Daily Archives: January 5, 2012

Greek Default Watch: Are We All Greeks Now? Greek Political Economy and the Origins of Greek Debt

What happened in the 1980s was state spending ballooned without a corresponding increase in state revenues. In part aided by two electoral cycles (1981 and 1985), the share of state spending went from 24% of GDP in 1980 to 43% in 1988, a 19-point rise. Revenues, by contrast, rose less than 7-points from 20.4% to 27%. Looking more specifically at the spending composition, transfers such as subsidies, grants and social assistance rose from an average 25% of the budget in 1980-1982 to 32% in 1986-1988 (reaching 37% in 1998). In other words, the state in the 1980s was increasingly spending money it was unwilling to raise in order to boost its legitimacy and popularity. As George Pappas put it, “PASOK’s basic contribution to Greek politics was to take the old clientelistic structure of control and reward and ‘massify’ it.”

via Greek Default Watch: Are We All Greeks Now? Greek Political Economy and the Origins of Greek Debt.

Greece Government Budget – TradingEconomics.com – Indicators for 196 Countries.

TradingEconomics.com – Indicators for 196 Countries..

The Street Light: What Really Caused the Eurozone Crisis? (Part 1)

Putting it all together, it seems that the EZ crisis is more consistent with the systemic causes view than the local causes view. In other words, while they didn’t necessarily make the right decision every time, the peripheral EZ countries were up against powerful exogenous forces – capital flow bonanzas and sudden stops – that tended to push them toward financial crisis. They were playing against a stacked deck.

It’s useful to reevaluate the macroeconomic history of peripheral Europe in light of this interpretation. Rather than large current account deficits being the result of fiscal mismanagement or excessive consumption, the current account deficits were the necessary and unavoidable counterpart to the surge in capital flows from the EZ core. Rather than above-average inflation rates and deteriorating competitiveness being signs of labor market inefficiencies or lax fiscal policies in the peripheral countries, appreciating real exchange rates were inevitable as the mechanism by which those current account deficits were effected.

via The Street Light: What Really Caused the Eurozone Crisis? (Part 1).

Greece: The sudden stop that wasn’t | vox – Research-based policy analysis and commentary from leading economists

Unfortunately, like Greece today, the authorities chose to increase domestic credit to delay a recession. The difference between Mexico and Greece is that while Mexico had to run down its international reserves, Greece has been able to keep them practically unchanged. Instead Greece has used the EU rescue package and the Eurosystem loans to increase domestic credit. Had Greece been like a typical small economy with no access to rescue packages, it would have had to close its massive current-account deficit by now. Its ability to maintain such massive current-account deficit in the face of a sharp reversal in private capital inflows will be recorded in the annals of financial crises as a remarkably rare feat.

via Greece: The sudden stop that wasn’t | vox – Research-based policy analysis and commentary from leading economists.