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Since the usual narrative about the Greek economy after the Euro introduction involves a large movement of resources and employment towards the non-tradable sector, it is interesting to check this claim against available data. I will be using the Ameco database and looking into the sectoral contributions on total Gross Value Added and Employment between 1995 and 2008 (in order to account for pre-Euro effects and not pollute the statistics with the post-2008 crisis).

Greek GVA Contributions by sector

Services GVA contribution did increase steadily from 71% during the mid-1990s to 78% in 2008. Nevertheless, excluding 2008 (which included a large fall in the industry contribution), almost all of the fall is attributed to lower agriculture GVA contribution (from 7.4% in 1995 to 3.5% in 2007, a fall of 4%). Industry only fell from 14% in 1995 to 12% in 2007. Although industry certainly lost ground (and was much lower than the Euro average of 20%), it seems that most of the change in GVA contributions is due to the Greek economy transitioning to a more ‘mature’ form with agriculture moving closer to the Euro area average of 2%. On the other hand, services contribution increased from 71% to 76% (in 2007), moving higher than the long-run Euro average of 71% (which was quite steady during the same period). Building and construction certainly do not show any signs of a bubble, except for a short period of time during 2006-2007.

Greek Employment by sector

The above observations are even more evident in the employment front. Industry shows a small drop in employment contribution (from 13.5% to 11.6%) which could be attributed to higher productivity while agriculture is the main sector losing employment, with its share falling from 19.3% to 11%. The primary source of employment growth is the services sector which increases from 60.5% to 69% during the same period.

Overall, although the long-run industry contributions are far lower than the Euro average, the Greek economy rebalancing during the Euro era is a result of its GVA composition ‘maturing’, with agriculture moving closer to European averages and the relevant resources and employment being absorbed by the services sector. Compared to the Euro averages (20% industry, 71% services), it is true that the movement went on the ‘opposite direction’, with the services sector growing to the disadvantage of industry (12% industry, 76% services), probably as a result of easy credit conditions.

Looking at more detailed data from the Greek statistical agency, land and water transport services contributions increased from 4% in 2000 to almost 7% in 2008 while ‘Accommodation and food and beverage service activities’ fell from 7.4% to 5.6%. As a result, the data are rather mixed about if the increase in the services sector contribution came from tradable or non-tradable parts. It seems that a large part of the 5% change (but certainly not all) can be attributed to non tradables.

Taking the above at face value, around 3-4% of GVA (and a corresponding part of employment which is equal to around 200,000 persons) should have moved to the tradable sector since 2008. The rough size of this ‘overshooting’ certainly cannot account for the enormous loss of output and employment since 2008 which can only be attributed to the negative credit conditions and fiscal austerity. The price paid for a relatively small adjustment is quite high.

This will be a short post looking into Greek household income trends based on Ameco data: Greek household income

Household income is broken into main sources, mainly gross wages and salaries, current transfers received and net property income. These sources do not include income of self-employed persons and should mainly be used to examine the income flows of wage earners/pensioners.

Looking into nominal figures, current transfers during 2013 will be back to 2007 levels while wages to 2003 levels. Only net property income appears as a stabilizing factor. Taking into account the more than threefold increase in the unemployment rate since 2007-2008, the fall in wages is easily justified by the loss of employment as well as the implemented drops in legislated wages (both in the public and private sector). What appears quite out of line is the drop in current transfers which should be attributed to austerity measures, heavily tilted on pensions and unemployment benefits.

Net annual changes clearly show why the 2009 recession was rather thin as well as the magnitude of income losses since 2010. Gross income stands for the sum of current transfers, gross wages and salaries and net property income. Both wages and current transfers are expected to take a severe hit during 2013 while the increase of net property income will be much lower. The drop of more than €9bn in gross income during 2013 (4.6% of 2012 GDP) is another element pointing to the fact that the projected 2013 recession figures (around -4.5%) are quite optimistic.

Regarding % of gross disposable income, all elements show clear stationary characteristics. Current transfers are quite elevated due to the deep recession while wages are quite far from their mean (37% during 2000 – 2007 compared to 33% for 2012 onwards. Personally, I am not so sure how the Greek economy can return to a growth path without the wage share returning to its previous mean.

One meme often repeated about the Greek ‘tragedy’ is that the large current account deficits during the Euro area were fuelled by equally large government deficits. The profligate state was the source of the increase in foreign claims and made the equilibrium unstable since, given the large share of foreign ownership of government securities, a loss of financing would impact on both the current account (and the ability of the Greek economy to import goods) and the government budget (and the ability of the Greek government to finance deficit spending). In my view, the actual data paint a different picture.

