Greece and the European Union: An assessment of macroeconomic policies and trade effects

PhDThis thesis aims to make a contribution to the study of the Greek economy by means of (i) assessing a number of macroeconomic policies adopted by successive Greek governments; (ii) assessing the present effort of Greece to join the EMU; and (iii) evaluating the trade effects caused by EU participation. Chapter 1 provides a detailed account of the main macroeconomic policies adopted by Greece during the period 1960-97. It also describes the Greek institutional environment and reports the movements of the leading economic indicators. Emphasis is placed on the post-1980 period. Chapter 3 attempts an assessment of a number of fiscal, monetary and exchange rate polices adopted by successive Greek governments based on the theoretical background and econometric methodology presented in chapter 2. We conclude that the post-1974 deterioration of the Greek macroeconomic performance is, to a large extent, explained by the fundamental change of the international economic environment and a number of sub-optimal decisions taken by the Greek authorities. We argue that the continuation of the currently applied policy mix, involving a combination of rather lose fiscal and incomes policies and a tight monetary/exchange rate policy, is questionable. Chapter 4 examines the future prospects of Greek macroeconomic policy in the light of the pursuit of EMIU participation. We suggest that if Greece is to achieve EMTU participation in the foreseeable future, it should adopt an economic strategy involving a reduction in public consumption and a number of structural adjustments. We also argue that Greece should not rush to cñn any new ERM-II arrangement without making sure that its participation involves a sustainable exchange rate, i.e. an exchange rate possibly different to the present one. Chapter 5 uses the original data sets presented in the Trade Data Appendix to examine the trade effects caused by the accession of Greece to the EU. It concludes that during the post-integration period the external trade of Greece has been reoriented towards the EU countries and that Greece lost part of her comparative advantage in those sectors in which such an advantage exists. Chapter 6 summarizes and concludes the thesis

The Greek crisis and financial assistance programmes: An evaluation

We analyse the background of the Greek debt crisis and evaluate the three Greek financial assistance programme. The crisis and the first programme’s (2010-11) failure were mainly the result of misguided internal policies. The second programme (2012-14) achieved progress towards recovery but this was fragile and was cancelled out by Greece’s stand-off with her lenders in the first half of 2015. The stand-off was one that predictably Greece could not win, due to the lack of a credible growth plan; and the adoption of a transparently non-credible ultimatum-game strategy. These explain the signing of the third programme in August 2015

Is Greece turning the corner? a theory-based assessment of recent Greek macro-policy

We use a macro-theory framework of analysis to assess Greek economic policy, with emphasis on the current period of the Greek debt crisis. We argue that this is mainly the result of misguided past internal policies deviating substantially from the policy lessons of modern macroeconomics. The current policy, however, is consistent with mainstream macro and provides a credible platform for achieving sustainable growth. We argue that Greece has entered the process of economic recovery, but this is still fragile and exposed to risks. Overall, we support the continued participation of Greece to the euro: Although a country's currency is not per se a determinant of long-term economic prosperity, supply-side reforms and institutional performance are; and both these objectives are better served for Greece within the EMU rather than outside

The EMU sovereign debt crisis: fundamentals, expectations and contagion

We offer a detailed empirical investigation of the European sovereign debt crisis based on the theoretical model by Arghyrou and Tsoukalas (2010). We find evidence of a marked shift in market pricing behaviour from a ‘convergence-trade’ model before August 2007 to one driven by macro-fundamentals and international risk thereafter. The majority of EMU countries have experienced contagion from Greece. There is no evidence of significant speculation effects originating from CDS markets. Finally, the escalation of the Greek debt crisis since November 2009 is confirmed as the result of an unfavourable shift in country specific market expectations. Our findings highlight the necessity of structural, competitiveness-inducing reforms in periphery EMU countries and institutional reforms at the EMU level enhancing intra-EMU economic monitoring and policy co-ordination

The determinants of sovereign bond yield spreads in the EMU

We use a panel of euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.12. We find that, on top of the fundamentals themselves, changes in the sensitivity of bond prices to fundamentals are also necessary to explain yields over the crisis period. We also find that the menu of macro and fiscal risks priced by markets has been significantly enriched since March 2009, including international financial risk and liquidity risk. Finally, we find that sovereign credit ratings are statistically significant in explaining spreads, yet compared to macro- and fiscal fundamentals their role is limited

The option of last resort: a two-currency EMU

This article, originally published at www.roubini.com on 7 February 2010, spells out our two-currency EMU proposal as a plan of last resort for resolving the present EMU sovereign-debt crisis. The key ingredients of our proposal involve a temporary split of the euro into two currencies, both run by the European Central Bank. The hard euro will be maintained by the core-EMU members whereas periphery EMU countries will adopt for a suitable period of time the weak euro. All existing debts will continue to be denominated in strong-euro terms. The plan involves a one-off devaluation of the weak euro versus the strong one, simultaneously with the introduction of far-reaching reforms and rapid fiscal consolidation in the periphery EMU countries. We argue that due to enhanced market credibility, our two-tier euro plan has a realistic chance of success in resolving the EMU crisis, if all other approaches fail