Elgar Debates: Lessons from Greece – “The positions taken by the coalition government are deafeningly silent regarding the boost in demand with private investment”

February 26, 2015

Economics Finance, Elgar Debates


In a new series of Elgar Debates, Dr. Philippos Sachinidis, former Minister of Finance in the previous Greek Government, tells Professor Steve Keen what is wrong with the current Government’s economic strategy.


Dear Steve,

The recent parliamentary debate on the Greek government proposed plan, to restore growth and address the social crisis, is a fresh start for a discussion of the challenges facing the Greek economy and an assessment of the solutions proposed by the government.

Let us first turn to the data. After five years of unprecedented adjustment, the Greek economy recorded, for the first time in years, a primary fiscal surplus and a surplus in the current account.

This twin deficit correction was made possible at an enormous cost in terms of the national income, with the cumulative losses approaching 26%, and in terms of employment with more than 1.3 million unemployed. Social inequalities substantially deepened and a large part of the population finds itself below the poverty line.

This means that a lot needs to be done to restore growth potential, reduce social inequalities and bring the economy to a steady state of fiscal and external sustainability.

In this regard, the effectiveness of the solutions proposed by the new SYRIZA-ANEL coalition government depends, to a large extent, on whether the causes of the crisis have been correctly diagnosed.

According to the government, the only challenge facing the Greek economy is inadequate demand. Dealing with the current lower levels of demand will bring back Greek economy to acceptable levels of welfare and lower unemployment.

Therefore, priority should be given to enhance demand via three channels.

–        By increasing public investment

–        By raising the minimum wage and by increasing pensions by around 8% (a 13th monthly pension) to those with a monthly pension below 700 Euros per month

–        Finally, through extended tax reductions in order to indirectly enhance the disposable income of households with lower income.

This is a classic recipe to remedy economies with weak demand and it has proved itself to be quite effective in the short run, especially when applied in relatively closed economies with their own currency.

How effective though can these policies be when one is a member of the Eurozone? Experience does not tell us much, at least in the case of Greece.

New Democracy’s government led by Mr. Karamanlis, in their attempt to avoid the negative shock from the global financial crisis, followed the same path in 2008 by increasing deficits between 2007 and 2009, but still failed to avert the recession.

This solution led in the doubling of the government deficit, reaching 15.5% of GDP in 2009, but still the recession deepened even more; please note that the decline in GDP was 4.4% in 2009 compared to 0.4% in 2008.

Thus, one conclusion that maybe reached is that traditional national Keynesian policies contrary to expectations are not always and everywhere effective in handling recessions, especially in monetary unions.

So why did national Keynesian policies fail between 2007-2009, at least in the case of Greece?

To answer this question one has to focus on current account developments. In 2007, the current account deficit was 14% of GDP. What does this tell us? Clearly, expansionary fiscal policy as well as the expansion of private debt was not boosting the national income leading to the restructuring and modernization of production but mainly involved an increase of imports.

The fast paced increases in imports, due to the increased levels of borrowing, led to the closure of businesses and cancellation of thousands of jobs in Greece. In other words, the economy was on the wrong track.

If the country had a national currency, it would have collapsed under the pressure of speculators well before 2009.

In the past, in 1983 and 1985, while having a much smaller deficit in the balance of current accounts, Greece was forced to adopt tough austerity policies.

After joining the Eurozone, there was no national currency. To the extent that the markets were willing to continue lending both the private and the public sectors, though, we could continue financing an unsustainable deficit and a ballooning public and private external debt.

As soon as the international capital market changed their perception of Greece, the country lost its access to markets and sought the support of the institutional lenders. This means that Greece was no longer in a position to refinance public and private debt at a low and feasible interest.

It wouldn’t then be impossible for one to consider that if Greece repeats the national Keynesian recipe of 2007-2009, it would be highly likely to see an increase of imports along with a rising in the underlying cost of capital, limiting gains in terms of growth and employment.

Even worse the coalition government wants to launch an expansionary fiscal policy, without having access to bulk capital markets, while it is rejecting borrowing from institutional lenders at the same time. Therefore, the government’s recent programmatic announcements have an “Achilles heel” , this being the high cost of capital, which does not allow the effective financing of any business and government investment plan.

The solution, in order for the country to be able to tackle the huge economic and social problems in a sustainable way, lies in restructuring of the public administration but also in transforming the economy to become more efficient and outwards oriented.

This transformation can only be realized by attracting mainly private investors who would place their capital in the competitive and export-oriented industries.

We need to consider that the state budget is incapable of financing the more than 30 billion Euro investment programs in the next three years, needed to restore the productive pillars of the economy destroyed during the crisis or even before that. What is needed then is the creation of an environment that is favourable for investors.

Recession in Europe needs to be fought with a federal Keynesian policy, involving a new system of fiscal transfers followed by a consumption increase in the Northern countries along with Europe-wide projects together.

Nevertheless, changing our production paradigm is solely our responsibility. The positions taken by the coalition government are deafeningly silent regarding the boost in demand with private investment. This silence is not incidental. It has deep rooted ideological roots and political values, concerning the role of private investment in a mixed economy. These beliefs undermine the prospects of private investment involvement in the Greek economy, as a viable, alternative solution for sustainable growth in Greece.

Yours sincerely,


Steve Keen’s reply will be posted next week. 

Edward Elgar Publishing wishes to thank Louis-Philippe Rochon for his help in arranging this debate.

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