Greece: From Exit to Recovery?

2. The Depression of the Century: Prejudice and Misguided Policies

2 The Depression of the Century Prejudice and Misguided Policies This chapter investigates the extent to which the success of the “internal devaluation” (reduction of incomes and asset prices) strategy depended not only on quantitative aspects of the initiatives but also on qualitative implementation of those policy initiatives. While the apparent success of labor market reforms after 2012—that is, the stabilization and even gradual increase in employment levels after the large decline of the 2010–12 period—is noted, so are two other facts. First, as a result of widespread self-employment in Greece, the potential benefits of reducing private sector wage costs were limited, even before the adjustment program began. This is particularly obvious when the benefits of reducing administrative costs and deregulating markets are taken into account. Second, forcing internal devaluation predominantly onto the private sector actually worsened the balance between the tax base and the government sector, with the latter expecting to be able to pay pensions and public sector wages from the taxes levied on the former. A disproportional focus on revenue increases further exacerbated the impact of this misguided approach. Analysis of developments in the Greek financial sector illuminates how internal devaluation was pushed predominantly onto the private sector, not only as a result of policies that favored tax increases over cost cutting but also due to strategic decisions such as the imposition of private sector involvement (PSI), increasing uncertainty about the European prospects of the country, and more recent intimations of a “bail-in” for private deposits.1 Developments in the financial sector demonstrate not only the impressive resilience of the Greek financial system, with the unquestionable support of the Eurosystem, but also how policymakers allowed the 41 02-2577-0 ch2.indd 41 4/30/14 1:50 PM 42 The Depression of the Century fiscal crisis of the country to gradually entangle the private sector in a full-blown, textbook-style liquidity crisis, with grave and unnecessary implications for economic activity and employment. Sectoral Developments The decline in economic activity in various sectors of Greek industry (manufacturing plus mining and energy) continued during 2012, with more sectors exhibiting lower activity, as measured by the Eurostat index, and with the declines in each sector increasing in absolute value (table 2-1). Among the hardest hit were textiles, apparel, leather, and furniture, sectors that had been declining for many years as a result of both increasing global competition from other countries with lower production costs and an inability to move up the value chain. Some of the sectors listed in table 2-1 also are affected by the activities of state-owned, or formerly state-owned, companies (for example, manufacture of transport equipment); face severe institutional impediments; or are hampered by declining government investment in ICT infrastructure.2 The slow-down in economic restructuring arising from institutional uncertainty also had an impact on some sectors, such as the manufacture of computers, electronics , and optical products. On the other hand, utilities (such as electricity, gas, water, and sewage treatment) have benefited, for example, from the expansion of the natural gas supply network and the resulting increase in consumption—or from similar developments. In other cases, such as government-controlled utilities, turnover has directly benefited from administratively set price increases. Domestic sectors with competitive, export-oriented private companies that manage to keep up with international markets, such as refineries and metal producers, were among the strongest performers. This is also true of the food industry, which traditionally has been an innovative and strong performer in Greece. Table 2-2 shows the annual gross employee earnings for 2009 by economic activity according to NACE Rev. 2.3 A comparison with ten other European countries for which these data are available yields some interesting findings. First, the average gross employee earnings in the Greek “accommodation and food services” sector are notable in 2009 for how much they exceeded the average of the other countries. Though the 2009 data do not reflect the reality after 2012, numerous provisions of related legislation ensured that employee compensation in this sector was very generous (and in many ways remains so). For example, 02-2577-0 ch2.indd 42 4/30/14 1:50 PM The Depression of the Century 43 legislation required seasonal staff in the accommodation sector to be paid a surcharge of almost 100 percent if they worked on Saturdays or Sundays (something absolutely normal for the...