Greece Before and After the Euro: Macroeconomics, Politics and the Quest for Reforms

Abstract

This paper analyses developments in the Greek economy before and after the euro. The main thesis is that the imbalances that led to the crisis of the post-2010 period were building up during the previous three decades and that their root causes were not merely economic, but social, structural, institutional and political. The fiscal imbalances created in the 1980s were not adequately addressed by the convergence policies of the 1990s, while the long-standing problem of low international competitiveness was further exacerbated by the failure to promote the necessary structural reforms. Greece's accession to the euro area with major structural and fiscal imbalances and low and deteriorating international competitiveness, led to a steep rise in its external indebtedness. The lopsided adjustment and the inadequacy of the reforms was due to domestic political and social constraints, both before and after euro area entry. In view of the institutional weaknesses of the euro area itself, the external imbalances ultimately led to the external debt crisis of 2010, the imposition of the economic adjustment programs and the ‘great depression’ of the 2010s. The paper also explores the prerequisites for a sustained recovery of the Greek economy within the euro area, once the global economic crisis induced by the coronavirus pandemic is over. The quest for wide ranging reforms remains Greece’s top priority.