The current account was mainly financed through private sector credit flows. These, very large annual flows, were originated by the domestic banking sector and allowed the private sector to finance an expanding trade deficit. The table below shows data for the period between 1999 and 2007 (when private credit expansion was at its height):

It is quite clear that private credit flow was usually at least twice as large as general government net lending. A simple scatter plot leads to an R² of 0.67:

It’s impressive how low the error term of the computed equation is, meaning that credit flows explain almost all of the current account movement. A similar exercise using government net lending leads to an R² of only 0.17 while the error term is quite large and equal to 3.41.

What seems to have actually happened is that domestic private credit flows financed imports. On a second phase, The Rest of the World (RoW) invested these flows in government securities instead of claims on the private sector. As a result, one can maintain that the expansion of net interest payments to the RoW, mainly in the form of government securities coupon payments, were the direct result of the private credit expansion. In any other case, the relevant securities would have been acquired by the domestic sector and consisted net income, rather than a net outflow.

This is quite evident in the RoW asset flows available in BoG financial accounts:

Although the cumulative current account deficit between 2000 and 2008 was almost €193bn (and another €31bn in 2009), most of it was ‘invested’ by the RoW on government securities, with the residual being only €62bn (and even a negative €2bn in 2009). While in the case of countries such as the USA, the RoW ended up acquiring claims on the private sector (in the form of various ABS paper), in the Greek case the foreign sector kept its ‘investment position’ as claims on the government sector, claims for which a large, liquid market existed and which were the main monetary instruments of the central bank.

In my view, such an ‘equilibrium’ was inherently more stable than an alternative one were the RoW held mainly claims on the private sector. As long as the central bank was determined to maintain stability in the government securities market, an adverse external financing shock could be avoided, something which would not be possible in the case of claims on the private sector, since in that case their underlying credit risk would be elevated due to the economic recession, lower real-estate prices and other factors.

On a related note, summing current account deficits since 1995 up to 2011 leads to a figure of -€276.4bn which should roughly correspond to the NIIP at historical costs. On the other hand, the NIIP in 2011Q4 according to BoG data was -€179.6bn, almost 100bn (48% GDP) lower. Based on historical financial accounts flows, at the end of 2011 the RoW should have held around €113bn of government securities, while the NIIP shows a figure of €71.6bn. The ‘internal devaluation’ has also had an ‘external’ effect on RoW claims.

After going through various aspects of the Greek economy since the mid-90’s in the previous post (based on a Levy Institute paper), I ‘ll try and look into other factors of the post-Euro period, mainly of the goods foreign trade. First, using AMECO information for the Real Effective Exchange Rate (based on ULC), here’s the relevant REER for Greece and other major Euro economies since 2000:

What is clear is that the Greek REER (relative to the rest of 35 industrial countries) was actually lower than the Euro area aggregate figure and was quite close to the France numbers. Furthermore, Germany embarked on a significant ‘deflationary’ route and managed to keep its 2008 REER 5% lower than 2000. This is even more visible in the case of the REER relative to the rest of the former EU-15:

Greece followed the Euro area figure while Germany managed a 13% devaluation in this case. Looking into the Euro nominal effective exchange rate (again relative to the rest of 35 industrial countries), the evidence suggests that Greek exchange rate appreciation happened only because of nominal factors and was actually much lower than the Euro area, the same as Germany and other major Euro countries:

Given the strong Euro 2% inflation target (which should make the Euro REER the ‘equilibrium’ rate) and the fact that Greece outperformed the Euro REER for extra-Euro trade and was in line with the relevant intra-Euro REER, any loss of competitiveness was mainly due to nominal exchange rate fluctuations and not because of large wage appreciation. This is also evident in OECD minimum wage data which show that, relative to the productivity increase and the 2% inflation target, minimum wage setting was not inflationary, except for 2005 and 2008:

Before turning to actual trade data, it is interesting to take a look at the terms of trade. Any large appreciation will allow a country to improve its trade balance without actually increasing its export volume, while the opposite will require higher volumes (relative to imports) just to stand still:

Greek terms of trade were actually 2.5% worse than 2000, a pattern which emerged since 2003. With the exception of Italy, most countries show small changes which means that any improvement in their trade balances should have come from actual volume (and probably composition) changes.

Since the AMECO database provides goods imports and exports categorized into intra and extra-EU trade it is interesting to examine the relative growth figures. One should keep in mind that during the 2000-2008 period, EU GDP grew by 35.5% while Greek GDP by 72.5% in nominal terms.

Intra-EU Goods Imports and Exports:

Greek Intra-EU imports rose 46% while exports 48%. Greece managed to follow the aggregate EU figure for exports, a number much higher than EU GDP growth, while import growth lagged GDP growth by more than 25%. Just for comparison, both France and Italy achieved much lower growth figures and only countries such as Germany and the Netherlands managed to grow over 50%. Overall, arguing that Greek goods lost ground in the EU seems rather hard.

