Halitosis y gingivitis 4

1990s

Greece experienced an economic expansion after WWII, which in a sense is only natural after a war time period. With the funds from the Marshall plan, Greece moved from being mainly an agricultural country to an industrial one. As we can see in Fig. 2.1 the unemployment rate, was

however, high compared to today’s standards for most of the advanced economies 2, especially

during the mid-1980s and mid-1990s. Moreover, while during the military dictatorship (1967- 1974) inflation was relatively modest, prices surged during the period from 1973 to the mid-1990s,

with inflation rising an average of about 17.7%3_{(see Fig. 2.2).}

The steep rise in inflation in 1973 was not only due to the first oil shock of 1973/74, and the subsequent rise in the prices of commodities and raw materials. Another important reason was the collapse of the Bretton Woods system a couple of year earlier. Greece was part of the Bretton Woods system from 1953 until its collapse in August 1971, with the drachma pegged to the US dollar (which was pegged to gold). The final main reason for the acceleration of inflation after 1973 is slightly more complicated. As was mentioned earlier, the period after the end of the civil war in

2_{Here I do not refer to Greece’s current unemployment rate as today’s standard.}

1949 was characterized by strong growth and monetary stability. Up until the onset of the military junta in 1969, the political regime despite its repressive nature followed relatively prudent fiscal and monetary policies. Investment both public (especially in large infrastructure projects) and private increased considerably, while government consumption spending declined. The Currency

Committee4, which was established in 1946, was responsible for the conduct of monetary, credit,

and foreign exchange policy, and while the banking system was heavily controlled, the Committee directed reserves and savings into high return sectors. Moreover, because labor unions were under firm government control, labor cost increases were contained. This together with increases in productivity helped keep inflation at low levels and created a favorable business environment, which was also fostered by low business taxes and property rights legislation. Unfortunately, the expansionary policies during the dictatorship, the great expansion of domestic demand, the high reliance on foreign aid, and the high trade deficits, led to an overheating of the economy. By 1969 the Greek economy was operating near full capacity. This together with sticky wage and price adjustment due to administrative controls is the third reason why inflationary pressures started in the early 1970s.

Most of Greece’s governments after the military dictatorship tried to battle stagflation by follo- wing expansionary fiscal policies, and in particular by leveraging deficit spending, while monetary policy was to a large extend accommodative. It is important to realize that the first governments after the dictatorship faced significant social pressures for a redistribution of income and wealth (mostly through wage policy) and for a more liberal political system. Moreover, the public wan- ted an active role of the state both as a producer as well as an employer, with the ultimate goal of improving living standards to levels comparable to those of Western European countries. The election of 1981 brought the socialist party Panhellenic Socialist Movement (PASOK) and An- dreas Papandreou into power who satisfied these demands, even to the point of excess, as did the 4_{The Currency Committee was part of a series of newly established government agencies. It reflected the need for} a closer cooperation between the government and the Bank of Greece in order to cope with the economic challenges the country faced after the end of WWII and the civil war.

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 1960 1964 1968 1972 1976 1980 1984 1988 1992

Figure 2.1: Unemployment Rate (1960 - 1993)

-5% 0% 5% 10% 15% 20% 25% 30% 35% 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993

Figure 2.2: CPI Inflation Rate (1960 - 1993)

following governments up until the early 1990s. Consequently, Greece’s public debt ballooned5

(see Fig. 2.3 and Fig. 2.4).

5_{Greece had parliamentary elections in 1993, which were won by PASOK and Andreas Papandreou. The new} government did not follow the fiscal consolidation and structural reform plans of the departed government of New Democracy (ND). The steep rise in the debt ratio in Fig. 2.3 is mostly due to the increase in interest payments. Moreover, while the primary balance in 1992 was in surplus, after the elections in 1993 it turned into a deficit.

10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

Figure 2.3: General government consolidated gross debt as a % of GDP (1970 - 1993)

-16% -14% -12% -10% -8% -6% -4% -2% 0% 2% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

Figure 2.4: General government deficit as a % of GDP (1970 - 1993)

At some point in the mid-1980s it had become apparent that the fiscal policies pursued were not

sustainable. This lead the government6, through the Bank of Greece, to two significant devaluations

of the drachma, in 1983 and 1985.7_{Moreover, in another attempt to control the fiscal situation, a}

6_{PASOK at that time}

program of fiscal and monetary tightness, known as the 1986-1987 Stabilization Program, was adopted in 1985 only to be abandoned in late 1987. This together with the relaxation of wage

controls and the political uncertainty during the years from 1987 to the early 1990s8 _{pushed the}

inflation rate back up and worsened the deficit. In the elections of 1990 the new government of ND initiated another medium-term adjustment program for the years 1991 to 1993 with the goal of bringing the deficit down and lowering inflation. However, the measures did not prove sufficient and there was also little progress concerning structural reforms, with large deviations from the original targets. The political cycle and the elections of 1993 contributed to the deterioration of fiscal figures. Moreover, the recession in the EU during the early 1990s had a large negative impact on the Greek economy.

With high unemployment, high inflation, and rising debt and deficit levels it was no surprise that Greece had to pay a much higher premium in international markets in order to borrow more, compared to other countries in the upcoming monetary union (see Fig. 2.5).