Economy and Trade
Greece became a parliamentary republic in 1974, following democratic elections. In 1981, Greece joined the European Community, now the European Union; it became the 12th member of the European Economic and Monetary Union (EMU) in 2001. Greece has a capitalist economy, with the public sector accounting for about 40% of GDP, and with per capita GDP of at least 75% of the leading eurozone economies. Tourism provides 15% of GDP. Immigrants make up nearly one-fifth of the workforce, mainly in agricultural and unskilled jobs. In 2010, the poor state of the country’s finances has posed a threat to the stability of the entire eurozone. Greece is struggling with debt of billions of euros, and in April 2010 was forced to agree a rescue deal with the European Union and the International Monetary Fund (IMF). As a consequence, the government has been forced to impose a painful austerity program in the midst of a deep recession.
Economic Policy over 12 Months
Greece adopted the euro as its currency in January 2002, having joined the EMU a year earlier. The adoption of the euro provided Greece (formerly a high inflation-risk country under the drachma) with access to competitive loan rates, and also to low rates of the Eurobond market. This led to a dramatic increase in consumer spending, which gave a significant boost to economic growth. The government also relaxed fiscal policy, starting in 2002 which, combined with expenditures associated with the preparations for the Athens 2004 Olympics, led to mounting fiscal deficits and rising public debt.
In subsequent years, the government also chalked up large fiscal deficits which added to the country’s mountain of debt. Meanwhile, relatively high inflation eroded Greece’s competitiveness, and the economy became increasingly reliant on foreign borrowing. The current account deficit widened to 14.6% of GDP in 2008. However, shielded by euro membership, Greece initially appeared to be relatively unaffected by the global financial crisis. Greek banks were free of toxic debt and the budget deficit forecast for 2009 of 5% of GDP appeared relatively modest compared with the large shortfalls projected for other countries.
However, following the general election in October 2009, the new government said that the fiscal deficit was likely to be 12.7% of GDP, and that the previous administration had underestimated the shortfall for 2008. Investor confidence in the country was shattered by this news, and ratings agencies cut their rating on Greek bonds and gave warning that a further downgrade was likely.
Starting in December 2009, under EU pressure to curb the budget deficit, the socialist government, which came to power in October 2009, announced several rounds of tough austerity measures including public sector pay cuts, fuel increases, and a crackdown on tax evasion. However, investors were unconvinced by these measures, and in April 2010 the government agreed a detailed rescue package with the EU and the IMF. The deal is designed to provide an alternative source of borrowing for Greece, should the bond markets continue to be too expensive. As of April 2010, Greece’s debts amount to nearly €300 billion (US$407 billion)—far bigger than its GDP, which amounted to an estimated US$341 billion in 2009. Despite the rescue package, the country’s weak growth prospects have lead many analysts to question whether Greece will be able to pay off its enormous debt burden in the coming years, or whether it will simply be forced to default on this debt at some stage. There is also speculation that Greece might be tempted to leave the euro to boost its competitiveness.
Economic Performance over 12 Months
Greece has been living beyond its means in recent years, and its rising level of debt has placed a huge strain on the country’s economy. The Greek government borrowed heavily and went on something of a spending spree during the past decade. Public spending soared and public sector wages practically doubled during that time. At the same time, tax income was hit due to widespread tax evasion—the black economy accounts for around 30% of GDP. Thus Greece was very poorly placed when the global downturn arrived. In 2009, for example, the budget deficit amounted to 12.9% of GDP, one of the highest in Europe and more than four times the limit under eurozone rules.
Greece has outlined plans to cut its deficit to 8.7% in 2010, and to less than 3% by 2012. In order to achieve this, the Greek parliament has approved a package of austerity measures to save €4.8 billion (US$6.4 billion). It also wants to freeze public sector workers’ pay and raise taxes, and it has announced a rise in petrol prices. It also intends to raise the average retirement age, in an attempt to save the cash-strapped pensions system.
Unsurprisingly, these measures have not proven popular. There have been a series of public protests, some of them violent. Wildcat strikes have hit schools and hospitals and brought public transport to a halt. Meanwhile, the government is angered that the measures it has announced have been poorly received by investors. In February 2010, the Greek finance minister George Papaconstantinou said that “We’re trying to change the course of the Titanic,” and that “anyone else doing this would get applause. But they tell us: ‘You’re not doing enough. You won’t be able to do it anyway.’”
The economy contracted by 2% in 2009, the biggest fall in 30 years. In the final quarter of 2009, GDP declined by 2.6%. The public debt/GDP ratio reached 114.6% in 2009, while the debt servicing costs of Greece reached 11.6% of the annual budget in 2009. Greek exports declined by 17.8% in 2009, while the current account deficit reached 9.3% of GDP in 2009. Meanwhile, unemployment in the troubled economy rose to 11.3% in January 2010, the country’s statistics department said in April, the highest jobless level seen in six years. This is a worrying sign for the Greek economy, as private consumption makes up more than 70% of Greece’s GDP.
Support for Inward Investment and Imports
Invest in Greece Agency is the government office responsible for promoting, attracting, and supporting foreign direct investment into Greece. The agency will help potential investors to identify investment targets, plus provide support and assistance in securing necessary licenses, and in applications for cash grants for investments in excess of €15 million.
The fiscal benefits available to investors are highly region-dependent. Larger tax exemptions are available from areas of high unemployment. Further information can be obtained from the Invest in Greece Agency.
GDP growth: 22.0% (official, 2009)
GDP per capita: US$32,100 (2009 est.)
CPI: 1.2% (2009 est.)
Key interest rate: 1% (April 2010)
Exchange rate versus US dollar: €0.7338 (2009)
Unemployment: 11.3% (official, January 2009)
FDI: US$43.07 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$34.43 billion (2009 est.)
Population: 10,749,943 (July 2010 est.)
Source: CIA World Factbook except where stated