Extra-EU Goods Imports and Exports:

In the case of Extra-EU trade the patterns are quite different and show that core and periphery countries did not follow the same path. Both Greece and Spain (as well as Italy and Portugal to a lower extent) dramatically increased their imports without managing to compensate through higher exports. France was a low growth outlier while both Germany and the Netherlands recorded much higher export than import growth.

These trends also show up in the following tables from an excellent IMF Euro Area Imbalances study:

Imports from commodity exporters grew strongly (in a large part due to higher oil and other commodity prices) without a corresponding increase in exports. Emerging Asia exports also gained market share but periphery products (except for Portugal) were not in high demand and did not cover the expanded deficits. The strength of Germany is explained by the different goods export composition (an emphasis on capital goods and high quality/strong brand name machinery and pharmaceuticals). In the case of Greece, Emerging Asia and commodity Exporters account for 3.5% GDP higher goods deficit in 2008.

So it seems that the goods balance deficit for Greece was mostly the outcome of Extra-EU trade. Intra-EU deficit went from €15.6bn to €22.6bn while Extra-EU from €7.9bn to €22.5bn or in terms of GDP from 11.6% to 9.7% and from 5.9% to 9.7%. In any country without strong inflows (from services exports and income) to service a goods deficit of 10% GDP the exchange rate would have highly depreciated. In the Greek case, it actually appreciated. Strong inflows from other sources were also not available since the services surplus went from €8.1bn to €14.9bn while net primary income from €0.4 to -€7.6bn thus worsening the overall balance.

The above are more clear in the following graphs of Intra and Extra-EU trade and REER:

The Intra-EU trade deficit (as %GDP) is actually quite stable during the Euro period despite the REER appreciating. On the other hand, the Extra-EU trade deficit more than doubles and basically follows the REER appreciation after 2001. Other factors (probably private credit) seem to play an important role since the deficit growth does not seem to be influenced by the drop in the REER in 1999-2001.

A scatter plot of the REER to EU-15 and the Intra-EU deficit does not produce any meaningful relationship (something which is evident in the Intra-EU trade chart). On the other hand, scatter plots on the REER and NEER with other 35 industrial countries and the Extra-EU deficit display a clear upward slopping relationship:

One could probably blame the Greek authorities and private sector for not targeting the extra-EU tradable sector better. But the clear conclusion is that the Greek goods deficit problem was mainly one of an appreciating currency and large deficits towards the Extra-EU world, not one of loss of competitiveness inside the Euro area. Pushing for demand destruction through internal devaluation while having an overvalued exchange rate sounds like bad advice.

Using BoG data to look at the trade balance excluding fuel and ships leads to an impressive result. The trade deficit was declining between 2000 and 2004 and only increased by 2% GDP between 2004 and 2008, probably driven by the very large credit expansion during that period:

The Levy Institute released a very interesting report on the Greek economy, authored by its president Dimitri Papadimitriou. It looks at various aspects of the Greek economy since the early 1990’s from a sectoral balance approach which points to the fact that the simple profligate nation thinking is not that close to reality.

Based on the sectoral balances, a nation’s external balance is basically the result of investment minus saving. As long as government saving (surplus/deficit) is roughly steady, a large change in the external balance can only come from a corresponding change of the domestic private sector balance. This seems to have happened in the case of Greece:

It is evident that since the mid 90’s, the government deficit was lowered significantly while the private sector balance moved from a surplus of roughly 10% GDP (reflected in corresponding government deficits) to a deficit which reached 8% at various points after the Euro introduction, a change of more than 15% of GDP. This was the driver of the large external deficits rather than the government deficit which did not change much until the 2008 crisis.

Since the private sector balance is defined as S – I, one has to examine both components. Starting with investment we can reach some important conclusions:

  1. There’s no construction boom evident. Rather, ever since the mid-90’s construction investment has been lower and remained quite steady between 13-15% of GDP.
  2. The increase in investment is driven by an increase in equipment purchases which almost doubled after 1995 from 4% GDP to 7.5% and even 9-9.5% in 2007/2008.

The increase in equipment investment can only be regarded as a positive development since the construction sector falls in the non-tradable category, while new equipment will allow higher production and productivity growth in the industrial, tradable sector.

