forces finally exploded in late 2009.
Was it worth it?
Many people tried to figure out whether Greece would be better off or worse off had it never adopted the euro and complied to the market discipline of external borrowing. An article from the Economists pointed out that Greece enjoyed a tamed inflation of 4% during the 2000s and a faster catch-up growth during its euro stint. However, the achievement quickly faded away after the crisis broke out.
Without further integration in fields like tax coordination, it is hard to let the more developed countries like Germany and Netherlands to use the same currency with the less developed countries like Greece. The current regime of EMU extracted more wealth from poorer countries to the wealthier countries than had provided sustained growth. I think it was not worth it for Greece to join the Eurozone in economic perspectives. Perhaps unifying with Greece had more political and symbolic importance to the EU, provided the contribution to European culture of the ancient Greek and the important geopolitical position of Greece.