A scatter plot of the real change in imports of goods and transport and equipment investment tells the same story:

Actually if one takes a look at the goods deficit minus equipment investment he ‘ll find that the balance was declining after 2000 and only increased after the oil shocks of 2006 and later:

The clear conclusion is that unsustainable investment did not seem to be the driver of the goods deficit after the Euro introduction. Nevertheless, the strong deterioration between 1995 and 2000 of roughly 4% GDP which is evident in the diagram requires an explanation. If one looks at the trade balance components and private sector saving the driving force is clear:

Household saving went from +8% GDP in 1995 to -4% in 2000 (a change of 12%) with the manufacturing deficit increasing by 4% GDP in the same period. This negative balance persisted up until 2005. So it seems that the actual deterioration in the trade balance happened before Greece entered the Euro with the latter helping the private sector to persist its negative balances without consequences.

One can wonder at this point if, despite low domestic savings, Greece could have taken advantage of the strong international economic growth in order to increase its exports and thus improve the trade balance. In this context the evidence is rather mixed. It seems that Greece REER actually followed the Euro rate, while Germany embarked on a ‘devaluation’ path through steady ULCs:

The  following diagram shows that Greece kept its market share since 2001 and more or less took full advantage of world trade growth:

An excellent IMF study of Euro Area Imbalances provides some useful thoughts on the periphery trade balances:

  1. The lion share of the appreciation between 2000 and 2009 was accounted for by the nominal appreciation of the euro vis-à-vis other currencies, even for the countries such as Greece and Portugal that entered the euro at a potentially overvalued real exchange rate.
  2. The rise of China generated strong demand for machinery and equipment goods exported by Germany while exports from euro area debtor countries were displaced from their foreign markets by Chinese exports.
  3. The term of trade shock associated with higher oil prices contributed to rising trade deficits but higher income in oil producing countries also generated strong demand for machinery and equipment exported by Germany.

In the case of Greece High and Medium-High technology manufacturers account for 20% of manufacturing while in the case of Germany these account for 55%. Manufacturing accounts for 55-60% of goods exports while food still accounts for 20%. So it seems that Greek production was just not in high demand, while China and the oil shocks, helped by the REER appreciation, pushed imports higher without a corresponding increase for exports (in contrast with the German case). Lower ULCs would have probably helped in the import side but not much in the export side, except if they made Greece an FDI target.

Turning away from the goods balance, one has to remember that the balance of payments also includes other important components:

Net transfers and property income seem to have contributed as much as the goods balance since they went from a combined 10% surplus in 1995 to a deficit of more than 5%, especially after 2005, a change of 15% GDP.

A significant part of net transfers balance change is probably attributed to the large inflow of immigrants to Greece after the mid-1990’s, moving the corresponding balance to deficit:

In the case of property income, large external deficits did not adjust through the exchange rate (as during the drachma era) but were accumulated as claims of the external sector leading to large interest payments:

These claims were held by the Euro debtor countries while the rest of the world held claims on the latter and not the periphery. Both movements should be considered ‘structural’, since they are inherent features of a monetary union and of a country rather open to large (legal and illegal) immigration flows.


  1. Greece saw a structural negative change in net transfers and property income balances which will probably persist in the future.
  2. Investment seems to have been a positive contributor since it was targeted towards equipment and not to non-tradable sectors such as construction.
  3. The features of a monetary union allowed its Net International Investment Position to deteriorate with the external sector accumulating claims on Greek residents (government and private sector).
  4. Production was targeted on food and low technology manufacturing sectors and lost ground to China, other Asian EMEs and Eastern Europe countries.

As the IMF acknowledged in its latest WEO, internal devaluation projects utilizing fiscal consolidation are self-defeating in the current environment due to very large fiscal multipliers. Eurobank Research also published a similar research note which found a government spending multiplier of 1.32 and a wage multiplier of 2.35.  2013-2014 measures are projected to lead to further output loss of €15-20bn (7.5-10% GDP). Any positive developments on the trade balance mainly come from demand destruction, while low internal demand, large long-term unemployment and negative bank credit conditions make investment actually the most negative component in real GDP growth. An impressive statistic is the fact that the Total Factor Productivity index for Greece will drop to 100.4 in 2012, down 11.1% from 113 in 2007, back to the 2000 levels. That will limit potential growth and require much more intense usage of other factors (labour and capital) in order for the country to achieve positive growth.

The strong deterioration in the NIIP has been spread throughout the economy, with no sector having a high positive net balance with the rest of the world:

As a result, Greece cannot lower its external debts by moving net financial assets from the private to the government sector (most of the positive ‘other sectors’ balance is due to low Greek equity prices held by foreign investors). Unless a strong policy of economic growth is adopted (through financing by the rest of Europe), the only way out for Greece, as long as it keeps with the current fiscal consolidation policy, is to literally move real resources to the external sector. Since the NIIP is now close to 105% of GDP and property prices in Greece are in considerable fall, even that alternative requires very large transfers.

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Kostas Kalevras

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